Welcome to the privatization of money. And it's revolutionary.
Some are calling Facebook's Libra a “cryptocurrency.”
But that label doesn't quite fit, as the fundamental defining principle of cryptocurrencies is decentralization. And Libra defies that principle.
On the contrary: It is centralized, sponsored, issued and controlled by Facebook and a consortium of powerful tech and fintech companies, including Uber, eBay, Mastercard, Visa, Spotify and Vodafone.
So, some others think of Libra as more of an investment vehicle, like an Exchange-Traded Fund (ETF).
And yes, it will be backed by financial assets, including fiat currencies and government bonds denominated in those currencies.
However, unlike an ETF or mutual fund, Libra does not represent a share in those securities. It won’t rise in value when those securities appreciate. Nor will it pay dividends on any of the profits generated.
Instead, its value will be fixed. The consortium of companies will keep all the profits. And other than its utility as a store of value or exchange medium, Libra holders will get zilch.
Given the current level of transparency of Facebook’s plans, these misunderstandings are quite strange.
What’s even stranger is that the debate between the two camps – those who claim it’s a cryptocurrency and those who think it’s akin to an ETF – rages on.
I say both are wrong.
I repeat: Libra is not a cryptocurrency. Nor is it an investment. Rather …
Libra is a new, revolutionary form of fiat currency.
It’s revolutionary for one main reason:
For the first time in history, we are witnessing the emergence of a currency that’s backed and sponsored not by a sovereign government, but by large multibillion-dollar corporations.
This is what makes Libra truly revolutionary. Not its technology. But rather the privatization of money.
With traditional fiat money, a single entity issues the currency. It backs the currency with its full faith and credit -- all the assets and productive power under its domain. Plus, it maintains reserves with a variety of assets, especially other fiat currencies and bonds denominated in these currencies.
Sound familiar? It should. Because that's exactly what Libra is going to do.
What’s new and special about Libra is that, unlike dollars, pounds, euros or yen, the entity is a group of some of the world’s largest companies.
It’s a form of money that has never existed in the modern era.
The fact that it uses the same technology as cryptocurrencies -- Distributed Ledger Technology (DLT) – is merely the means to an end.
And that end is simply to prevent any one of the companies in the consortium from gaining complete control over the asset. Instead, the idea is for decisions regarding this new form of money to be made by committee.
Each member of the consortium gets a vote. And the Distributed Ledger Technology is used as the mechanism to enforce the decision-making rules.
Like a Private-sector Central Bank?
In many ways, yes!
The model does borrow heavily from the way central banks work.
Think of the consortium as a kind of Federal Reserve.
And think of each company as contributing one board member or representative to the Federal Open Market Committee (FOMC), which decides monetary policy.
Where does Libra stand in terms of distribution of ownership?
It will probably be less centralized than government currencies, but it doesn't even come close to the decentralization of cryptocurrencies like Bitcoin.
What does Libra have to do with
the growth of cryptocurrencies?
A lot, actually.
First, it’s the relative success of Bitcoin that has inspired many companies and communities — big and small — to attempt to create their own money.
Before Bitcoin, only fringe communities would even think of doing so. But in this new era of cryptocurrencies, it seems a new currency idea is born every week.
Second, Facebook and its consortium will lend great credibility to Distributed Ledger Technology.
It will help teleport cryptocurrencies from the fringes to the mainstream.
And even if Libra never touches those cryptocurrencies directly, it’s bound to generate a far broader interest in anything crypto.
Investors will become more comfortable with assets that they can’t touch or feel, deposit in a bank, or add to their IRA and 401(k).
And, we can envision future platforms that provide easy mechanisms for directly converting Libra into Bitcoin, Ethereum and other cryptocurrencies.
Plus, there’s another, little-talked-about factor that may have contributed to this evolution of money:
A Fusion of Bitcoin and Alipay?
Alipay, created in China, started as a simple payment application. But then it grew to become the largest commercial bank in the entire country (by number of users).
Before the Chinese government cracked down on it, Alipay was so large that it was serving half of the small- and medium-sized enterprises (SMEs) in China.
And today, if you visualize Libra as a fusion of Bitcoin with Alipay, you wouldn’t be far off the mark.
It borrows concepts from both
(a) free, open crypto assets and
(b) centralized payment apps.
Alipay or WeChat may have been too afraid or too shortsighted to create a brand-new currency; they stuck with whatever their government allowed.
But now, Facebook and its consortium have taken it a step further.
And the end result is neither government-issued money, nor decentralized cryptocurrency, but rather a fusion of the two.
Some skeptics say Libra is a passing fad and won't be successful.
I think they’re also wrong. But even if they’re right to some extent, they’re missing the big point:
This is the first time in history that multibillion-dollar companies have set out to create their own form of money. That alone will change the world of finance. And there’s next to nothing sovereign governments can or will do to stop them.
Bitcoin changed the world's monetary system forever. The cat is out of the bag.
Whether it's company-sponsored money or a pure cryptocurrency, the days in which governments monopolize the issuance and control of money are numbered.
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created the first-of-their-kind Weiss Cryptocurrency Ratings