After months of anticipation, Facebook has recently unveiled its own cryptocurrency, the Libra.

Hmm . . . actually, that’s not entirely accurate. Perhaps it would be better to say that Facebook has unveiled its ambitious plan to dominate the world’s payments systems and challenge the power of nations.

Let’s take a step back and start from the beginning. The world right now is filled with payment services galore. We have credit card networks (such as Visa, Mastercard, American Express), online payment companies (Paypal, Stripe, SecurionPay), and even mobile payments (Venmo, ApplePay, WeChat). All of these services and more are crucial to modern commercial and financial activity.

There are, however, what could be considered two major problems when it comes to modern payment systems. The first is that most of these services are siloed—they do not interact with one another. A person cannot send money directly from Venmo to ApplePay, and vice versa. Money must be moved through a bank first and then deposited into the appropriate application/service. This can be rather inconvenient and inefficient for consumers and businesses, especially if geopolitical differences are considered. In the European Union, for example, Orange Cash is a mobile payment service available in France and Spain, but not in the rest of the union. Despite being united by a single currency, people can be, and are still, divided by the choice of payment services used.

The second problem is, for want of a better term, privacy. All of these services require that individuals rely upon financial institutions as trust third party payment processors. Even if a person wanted to do something as simple as buying a cup of coffee, that transaction would have to go through a bank, credit card company, or payment processor. As a result, there is an electronic paper trail of all of one’s transactions—otherwise private financial information that is now in the hands of an institution. In addition, since these institutions must sometimes mediate transaction disputes, they must implement certain inefficient measures (raised transaction costs, a limit on the maximum amount of money that can be transacted in a set time period, etc.) upon users.

How Does One Create Online Money?

Finding a way to resolve this conundrum—a simple system to engage in financial transactions online without forgoing privacy—was one of the goals of an online movement in the 1990s composed of privacy-focused activists, computer scientists, cryptologists, technical experts and political advocates. These “Cypherpunks,” as they informally called themselves, undertook a number of experiments and ventures in an attempt to create this sort of privacy-focused online currency. Though not many remember, even Paypal itself was originally conceived as an attempt, in the words of cofounder Luke Nosek, to “create a global currency that was independent of interference by these, you know, corrupt cartels of banks and governments that were debasing their currencies.” All of these initiatives, however, failed because no one could figure out how to create online money without also creating a central institution to manage this hypothetical currency. Such a central institution represents a single point of failure: it can be manipulated, subject to government regulation, or otherwise destroyed.

The solution was finally conceived by a pseudonymous online individual calling himself Satoshi Nakamoto, who presented a white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System.

Satoshi’s system was simple: rather than relying on a central institution, his system was set up so that every transaction and every individual’s holding would be simultaneously tracked and recorded on a shared ledger. Transactions and holdings would be pseudonymous, thus preserving privacy. The shared ledger would be distributed in the computers of everyone using the system, thereby preventing the creation of a central institution and single point of failure. This shared database, which would come to be known as the blockchain (named such because of how the system bundles transactions into sets called blocks, which are added on to a continuous chain), set off something of a revolution in finance. Bitcoin was born and introduced to the world.

Over ten years have passed since Bitcoin was created. While the system is still going strong, several limitations, however, have become apparent. For one, Bitcoin can only handle an average of four to five transactions per second (tps), with some variation. Visa alone, by comparison, handles an average of 1,700 tps, and is capable of handling over 24,000 tps. Then there is the issue of latency: the time it takes from the creation of a transaction until the initial confirmation of it being accepted by the network. Bitcoin’s confirmation time varies depending on how much the system is being used, but it is certainly no less than five minutes and sometimes more than ten. Compare that to the few seconds one must wait for a credit card transaction to be confirmed, and the choice is obvious.

Bitcoin’s intended privacy is also less secure than originally expected. While transactions and holdings may be pseudonymous, it is possible to tie these financial details to a real identity once a Bitcoin user attempts to convert their Bitcoin into fiat currency or vice versa via an exchange or other service. Finally, Bitcoin’s limited supply (a predetermined limit of twenty-one million coins) means that it is deflationary—there will be less of it to go around. While this may be good for holders over the long term, as they can expect a positive return on their investment, the price volatility attached to this sort of asset does not sit well with short-term users.

In short, while Bitcoin has properties that make it an attractive store of value and/or speculative investment, it lacks capacity to function as a stable-enough medium of exchange. The “cryptocurrency,” such as it is, can no longer fulfill its original intended purpose of an anonymous, cash-like online payments system. Some of Bitcoin’s most ardent boosters and defenders would argue against this view, pointing to solutions under development such as the Lightning Network. These efforts, however, still face both technical and regulatory hurdles in both the short and the long term. Even then, they’d be hard pressed to overcome a now firmly ingrained public perception that Bitcoin is a speculative asset and not a medium of exchange.

It is because of these limitations, among others, that many have taken the underlying blockchain technology that allows Bitcoin to function and have used it to create newer, more advanced cryptocurrencies and platforms. For example, a cryptocurrency and blockchain platform called Zilliqa indicates that it can handle an impressive 2,828 tps—more than enough to compete with Visa and other large payment processors. However, there are still a few hurdles to overcome, such as the fact that transactions on this platform take around a minute to confirm. Though Zilliqa’s development team is working on improvements to cut down confirmation times to around twenty seconds and further ramp up tps, these are still a ways away, and the platform suffers from a lack of name recognition outside of the niche realm of cryptocurrencies and blockchain software.

A Benefit to All of Mankind?

It is here that we return to Facebook’s announcement of its “Libra” system, with interesting information contained in the cryptocurrency’s white paper and technical paper. The stated details of the project are rather impressive. The system is intended to be able to handle one thousand tps at launch with a ten-second confirmation time—with plenty of room for improvement. The Libra currency itself will be “backed by a reserve of real assets—the Libra Reserve,” which will be “a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.” To help oversee, design, launch, and manage the Libra, Facebook is putting together a Switzerland-based governing association composed of a consortium of partner organizations. The list of founding members alone is impressive: it includes Visa, Mastercard, Paypal, Stripe, eBay, Uber, Spotify, Vodafone, and many more.

In short, the Libra is intended to be a unified global payment processor and optionally-pseudonymous cryptocurrency, backed by real assets and supported by some of the world’s best companies, that can be used by any company or individual that has access to a Facebook account—in short, it is the future of money. Its users would include the world’s unbanked and underbanked—individuals who lack access to traditional banking for a variety of reasons—as well as other vulnerable populations. Facebook’s newly announced Libra-focused subsidiary, Calibra, released some documentation that further elaborates on the pressing situation that the unbanked face:

For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account, and those numbers are worse in developing countries and even worse for women. The cost of that exclusion is high — for example, approximately 70 percent of small businesses in developing countries lack access to credit, and $25 billion is lost by migrants every year through remittance fees.

The point about remittances is particularly important. According to the World Bank’s latest Remittance Prices Worldwide report from March 2019, the global average cost for sending money is 6.94 percent. In other words, for every $100 sent by, say, migrant workers to their families in their home countries, $6.94 must be paid in fees. Keep in mind that these amounts also vary depending on the geographical region money is being sent from, where it is going, and what service is being used. The average cost of using a bank to send money, for example, is 10.9 percent. While Westerners may regard these amounts as relatively small, they can mean a lot to not just families, but also entire nations. A June 2017 report from the United Nations’ International Fund for Agricultural Development reveals that remittances make up a significant percent of the GDP of numerous countries. These include Nepal (32 percent), Liberia (31 percent), Tajikistan (29 percent), Moldova (24 percent), Gambia (22 percent), and many more. This same report notes that “US$450 billion [in remittances] is projected to be sent this year, more than three times official development assistance,” and argues that remittances are crucial to meeting the UN’s Sustainable Development Goals. With a blockchain-based system like Libra, these costs could be brought down significantly. Anything around 3 percent or lower would enable billions of dollars in savings around the world.

Mark Zuckerberg’s Master Plan to Take over the World

At face value, this all sounds like a net positive for humanity. Surely people everywhere would collectively benefit from a cheap, universal payment system and global currency, right?

Things are never so simple. Facebook is, after all, a corporate entity, with an obligation to shareholders to deliver a return on investment. A deeper analysis of its plans with Libra raises some questions worth considering.

For starters, there is the Geneva-based Libra Association, which is intended to be the independent organization that oversees Libra. This association will eventually be comprised of one hundred members, representing a variety of corporate and non-profit interests. Each one will control no more than 1 percent of the Libra network, and decisions will require a supermajority of a two-thirds vote. How are these members chosen? Aside from paying an upfront cost of $10 million and being able to run the hardware necessary for the Libra network to operate (estimated to cost around $280,000 per year), these entities must meet specific requirements. Businesses seeking to join must be worth more than $1 billion in market value or possess more than $500 million in customer balances, be able to reach 20 million per year, and be “recognized as a top-100 industry leader by a third-party sector-specific association or media company.” NGOs and nonprofits must have a proven record (greater than five years) of alleviating poverty, an operating budget of over $50 million, and possess a “top-100 ranking in Charity Navigator, Charity Navigator International, GuideStar, NGO Advisor, Devex, or GiveWell.” And finally, academic institutions seeking to participate must be a top-100 university according to QS World University Rankings and possess a top-100 computer science department as measured by CSRankings.

In other words, the Libra Association would be composed of “publicly trusted” but otherwise rather unaccountable corporate entities and nonprofits. Some critics would describe this as an oligarchical plutocracy that is out to enrich themselves at the expense of the public—not exactly the sort of consortium that regular people are ready to trust with the future of money.

Then there are the benefits that Libra Association members (including Facebook) receive. Aside from playing an active role in creating and managing the Libra, as well as “being eligible for new user incentives and transaction rebates,” members would receive the dividends that come from holding “Libra Investment Tokens.” These are essentially equity shares of the network, entitling holders to dividends from the interest generated by the collateral that make up Libra’s reserves. This interest could be significant—if Libra’s reserves were greater than $1 trillion (not an entirely unrealistic amount when one considers that there are currently around 1.7 trillion physical U.S. dollars in circulation), then a mere 1 annual percentage rate would generate Libra Investment Token holders $10 billion in income. Divide this evenly for Association members, and a single company/nonprofit would see an annual return of $100 million for doing little other than maintaining some computer hardware and attending a few meetings a year in Geneva.

These are only the official benefits though. The unofficial benefits to being a Libra Association member are arguably even greater. For example, there is the fact that the Libra blockchain could be used to create an entirely new universe of financial tools—the “internet of value” that is often touted by Silicon Valley types and attendees of the World Economic Forum.

Some background knowledge is necessary here. Since cryptocurrencies such as Bitcoin serve as programmable money, this means that they are also technology platforms. Just like how a developer can build an application on Facebook’s platform (for example, the video game FarmVille), so too can developers build applications on top of Bitcoin, Zilliqa, and other blockchains. Libra would also offer this option. In fact, their whitepaper specifically states that, in time, the

Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world.

This goes to show how lofty Facebook’s ambitions are: they wish to replicate Google’s success with its open-source Android mobile operating system, but instead of taking over the mobile phone market, they wish to control the entire consumer financial infrastructure of the world of tomorrow. The next generation of financial applications and products would be built on Facebook’s financial platform and presumably be accessible from its social media platform. In the future, an individual could receive birthday money from grandma in the form of Libra, then immediately invest it into Facebook stock via an application built on the Libra blockchain. Better yet, instead of investing in Facebook, why not invest in an individual, securitized, self-driving delivery truck that serves your own high-traffic neighborhood? (That particular example may sound rather silly, but boosters of blockchain technology contend that it is entirely possible in the future, given sufficient advancements.).

From a certain perspective though, this move by Facebook to create a new “internet of value” is essentially an attempt at a sort of monopoly. Libra’s sheer starting size (a potential 2.8 billion Facebook users, and then some) and incentives to build on it would put most other blockchain platforms out of business overnight. It would be a highly profitable monopoly too, since Facebook would financially benefit from all of these applications and tools being built on a platform it and its partners control a share of. And all this presumes that Facebook and its partners themselves don’t start building and developing applications—which is precisely what they likely wish to do. In an interview with The Australian Financial Review, David Marcus, the former president of PayPal and the current lead at Calibra, indicated that Facebook wants “to use the data generated by Calibra to move into lending.”

This brings us to the final, and possibly the greatest benefit that Facebook and the Libra Association would attain if everything goes according to plan. By being one of the network’s validators, a member of the Libra Association would conceivably have access to Libra’s entire database of transactions. And while Facebook claims that the Libra is “pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity,” like Bitcoin, this pseudonymity loses value if these addresses are tied to real identities at transaction end points. This will likely be obligatory, as people will be interested in trading their libras for dollars, euros, pounds, and so forth, as well as paying for things such as rent, utilities and more.

In other words, for the Libra Association, the Libra is a bottomless source of that most valuable prize of them all, the digital equivalent of oil: data. Facebook and any other corporate members would have access to the entirety of an individual’s financial history so long as the libra is used as a medium of exchange. This data would be invaluable in determining the financial habits of individuals and offering them customized advertising, deals and so forth.

Can a self-governing, self-policing association with strong corporate representation and no external oversight really be trusted with this treasure trove of data? Facebook alone, after all, is under fire for being inconsiderate of its user’s privacy, to put it lightly. A recent court debate concerning how users’ personal data was shared—without consent—with the now infamous consultancy Cambridge Analytica is revealing. A transcript of the proceedings was published by Law360, and it demonstrates Facebook’s point of view when put under the gun. Representing Facebook before U.S. district judge was Orin Snyder from Gibson Dunn & Crutcher. He argued before this judge that, when it comes to Facebook:

There is no privacy interest, because by sharing with a hundred friends on a social media platform, which is an affirmative social act to publish, to disclose, to share ostensibly private information with a hundred people, you have just, under centuries of common law, under the judgment of Congress, under the SCA, negated any reasonable expectation of privacy.

In other words, Facebook’s legal argument is that the simple act of even using Facebook negates any expectation of privacy. This is not exactly what someone would want to hear from the company now proposing that it wants to help handle a good chunk of the world’s financial transactions.

Breaking the Bank

Can Facebook and the Libra Association, with all its audacity, really pull this off? Maybe, but not without facing significant challenges.

For one, the banking industry will be beside itself at the audacity of Facebook and the Libra Association. This scheme of theirs is tantamount to a declaration of war. They will argue, with some merit, that the Libra Association (and its intent to expand into the realm of financial products) is a direct competitor to its traditional lines of business, particularly payments. Shouldn’t the Libra Association be brought under existing banking regulation? Shouldn’t they too be subject to central bank regulation, bank holding company acts, taxation rules, depositor insurance schemes, and so forth? Shouldn’t the Libra Association also have to answer to FINRA, the CFTC, the FDIC, the UK Office of the Comptroller of the Currency, the French Autorité des marchés financiers (Financial Markets Authority), the German Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority), and so on and so on and so on?

More to the point, has the banking industry ever really lost (in business and/or politically) this sort of existential battle?

Then there are more practical considerations. A mountain of them, really. Does Facebook have the capacity to identify its approximately 2.8 billion users and bring them into the Libra ecosystem while meeting the regulatory “Know Your Customer” requirements that are usually expected from financial institutions for anti-money laundering/anti-terrorism financing purposes?  Can the Libra Association sincerely guarantee the viability of its currency without publicly committing to a distinct monetary policy that ensures a stable value relative to the value of goods and services? What sort of taxation issues do Libra users and the Libra Association face from using the currency? Can an “immutable” blockchain of this size comply with numerous regulatory requirements, such as the European Union’s General Data Protection Regulation Article 17 on the Right to Erasure (ie, the right to have personal data deleted), which any EU citizen can invoke? These sorts of questions seemingly go on forever, and the Libra Association will have to answer all of them.

The greatest and most glaring challenge to the Libra, of course, is the fact that its creation is a direct challenge to nation-states, which have traditionally held the exclusive right to create, mint, and manage the coin of the realm. In fact, The Denationalisation of Money: The Argument Refined, written by Friedrich Hayek in 1976, makes this point rather clear. Hayek writes that:

When, at the beginning of the modern era, Jean Bodin developed the concept of sovereignty, he treated the right of coinage as one of the most important and essential parts of it. The regalia, as these royal prerogatives were called in Latin, of which coinage, mining, and custom duties were the most important, were during the Middle Ages the chief sources of revenue of the princes and were viewed solely from this angle. It is evident that, as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain. From the beginning the prerogative was neither claimed nor conceded on the ground that it was for the general good but simply as an essential element of governmental power.

The ability to produce currency is one that nation-states guard with zeal. Apart from being a primary instrument of power, it is immensely profitable. Consider, for example, how much the United States makes from seigniorage—the economic cost of producing a currency, which, if positive, means that the government is making a profit. It currently costs the U.S. government around 11.5 cents to produce a $20 note and 14.2 cents to produce a $100 note. Given that there are currently 1.7 trillion dollars out in circulation and that inflation is increasing annually at a rate of 2 percent, that would mean that the United States government is making billions and billions of dollars each year in profit just for printing money.

There have, of course, been attempts at creating privately-issued money in the past. Yet these have all failed over time because of incentives to cheat, generally giving way to fiat money. Consider an example given by Agustin Carstens, the General Manager of the Bank for International Settlements:

In the period in the United States known as the Free Banking Era, from 1837 to 1863, many banks sprang up and that issued currency with no oversight of any kind by the federal government. These so-called free bank notes did not work very well as a medium of exchange. Given that there were so many banks of varying reputation issuing notes, they sold at different prices in different places, making transactions quite complicated. And as supervision was largely absent, banks had limited restraint in issuing notes and did not back them up sufficiently with specie (gold or silver), thereby debasing their values. This era of “wildcat banking” ended up being a long and costly period of banking instability in the history of the US, with banking panics and major disruptions to economic activity. It was, after some further hiccups, followed by the establishment of the Federal Reserve System in 1913.

Despite the general triumph of central banks in the early twentieth century, there have been holdouts who speak in defense of private currencies. In the aforementioned The Denationalisation of Money, Hayek argues that businesses should have the right to issue their own forms of money. Whether or not these are adopted is debatable, though Hayek indicated that the ideal solution would be a currency based on a basket of commodities. However, these holdouts have generally not been taken seriously, and the notion that private currencies might emerge unto the world once again was dead letter—until Satoshi Nakamoto created Bitcoin.

The advent of blockchain technology has had an effect akin to the creation of the printing press in fifteenth-century Europe: it has robbed a previously invulnerable priesthood of its monopolistic control over a sacred sphere of influence and public life. At the time, the Catholic Church held tight control over religion and society. The mass was celebrated in Latin, the Bible was in Latin, and the monks and scribes who transcribed the Bible weren’t about to do something as daring as produce a vernacular copy. Even if one or two foolish souls did, they could only produce a few copies before being found out, excommunicated, arrested, and possibly burned at the stake like a witch. But with the printing press, the mass production of the Bible in vernacular was possible. A mere century later, the Church split between Catholics and Protestants, the latter fragmenting even further into various denominations.

Blockchain technology can achieve a similar effect: it provides anyone with general competency in computer science with the means to create their own programmable currency from the comfort of their own home. Of course, just because anyone can now do this doesn’t mean that they can do it well. Cryptocurrencies have failed to catch on as a medium of exchange thus far due to a number of reasons, with price volatility being the most cited factor. The Libra, with its strong corporate support and its asset-backed status, is possibly the first serious and credible contender. Like the priesthood of the Catholic Church, central bankers and finance ministers have been put on notice—their reign is now officially under siege.

That Last Argument of Kings

So what comes next?

The short answer is that Facebook and its partners are now facing a regulatory storm the likes of which is rarely ever seen. Far from letting the bull loose, they seem to have woken the bear.

On the European side of the Atlantic, mere hours after Facebook’s initial announcement of the Libra, French finance minister Bruno Le Maire thunderously declared on an interview with Europe1 radio that “It is out of the question that [the Libra] becomes a sovereign currency. It can’t and it must not happen.” He went further, stating, quite explicitly, that the ability to mint currency is an “attribute of the sovereignty of states,” and it must “remain in the hands of states and not of private companies which answer to private interests.” Le Maire then added that he has asked the central bank governors of the G7 to produce a report by mid-July (when the G7’s finance ministers meet) on the Libra, with an emphasis on possible risks, such as terrorist financing and other forms of illegal activity. The Bank of England’s governor, Mark Carney, took a more diplomatic approach, saying that he had an “open mind” to the Libra, and was sympathetic to the notion of making payments easier and cheaper. But he made it clear that the Libra would find no “open door” to its launch and said that if the Libra succeeded in attracting a following “it would instantly become systemic and will have to be subject to the highest standards of regulation.”

In the United States, Rep. Patrick McHenry, a senior Republican on the House Financial Services Committee, asked for a hearing on the Libra in a letter (helpfully posted on Twitter) to the committee’s chairwoman, Representative Maxine Waters. Waters, for her part, has called on Facebook to halt the development of the Libra. While also referencing Facebook’s data policies, she said that the announcement of the Libra demonstrates that “Facebook is continuing its unchecked expansion and extending its reach into the lives of its users.” Meanwhile, over in the Senate, Sen. Sherrod Brown (a senior member of the Senate Banking Committee) said in a statement that “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.” The committee has already scheduled a hearing on this matter next month on July 16, with no witnesses announced as of yet. Meanwhile, Fed Chairman Jerome Powell disclosed that Facebook “has made quite broad rounds around the world with regulators, supervisors, and lost of people to discuss their plans and that certainly includes us.” He generally echoed Carney’s view that “we will wind up having quite high expectations from a safety and soundness and regulatory standpoint if they do decide to go forward with something.”

Governments outside of the West have shown similar reactions, if not outright denying the Libra a chance. The Reserve Bank of India (RBI, the country’s central bank), for example, decided last year that “entities regulated by RBI shall not deal with or provide services to any individual or business entities dealing with or settling [cryptocurrencies].” Seeing as how Facebook has not filed any application for an exemption with the RBI, it is highly unlikely that the Libra will make an appearance there. China and Russia, for their part, are highly unlikely to welcome a new cryptocurrency crafted by an American technology giant. Facebook is blocked in China at any rate.

What will happen next? It is hard to say. Perhaps the regulatory pressure will force Facebook to cancel the project. Maybe the company might opt to peg the Libra to the value of the U.S. dollar instead, essentially making it an extension of the greenback (though it would still face a thousand and one challenges, including the banking industry’s impending assault). Even if Facebook decided to do something as foolish as releasing the Libra on without addressing concerns, they would have to face what Louis XIV of France called the last argument of kings—the use of force. Even if people are distrustful of governments and their politics, what underlies fiat currencies is the belief that only nation-states have the legitimacy to wield the use of force as a way to enforce laws and impose order in a society.

Facebook has succeeded in at least one respect though: they have forced a conversation on tech sector regulation, the payments industry, cryptocurrencies, and most important of all, the monopoly that governments have enjoyed over the creation and distribution of currency—until now. Pandora’s box has been opened, and it is highly likely that other large corporate or noncorporate entities may borrow a page from Facebook’s playbook and consider the possibility of issuing their own, possibly more regulator-friendly cryptocurrencies. A new era in the world of monies is about to begin, for good or ill.

Carlos Roa is the senior editor of the National Interest.

Image: Reuters