Facebook is hoping to get into the cryptocurrency business with the proposed launch of its Libra currency. The positions on both sides of this battle seem to be pretty confused.
There are a lot of cryptocurrencies around these days, and while Bitcoin and a few other major players get all the attention and all the press, cryptocurrencies just keep popping up just like weeds and number in the thousands now.
When a company as big and as popular as Facebook is looking to sponsor one though, that’s a lot bigger news, and maybe even the biggest since Bitcoin was born. Facebook has 2 billion regular users and this means a lot of potential indeed, at least in theory, should they be successful in promoting Libra as a payment processor.
Facebook claims that this new currency will allow for cheaper transactions across borders and also permit more people to access financial services, with so many people in the world not having access to means of payment.
We might wonder what sort of impact that the access part might actually provide, as if someone does not have access to payment methods besides cash, how are they going to access Libra? It’s not as if you can send Facebook some cash in an envelope and they will credit you with the equivalent in Libra. You need to have access to the means to fund a cryptocurrency wallet which means that you have access to a payment method to start with.
A lot of people do don’t have access to payment methods other than cash choose to do so because they prefer cash over digital money. The far end of digital money therefore may not appeal to them very much.
This is one of several oddities that have emerged in this conversation, and the idea that we could figure out a way to make a cryptocurrency an effective currency for payments is one of them. This might be possible in theory but the theory and the reality just don’t match up that well.
There Are Huge Problems with Alternative Currencies
The heart of the problem isn’t even the fact that we haven’t figured out how to make blockchain payments practical, which Libra is supposed to use as well. Blockchain confirmation takes real time, and usually far more time than would allow for its widespread practical use with payments. Even though people who pay over the internet can afford to be a lot more patient than with face-to-face transactions, there are limits to this and we’re a long way away from going beyond the very narrow appeal that cryptocurrencies possess for this purpose.
The real problem here is that in order for a currency to function even minimally well as a payment method, it must be stable. Stable is not a word anyone would use to describe any cryptocurrency, and in fact any transaction will involve significant speculation on its future value.
While a lot of people like to speculate, this is not something merchants care for, as they need to know what they are going to be getting back with quite a bit of precision. There is some currency risk when you accept a foreign currency but foreign currencies don’t fluctuate much at all in a couple of days, while cryptocurrencies can and do fluctuate pretty widely over this short amount of time.
There’s just no good way that you can prevent people from speculating on a cryptocurrency, and this is where things go wrong as far as its use as a payment method. It’s not that the price of Bitcoin and other digital currencies have skyrocketed and plummeted due to their use as payments, and this is solely due to speculation. This can be great if you are on the right side of a trade, but this creates a nightmare for using it for payments.
Aside from its use as a tool of speculation, there really isn’t a good reason why people would want to use such a thing, apart from wanting their transactions off the grid. This might be merely for privacy reasons, or it may be to evade authorities, but not enough people care about such things to make these currencies popular enough to be used as payments to take it beyond this niche, and the government wants to curtail this.
Cryptocurrencies started as a dream but the dream did end up turning into a completely different one once we understood the practical side of the matter. It does seem like Facebook has lost themselves in the original dream and have perhaps travelled back in time but forgot to look around once they got back to the present.
U.S. Authorities Hate cryptocurrencies and are Flexing Their Muscles with This One
It is completely unsurprising that the U.S. Treasury Department is not a fan of Libra or any cryptocurrency, as they serve to not only circumvent their authority but also offer a competing product to the U.S. dollar. cryptocurrencies exist apart from their purview, which was actually the main point behind doing this and having to wait hours at times to have your payments go through.
The thought of regulating a cryptocurrency like we regulate domestic financial institutions, which the Treasury Department wants to do, is actually a pretty amusing idea, although in Facebook’s case, especially with Facebook being an American company essentially, they certainly can try.
Facebook has already come out stating that they will disclose private information regarding Libra transactions to authorities when required by law, and just reading that tells us that a main component of cryptocurrencies has already been trashed.
Anti-money laundering does not work that way though, and this is used proactively, to seek and find using a blanket approach, like the NSA does, rather than to just gain someone’s personal information by way of court order. The books need to be opened not rarely but all the time in order for them to comply.
The very nature of cryptocurrencies, even ones modified to appease regulators more, isn’t going to allow them to be as transparent as hard currencies are, even if Facebook opens up their servers to the government completely. A lot of money is laundered with hard currencies and with any cryptocurrency, and it’s not hard to imagine how this would be made easier when dealing purely in a digital world, tracking or not.
If the government was more honest, they might say that if they are allowed to cast their eyes on Libra, this will certainly drive away the criminals and other people with things to hide, as this would render Libra uncompetitive with the cryptocurrencies out there now that they have no such worries with. They may not want to admit just how easy it is to hide money these days though in this new era.
President Trump has also weighed in on the issue, stating that digital currencies are “highly volatile and based on thin air.” He’s certainly right about the volatile part, but all currencies these days are based on thin air, including the U.S. dollar, and he may have forgotten that we got off the gold standard or any standard almost 50 years ago.
The dollar in fact is not only based upon thin air, it is created out of thin air as well. On the other hand, the supply of cryptocurrencies are strictly limited, which means less not more air involved.
Sure, hard currencies are much more stable, usually anyway, but are subject to inflation and even hyperinflation, where the air that a currency is based on can become much thinner than any cryptocurrency would ever be based on. The thin air comment confuses these currencies with assets, like gold or stocks, which are entirely different things.
The fact that cryptocurrencies are isolated from the usual pressures and influencers that hard currencies are prone to is one of their biggest benefits in fact, where you don’t have to worry about your money becoming severely devalued due to either bad government policies or economic misfortunes. The value of a national currency is tied to their particular economy, while cryptocurrencies are only tethered to their users.
Treasury Secretary Stephen Mnuchin is particularly concerned about Libra’s potential to be used to launder money and considers it “a national security issue.” Trump uses national security pretty loosely at times and this is at least right up there with any way he would use it, like for instance thinking that people paying more for things made of steel and aluminum somehow promotes national security.
Cryptocurrencies are a godsend for criminals, and we might therefore think that there is a threat to the Treasury’s coffers by Libra enticing people who would declare income otherwise to now decide to use Libra to hide it. Criminals have a natural tendency to evade though, and money laundering isn’t new, it’s just gotten easier lately.
These are not people who would want their finances exposed in any case, but what we need to realize is that whatever happens with Libra, the threat will remain the same. We can even laugh at the idea of some shady characters sitting back and waiting for Libra to go live so that they can now hide their money. National security is not even pertinent to this discussion, even though we do need to take a step back and realize we have these things already and the opportunities to do this already, in abundance.
Regulators, Facebook, and a cryptocurrency make for some very strange bedfellows actually. Regulators want to make this currency transparent, but when you take a currency that has its main feature as not being transparent at all we might wonder what to even call what we end up with. Why a lot of people would prefer such a thing over cash for payments is not easy to understand, for any reason.
Facebook thinking that they can improve upon hard currencies as a means of payments is another strange idea, given how miserably this idea failed in practice. This is not because Bitcoin doesn’t have the branding of Facebook or whether or not so many users will have an opportunity to use it, because you still need two willing parties to any transaction and this remains a huge challenge.
It is not even a matter of cryptocurrencies not evolving enough to match real currencies, as the very structure of a cryptocurrency involves currency risk at every turn, and explosive currency risk at that, and that’s a problem that will remain regardless of how fast we can process these payments.
There’s also the regulation part of this, and the idea of a cryptocurrency being regulated by a government is a strange concept indeed. Libra might actually be a perfect name for this, given that the libra symbol is a set of scales, the scales of justice perhaps, as in the Department of Justice.
It will be interesting to see how this moves forward, although it’s clear that a lot of people appear to not have thought this thing through enough. Perhaps Libra can become another roller-coaster investment, and governed by the SEC and other authorities to their heart’s content.
Like the original cryptocurrencies, what we thought it would be and what it ended up being may be two entirely different things.