David Hargreaves says Facebook's pre-emptive strike with a global cryptocurrency has given huge urgency to the whole question of what happens after cash

David Hargreaves says Facebook's pre-emptive strike with a global cryptocurrency has given huge urgency to the whole question of what happens after cash

We may all end up being thankful to Facebook.

No, really.

But a lot will depend on what global financial regulators do from here. If they muck it up we could all end up being beholden to Facebook and its opportunistic business friends. In such an outcome, I for one, will not be thankful at all. Oh no.

By advancing plans for a global cryptocurrency to start as early as next year the ubiquitous social media platform has, probably unwittingly, acted as a catalyst for global authorities and regulators to much more urgently consider the future of cash and the whole financial system. It's perhaps the kick up the whatsits that the world has needed.

I would suggest, however, we will only end up being thankful to Facebook if said global authorities - who appear to have been woefully tardy in this area (head in the sand? too-hard basket? no real answers?) - do now pick up the act and get on and start making some serious decisions about what sort of financial world and systems we want in the future.

Is cash dead? What happens after cash? What about cross-border currencies? What will the role of cryptocurrencies be? The very first thing that should be done is the putting on ice of Facebook's plans. Right now. Stick up a big hand and say: "Halt! We need time to work this out."

Get their acts together

If the likes of central banks cannot get their acts together quickly then maybe Facebook will be able to steal a march (as it has clearly intended to do) and begin imposing on us its version of a new world order for financial dealing in tandem with its business partners. Under such circumstances then we may end up being rather less thankful in the long term that Facebook's doing this now.

With the sheer size and scope the dominant behemoth Facebook has it could, if left unchecked, very quickly establish Libra as THE pre-eminent global transaction system. If that were allowed to happen global regulators and the public would be left trying to retrospectively rein in the power and regulate an already dominant force.

Check what has already happened with Facebook itself. Very quickly it moved into the too big to control category. It would be aiming for the same thing with Libra. Open gate. Horse. Bolted.

I heartily recommend, if you are able to access it through the paywall, this piece in the Financial Times from Chris Hughes

Hughes knows of what he speaks, having been a co-founder of Facebook, now turned critic. 

'Handing over control'

His basic argument is that if even modestly successful, Facebook's Libra cryptocurrency would hand over much of the control of monetary policy from central banks to the private companies backing Libra. "If global regulators don’t act now, it could very soon be too late."  Exactly.

Hughes points out that Libra could disrupt and weaken states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations. 

This is an extremely sound point.

I do urge you to have a read of the Libra White Paper. Look it's real short on detail, but you can infer a lot.

Consider this brief passage: "Despite this progress, large swaths of the world’s population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access." 

You can just about read that as a direct invite to third world countries to clamber on board. Hey, and you know what. They would.

An alluring prospect

So, what, you might say. Freedom for the people. Well, it's an alluring prospect. But as somebody once said: Freedom isn't free. Problems such as widespread money laundering immediately come to mind. But I think the bigger problem is what the sudden widespread usage of this cryptocurrency may do to individual economies. 

The idea that we can all just start leaping in and sourcing - in a non-traceable way - things from low cost economies sounds wonderful. But what happens to our domestic economy? People trying to earn a dollar producing and selling goods here?

Of course, this is already an issue. But a global cryptocurrency available as soon as early next year would blow this issue sky high.

All right then. Do we say 'no' to cryptocurrencies? Go back to trading in commodities? Working out our sums on an abacus? No. Of course not. But this is where the global authorities need to get A into G and decide how we go forward before somebody else makes that decision for them.

It is interesting indeed that our own Reserve Bank is currently having its own look at the future of cash. 

As the paper the RBNZ has produced highlights, there's a lot of things to decide. And this is presumably why we really haven't seen substantive progress on what is a global issue to date. 

There isn't time

It is one of those things that everybody seems to want more time on. But in the meantime so time is marching on and so those who see a commercial opportunity are tempted to get in with their own 'solution'.

What do we want?

Logically the world is going cashless. Increasingly people do want to trade across borders and transfer wealth across borders. The banks are not helping themselves by charging it seems increasingly ridiculous sums of money just for the pleasure of exchanging currencies. Cryptocurrency is indeed an attractive option. From one person straight to another. Wherever they may be. No fuss. No worry. No massive forex fee.

So Facebook and Libra are actually right. But there needs to be some sort of global regulatory agreement on the establishment of common, cashless, currency. With hard and fast rules. 

That the Libra concept would be 'making things up as it goes along' is evidenced by passages like this one from the White Paper: "...Our ambition is for the Libra network to become permissionless. The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem."

I read that as a kind of 'come with us now and we'll work it all out eventually' kind of clause. No. Sorry guys. I think this all needs to be worked out first.

Really the key thing is who might control a global cashless currency and value transfer system. That is the big question. But I think if we search for a perfect solution we'll be waiting for a while and in the meantime Libra will be over the hills and far away. 

Private interests shouldn't have a look in

I do think really that this initiative has to come from a combination of central banks and other regulators - worldwide. And I think private interests - no matter how they are dressed up - should not have a look in. They should be a very long way away from the decision process.

This is a really important issue on how we want the world to look and to trade.

Thanks to Facebook there's now real imperatives for people to sit down and work out a solution. And they need to do this and there is urgency.

If there's a vacuum, somebody will always look to fill it. Facebook has stepped forward to fill this one.

Global regulators must act now to make sure the world has a well thought out solution that fits as much of the population as possible. And acts in everybody's interests.

They really cannot afford to muck this up.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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We all now what happened to Libya when they tried to organise an alternative to the US petro dollar. I'm bullish on gold.

Gold is forever. The past 5000 years it has held it's value, for the next 5000 probably too.

Consider this brief passage: "Despite this progress, large swaths of the world’s population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access."

A deliberate ploy engineered by the Washington Consensus to deny certain population groups the right to use their land as collateral to raise credit domestically. Western "liberals" preferred that they accept foreign debt in order to pay tribute to them.

off the grid cryptos cant work in the long run unless the population decides they want corporations to govern the people.

All the things we take for granted like infrastructure, Health, schooling, police, defence and Law and order are all as a result of taxes and governance over time. If everyone went to Cryptos, the governments would have no option but to legislate to tax them and that would require the necessity of personal information to be exposed.

It then just becomes another bank account so either way cryptos are doomed

agree - cryptotopia has a millennial's blindspot ... ie the thinking that things like infrastructure just IS ....

How is Libra different from Wechat Pay. ?? Which is already used to rort and bypass the NZ tax system

It’s not. It’s like buying and selling iTunes gift cards. We need to delineate between genuine crypto currencies and what ever this is.

It's completely different for 2 major reasons:

1. You need a real world bank account with a Chinese Bank
2. It's denominated in RMB

Both of these means it is under China central bank's control.

Libra would not be under the control of any one entity. It would be controlled by tech companies, who would have to have a consensus for changing any part of the system.

I find this quite terrifying tbh - because once it's out there, it will catch on.
And for all their incompetence, I'd rather have the money supply controlled by an elected govt. than by an unholy alliance between Facebook and credit card companies.
A few thoughts:
-Would the US Govt. allow this to happen? Unless it's officially pegged to the USD, it could undermine the USD as global default currency. That would have potentially disastrous consequences for them.
-How would the money supply be managed, ie who would have the ability to create new money through lending? What an enormous power. Or would it be a deflationary currency a la Bitcoin?
-if it were freely exchangeable with other currencies, would stopping money laundering become impossible?

the US is the global default currency because its the basis for commodity trade (actual real stuff)
They have a military to ensure this remains the case
https://medium.com/@End_of_More/the-myths-of-crypto-currency-f5dea863d116

Supply is created when one purchases this Facebook currency and destroyed when they cash it out so to speak. It will reflect the money in circulation, not be its own currency. The only real benefit is that it could make international transactions easier? It isn’t a real crypto currency, just facebook’s attempt to draw you into using a Facebook product.

You aren't getting it Withay.

Supply is created when the tech companies decide to put more supply out there, based on a percentage of the assets they stump up at the start. Just like a banks reserve requirement ratio (NZ does not have, but other countries do). We will be able to "load up" our wallets by exchanging another currency (say NZD) with Libra to start with, which will then give the tech companies multi national currency positions.

But it will NOT just be a medium of exchange between existing currencies. Why? Because when I get an Uber and it gets charged to my Calibra wallet, that transaction does not touch any other currency. No NZD were involved. If I then perform a service (say cleaning Uber taxis), they will then want to pay me in Libra, which goes back to my Calibra wallet, which enables me to get 20 more Uber rides etc etc. I can then also pay for my google services, my Xero account and my spotify music. It creates a monetary economy outside of the control of any government, save the tech companies governance structure they create.

THIS is why they want tech companies to support it. More and more transactions with tech companies make a "tech currency" more viable.

And none of this will be trackable by the NZ government, nor will it necessarily be taxed (no GST paid). Essentially I have transacted in a non-national currency, so can ignore taxes if I wish and who would know? It becomes similar to a "cash job" that already exists, but one that can have much more reach and is much more trans-national in it's application.

Your correct about the second part however not the first (yet anyway). They have said that libra currency will be created when someone purchases a “Libra” (or whatever we’re calling it). I.e. $1 purchases 1 Libra, that Libra is created and is exchange for that $1. When that Libra is sold back for $1, the Libra created is removed from circulation. It’s meant to work in tandem with existing currencies not in competition with them.

Will it stay that way? I don’t know but that’s what they are prodosing for now. Again, correct on the tax and traceability issues however.

Edit: Here's a video explaining - https://www.youtube.com/watch?v=v8yKNmeU30U

Probably more so than in many generations, the world I know is going to be so different to that of my grandchildren.
In 1840, could Maori comprehend the world as it is today?
I have little certainty as to how the world will be in 50 years. Changes such as this will bring significant changes not only to our currency but government and economy.
I am in awe.

The current banking system is already a rort.

They just key-stroke money into existence then displace others in claiming rights to purchase 'stuff'.

There's isn't enough 'stuff' anymore, something economists and bankers deny. But the question about facebook is how long the supporting mechanism survives economic decline - and my answer is 'not long'. That, given the on-line nature of money, goes for banking too.....

I do think that the banking sector as we know it is going to be crushed in coming years.
They're intermediaries who charge a very large margin.
Once the IT infrastructure (which may include something like Libra) is in place, banking will be dominated by low-margin, probably monopolistic players.
Any inflation will come from the actual demand for reducing resources, rather than magicking of money by banks.

Any inflation will come from the actual demand for reducing resources, rather than magicking of money by banks.

Bank's aren't special - they don't have a monopoly on money/credit creation. ANY lending transaction creates new money supply so long as the lending organisation has sufficient credibility that enough people believe they'll be able to convert that asset to "cash' in future. Credit Unions, Building Societies, even finance companies, make loans that create credit in exactly the same way banks do. Hell, even you and i can create money under the right circumstances.

How about we all just agree to use gold again and link it to blockchain technology for ease of digitisation and accountability. Problem solved.

Hmmmm...

Commercial banks are supposed to be making safe and sound business loans to keep the U.S. economy humming, creating good-paying jobs and making America competitive around the world. But according to the latest OCC report, of the $38.57 billion held in precious metals derivative contracts by all Federally-insured banks and savings associations in the U.S., JPMorgan Chase Bank NA held $17.509 billion and Citibank NA held $11.691 billion. JPMorgan Chase is currently under a criminal probe by the U.S. Department of Justice involving precious metals trades.

Link

I don’t quite know the point your getting at but it wasn’t always this way. The first line is key though - “Commercial banks are supposed to be making safe and sound business loans to keep the U.S. economy humming” with inflation targeting these loans have gone to speculative purposes not productive. Why would anyone take a risk on a business loan when you can loan on a house where through continual inflation, the value of the loan is eaten away - much safer!

Just keep up with Max and Stacey, https://www.youtube.com/watch?v=Q1w6IntlnBg

Max Keiser on RT railing against the corrupt, decadent, declining West? Colour me aghast!

BIS - Big tech in finance: opportunities and risks - Link

All good until you do some wrongthink and Facebook blocks your wallet.

yes this is a real issue. There needs to be a global currency. It cant be linked to any existing unit, so I propose the quetzal which is but guatemala hardly counts as a world power. Everything at the moment is traded in ways that promote scalping. The new system would have to ensure speculators always lose money preferably all of it. the global repository of credit would need a staggering amount of care in its constitution to ensure people who put in cash or trees or widgets get certain numbers of quetzals and can always redeem them for that widget. clearly there would need to be exchange rates. No futures could be permitted as its speculation unless the speculators had money they screwed from the world previously. How we get rid of banks and credit companies and other stuff overnight is a major issue. Sorting out how the overarching repository gets some funding to run but not generate rorts is difficult. For once an article that could provoke deep thought about how the world needs to change.

Well I think it's fantastic. Central bankers have been woeful custodians of the monetary and financial system, time to give other options a go.

What people don't realise is that pre our modern monetary regime, there were often many competing "currencies" via bank issued bills backed by gold reserves.

I'd prefer a well governed and transparent Libra, over holding fiat currency that the central banks are deliberately and continuously trying to debase.

An interesting development. I remember in the late 90s when peer to peer transactions were supposed to come in but the banks squashed that into the dust pretty quickly. Libra could be the napster of banking, the question is will it be anybetter for us?

The equation is simple - Facebook collects interest on the stable coin reserve of Treasury notes. They pay us no interest. They win, we lose. It's called banking.