That was fast.
From the House Financial Services Committee of the US Congress to banks in Australia, reactions seem to reflect a similar thought put most succinctly in a statement released by the Bank of England: “We will approach Libra with an open mind, not an open door.”
The swift pushback from regulators and government financial institutions reflect one thing: there is an ever-present fear of digital currencies.
But where does this fear stem from? As can be gleaned from various statements that expressed apprehension over Facebook’s Libra, it most probably emanates from these five things:
Criminal Activity. Given its controls-free nature, digital currencies can easily be used for nefarious activities. In fact, there already have been instances where drug cartels have used cryptocurrencies to launder money. Channel News Asia also reported on digital currencies as the preferred mode of payment for online streaming of child abuse. Since there are no controls, authorities will find it difficult to shut criminal activities where digital currencies are involved.
Power. Digital currencies present a formidable challenge to the monetary and fiscal powers of established financial institutions. A giant company with a massive global presence like Facebook to launch its own cryptocurrency that runs on a dedicated digital wallet (Calibra) may cause a major power shift, resulting in many unintended consequences.
Control. Digital currencies such as Facebook’s Libra are borderless. They can be used for transactions practically anywhere at any time. How then can countries keep track of all these? Lack of oversight drastically reduces safety and security. Regulations may not be enough and economies may suffer as a result.
Economy. Given the challenge borderless and controls-less cryptocurrencies pose, more and more experts have come out to warn governments about these currencies potentially disrupting economies. A Binance Research report, while detailing some of the positive points of Facebook’s Libra, says this cryptocurrency could well be the “new unit of account for global trade.” When this happens, “a shift in monetary economics from public officials to private corporations which could ultimately hinder consumer rights and lead to new monopolistic environments in the global export/import industry,” the report went on to say.
Liquidity. In an article for Financial Review, professor of Comparative Law at Columbia Law School Katharina Pistor writes:
“The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide.”
Another article on the Finacial Times written by economist Colby Smith and the magazine’s editor Izabella Kaminska was more forthright with their objection to Facebook’s Libra. They wrote:
“The irony of Libra being represented by a balance is that its structure — unlike the SDR which actually does strive to rebalance the system — is more than likely to worsen global imbalances rather than improve them.”
In the midst of it all, Facebook, for the most part, has kept its silence and has yet to address these concerns. The Libra Association, the group of investors behind Facebook’s cryptocurrency pursuits, did show signs of attempting to quell the rising opposition to a Libra launch in 2020. A statement released last Tuesday assured the public that the group will “continue engaging with regulators, policymakers, and experts to solicit feedback and ensure that this global financial infrastructure is governed in a way that is reflective of the people it serves.”
Despite their best efforts, however, anxiety over Libra, as with other digital currencies, lingers. The challenge now is how to find a viable middle ground since, realistically, cryptocurrencies are here to stay.
Online magazine The Spectator sums up this sentiment with this statement lifted from an article published in 2018, “But as cryptocurrency matures and grows out of the phase of irrational speculation, its uses will become clear. Better to find ways of working with these currencies than trying to banish them or pretend they do not exist.”
When that will happen, is, without a doubt, the question.