It's T+4 since Facebook revealed details of its audacious plan to take over the global monetary system with a cross between a weirdo multi-currency-board type thing and a global digital reserve.
Facebook is insisting the system is decentralised because “blockchain”. And that it's fully universal and democratic because, erm, “blockchain”. Alphaville, if you hadn't noticed, isn't so sure.
Questions not yet answered include:
1) Would people banned from Facebook be able to use Calibra (the Facebook subsidiary that plans to offer payment services using Libra to users)?
2) Would people banned by Facebook — in the envisioned fully permissionless future of Libra — be able to acquire limitless nodes and thus potentially influence the network?
3) Would Facebook be free to rehypothecate assets acquired with customer deposits? And if so what risks does this pose?
4) Does anything stop Facebook from one day changing the rules about redeemability and/or the degree of collateralisation?
But another central point being missed by many commentators is that as it stands Libra (and other cryptocurrency global currency replacement aspirants), are merely closed-loop systems.
For a bit of background about the difference between closed and open-loop payments systems, and the reason why credit is usually preferable in the latter, see here.
On that note, we'd like to highlight the following points recently raised by Swift in an outline of their vision about how payments of the future should work (H/T Frances Coppola for bring this to our attention). With our emphasis:
Importantly, we don’t think that cross-border payments challenges should be solved for with closed loop systems. Doing so would easily solve for a subset — or multiple subsets — of participants, but value needs to move everywhere — from every account, to every account. Loops create barriers and friction; they reduce fungibility and portability, they limit competition and they fragment liquidity.
With goods and services moving more quickly and across greater distances than ever before, value needs to shift further, faster. Value transfers must be friction-free. Bank account to bank account. They must also be safe, secure and compliant. While banks sit at the centre of this, the core architecture is key. It must be open and trusted, innovative and resilient; its reach must be ubiquitous and its operations robust. It must enable smart, embedded, instant payments, 24/7 from every account to every account, everywhere. It must support banks in this journey.
You can think of closed-loops as mini sovereign zones. Yes, payments can be quickly and easily facilitated within those zones because everyone in them is subject to the same autocratic overseer and thus theoretically the same trust base. They're great if the overseer has large reach. But the problem which eventually emerges is that, ultimately, nobody wants a market dominated by just one payments overseer who can dictate what value gets to be transferred and to whom, and what can't.
Furthermore, in a free market nothing stops another entity from launching a competing closed-loop system anyway. While we can agree that competition is a good thing in that context, the problem with multiple closed-loops running side by side is that due to their intrinsic competitive nature (and different approaches to whom they let into their zones and how they manage risk within them) they don't interoperate easily.
The inherent frictions between closed-loop systems (multiple sovereign states) is what brought about the need for open-looped solutions.
Sticking with the sovereign metaphor, opened-loop systems engineer the illusion of frictionless transfer with effective multilateral “trade agreements” between all participant closed-loops systems in their network (which in the past included banks).
The sovereignty clue was always in the name Visa. Once standard-based agreements have been forged between closed-loop “states”, all the respective members of those states can easily passport in and out of each other's zones. It's the equivalent of the free movement of people, but in money terms, based on the notion that everyone in the open-looped system is signed up to some basic common principles with respect to how they manage risk and who they are, and are not, prepared to bank.
Hence why it's often difficult for challenger closed-loops systems to gain access to such multilateral transfer zones, especially if they're coming to market on the basis they've found a way to bank people other closed-loop systems might avoid.
The closed-loop/open-loop barrier exists on a national level, but it's obviously even more pronounced on a cross-border basis. That's because on an international level it's not just a varying business model that undermines the uniformity of the respective interoperating closed-looped systems. It's also law, the manner in which the law is enforced, culture, governance, tax, attitude to protectionism — to name a few.
In other words, it's exactly the same sort of stuff posing cross-border costs and frictions that poses costs and frictions when it comes to free and interoperable trade.
Bear that in mind with the following points raised by SWIFT (with our emphasis):
Cross-border payments are inherently more challenging than domestic ones, precisely because they involve bridging the “closed loops” of multiple currency systems. Adding to the complexities presented by the world’s 180 currencies and many more regulatory jurisdictions by introducing new “value loops” will slow down the movement of value, not speed it up — at precisely the time when technology affords progress, and economics demands it. With goods and services moving more quickly and across greater distances than ever before, value needs to shift further, faster. From account to account, in an instant. Only a seamless and open global value transfer system can enable that.
SWIFT understands the political reality of why cross-border payment frictions exist. They're not technical problems, they're political problems.
Facebook's Libra initiative in that context implies two very concerning things.
The first is that Facebook — despite all its access to capital and talent — possibly doesn't understand the basic problem it is trying to solve. If that's the case, that suggests it's not a business worth investing in.
The second — possibly more alarming thing — is that Facebook does understand this, but it doesn't care. And that's because it's objective isn't building an open-loop decentralised system, but quite plainly, getting the world at large to onboard, politically and financially, into its holistic and autocratic system.
James Bond movies were made about far less audacious global domination plans.
- Libra is imperialism by stealth
- France says it won’t allow Libra in Europe
- ECB board member slams “cartel-like” Libra
- Facebook fights back against Libra criticism
- Libra myth-busting (video)
- Nick Clegg: “I'm not just providing a PR gloss”
- A pound of flesh for your Libra inclusion
- Facebook's Libra will not help the unbanked
- Facebook’s Libra: blockchain, but without the blocks or chain
- What exactly is Facebook's Libra Reserve?
- Alphaville's Libra cheat sheet
- Zuckerberg: The man who would be monetary king