Nothing quite gets your attention in the morning like an existential crisis — which is precisely what Facebook’s proposed Libra cryptocurrency was to central bankers.
Mohammed Abdul Hamzar wiped the sweat from his brow with the back of his dirt-stained hand. Streaks of brown earth drew crooked lines across his forehead, like the Tigris river during the dry season.
In the oppressive Syrian summer heat, Hamzar didn’t notice the dirt or the heat.
His fatigues drenched in sweat, the only thing on Hamzar’s mind right now was getting to cover and taking care of his men.
As a member of the Syrian opposition fighting against embattled Syrian President Bashar Al-Assad, Hamzar was a member of a motley crew of rebels, entwined together in a patchwork alliance of competing interests and ideologies.
To say that the Syrian conflict is complex, is to say that quantum mechanics is like solving for fractions — it’s a gross understatement.
And nowhere was this more evident than in the summer of 2016.
As bullets rained down on Hamzar’s position his radio suddenly crackled to life.
“Brother are you there?”
“Yes brother, where are you now.”
“I’m being pinned down near the old mosque. Da’esh (ISIS) is on my left flank and there are government forces just two blocks down from my position. Brother, can you and your squad flank the infidels and get some fire off my position.”
The “brother” on the other end of the radio was from a different rebel faction, a fierce rival of Hamzar’s more moderate rebel group and the two had only just recently agreed to work together despite having fought each other ferociously on more than one occasion.
“Yes I am here,” Hamzar replied.
“Where are you exactly?”
“Two blocks left of the market, in the old post office.”
As Hamzar readied his group of men to move out, a hailstorm of mortar fire rained down on his position.
In an instant, concrete and flesh, bone and metal were sent scattered and flying in all directions.
As the walls and roof of the old post office were pounded to dust, Hamzar breathed his last as his body was ripped to shreds by shrapnel and concrete shards.
In the ensuing chaos, fingers would be pointed in all directions as to who was the party responsible for bringing down Hamzar’s position and scores of men fighting both Da’esh and Syrian government forces.
Hamzar’s rebel leaders would point the finger at the Syrian government. But men on the ground would claim that Hamzar had walked into a trap and that the radio call had been in fact a ploy by the rival rebel faction to get him to reveal his position.
Others would claim that Da’esh had just got lucky and randomly shelled the position on picking up radio transmissions.
In the fog of a civil war as confounding as Syria’s, anyone and no one could be simultaneously implicated for any manner of mishap or mayhem.
Because alliances built on competing interests are only so deep.
Which is why Facebook’s latest troubles with getting its Libra cryptocurrency off the ground was always going to be tricky.
Like the Syrian rebels, the loose coalition that Facebook had founded to back its fledgling financial foray was always going to be fractious.
With strongly competing interests, rivals were put alongside each other and naively assumed to buy into a vision of a new global cryptocurrency
And cracks were bound to surface eventually on an alliance built on such weak foundations.
But if nothing else, Facebook’s foray into financial technology has laid bare the very obvious shortcomings of cross-border payments and financial inclusion.
In a world where shoppers in rich countries expect their every need and want fulfilled in as little as ninety minutes or less, with goods and services coming from all across the globe, payment service providers and companies have been making a killing off the myriad fees that are the cornerstone of the payments business.
But while rich country customers may ignore transaction fees as the cost of convenience, where it truly hurts the most is for the millions of overseas workers remitting money back to families and loved ones and where transaction fees can sometimes place an unenviable burden of some 14% of the amounts transferred.
Which is why central banks, who are ill-equipped and ill-prepared to address that problem, must either engage other agencies to do so, or staff their numbers such that they can solve the problem themselves.
Square Peg, Round Hole
The issue is complicated by the fact that cryptocurrencies such as Libra (though arguably not strictly speaking a cryptocurrency in the purest sense of the word) are not just “currencies” but payment systems in and of themselves.
Think of it as if the dollar in your pocket was also a debit card that had the ability to go to any part of the world instantly.
While central banks are geared towards tweaking and managing monetary policy by way of interest rates, they are not so structured to take on the conundrum of payment systems.
The problem though is that cryptocurrencies are both.
In an interview with Bloomberg last week, Monetary Authority of Singapore (MAS) managing director Ravi Menon noted,
“They (Facebook) are pointing to a correct problem, they are offering a solution.”
Menon suggest that the challenge is to see if similar results can be achieved “within the existing banking framework — which is tried and tested” and with the involvement of central banks.
Menon’s MAS may be more adept to do so than perhaps other central banks.
Because the MAS is both a financial regulator as well as the central bank, giving it both authority over financial regulations as well as monetary policy, the two can be coordinated in concert, to deal with new developments in a timely manner.
Back in the United States however, the Federal Reserve which controls monetary policy is separate from the regulators — an alphabet soup of agencies with competing interests, agendas and mandates.
But that doesn’t mean that the Fed as well as regulators should dismiss the challenge that Libra has presented to them.
Facebook set off alarm bells among central banks in June with its plan to create a cryptocurrency seen by many as an existential threat to existing monetary regimes and the power of central banks to influence monetary policy.
But the challenges raised against Facebook’s Libra have at times been disingenuous, with the U.S. Federal Reserve chairman Jerome Powell raising concerns about Libra on the grounds of money laundering and consumer protection and the European Central Bank’s Yves Mersch describing it as “beguiling but treacherous.”
Because while Libra could well be used for money laundering, the responsibility for preventing that abuse should lie with the payment processors as opposed to being leveled against the cryptocurrency itself.
For instance, the dollar is the world’s favorite currency for money laundering, followed by the euro, yen and then the yuan — should that therefore mean that all of these currencies be banned?
What central bankers have not come out to admit is that their real concern with Libra is the threat it poses to central bank and national hegemony.
Banking for the Unbanked
Over 1.7 billion people around the world, including in some of the richest countries are “unbanked” meaning they do not have access to a bank account and the financial services which many others take for granted.
Whilst most in the rich world take bank accounts, credit cards and online shopping for granted, almost one in every three adults in the world can’t even have a bank account to borrow money to develop a small business, or to raise a farm.
Meanwhile, a study on worker remittances by the World Bank revealed that it costs on average 7% in fees and commissions to send US$200 across the globe.
While US$14 may not seem like a lot, in many developing nations, that amount is sufficient to feed a family of four for a week.
At least Singapore’s Menon has the integrity to acknowledge that Facebook’s Libra shows the banking community has not done “too good a job” and needs to provide an answer.
Menon hints that unless legacy financial institutions rise to the occasion, new technologies such as cryptocurrencies will disrupt them,
“Do we need a Facebook kind of solution outside of the banking system in order to solve this problem? I am not so sure.”
To be sure, Facebook itself is struggling to get Libra off the blocks.
With a patchwork coalition of directly competing interests and well-embedded rivalries, the constitution of the Libra Association was flawed from the very beginning.
While a critical part of Facebook’s plan was to secure the support of major players in the payments and technology industry to launch its stablecoin, it was this very reliance on legacy payment services providers that led to the current state of crisis.
Already, Mastercard, Visa and eBay have dropped out, as has PayPal.
Card issuers Mastercard and Visa make billions of dollars a year by supporting the legacy payment systems and eBay which partners PayPal has a stranglehold on digital payments for small retailers across the globe.
Why then would they stake their reputations, as well as invite regulatory scrutiny just to join a coalition that has politicians’ favorite punching bag Facebook at the helm?
Go It Alone
With little commercial interest to back the project as well as strong downsides to teaming up with Facebook — Libra was always something that Facebook ought to have pursued on its own.
Facebook’s vast ecosystem with over 2 billion users means that it could have developed Libra’s payment systems and processes organically.
Remember when Facebook first started and many people were reluctant to sign on?
But because all their friends were on, they signed up anyway and got hooked?
Same with Instagram?
It’s called a “network effect.”
And Facebook could easily have used its substantial network effect to roll out a payments system that would have had far more efficacy than working with the likes of Mastercard and Visa.
Because ultimately when more and more customers want to use Libra, it will cost retailers and merchants more to exclude themselves from that ecosystem.
Whilst Facebook’s attempt to build a coalition was no doubt a result of trying to diffuse some of the regulatory scrutiny and media spotlight away from itself, it was naive to think that the Libra Association would have achieved that in any meaningful way.
With Facebook at the helm, Libra was and will always be viewed as a Facebook project first.
And Facebook will still take the point when Libra is being scrutinized by Congress and lawmakers across the globe.
The Discussion Has Barely Begun
Libra may be dead in the water for now.
And cryptocurrencies (for now at least) provide a halfway house solution that is not entirely satisfactory either.
Against this backdrop, the ground is fertile for a decentralized solution that is neither completely off the grid like Bitcoin, but not completely on the grid either like Libra.
Such a hybrid system would probably take the form similar to the Hong Kong protest movement — decentralized, but devastatingly effective.
To quote Bruce Lee, that cryptocurrency would have to take this form,
“You must be shapeless, formless, like water.”
“When you pour water in a cup, it becomes the cup.”
“When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash.”
“Become like water my friend.”
Lee may not have known it at the time, but perhaps he coined the perfect definition of what a currency should be like — water.