By: Matein Khalid, Chief Investment Officer and Partner at Asas Capital
It is ironic that Facebook and its corporate partner constellation (Visa, Mastercard, Lyft, Vodafone, PayPal and Uber but no big money centre banks) decided to launch Libra at a time when the world’s financial regulators are struggling to fight narco/terrorist financing, tax evasion and money laundering in the global banking system. After all, cryptocurrencies appeal precisely to these sort of people, from North Korean dictators, Mexican cocaine kingpins, tax evaders, black money hawala syndicates and third-world warlords, denied access to the legitimate cross-border banking channels.
Moreover, as the spectacular flameouts of the Bitcoin ecosystem in 2018 proved, cryptocurrencies are anything but a stable unit of value or credible medium of exchange. The spread of ATM’s and credit cards/“mobile wallet” technology enables human beings to move money at literally the speed of light via legitimate, regulated banking intermediaries. The Federal Reserve and the ECB have also won the 1980’s war against inflation – in fact, technology’s global dominance threatens the world with deflation, not inflation.
So who needs crypto-currencies in the first place other than their usually dodgy promoters? After all, 70% all initial coin offerings (ICO’s) have turned out to be fraudulent and the NSA’s Snowden scandal has proved even the most sophisticated network technologies can be hacked. Facebook is demonized in Congress and the European Parliament for its sheer scale and cavalier attitude to data privacy, as demonstrated in the Cambridge Analytica scandal. Should Facebook be trusted to dominate the world’s banking, payments and remittance systems and allowed to extract monetary profits from its 2.4 billion users as well?
Of course, financial institutions, money exchange houses and even illicit hawala syndicates charge their customers a multiple above the true microscopic cost of cross-border electronic money transfer systems. This can easily be remedied by legislation and regulatory action, assuming that the banker lobby did not “capture” the parliaments and regulatory agencies in the first place. Sadly this is not the case as the West has the best democracy money can buy. In essence, Visa, Mastercard, Citigroup, American Express and all the sanctimonious brands of global finance (with slogans like “we are here for good”, “The world’s local bank”, and “Bank for a changing world”) extract hundreds of billions of dollars in “rent” from the world’s consumers while charging them with proprietary money transmission ecosystems.
Facebook would never have launched Libra if Mark Zuckerberg did not covet the untold billions in rentier profits made by the credit card payment processes and banking platforms in the remittance/money exchange business. Yet the launch of a new alternative currency creates an immediate global economic externality – it becomes an immediate magnet for terrorists, dictators, money launderers and tax evaders who need to move dirty money across borders.
Libra will also create a backlash among smaller, more vulnerable countries losing control of their sovereign banking systems by the sheer anti-competitive global scale of Facebook. Capital controls, for instance, will be routinely violated in the Age of Crypto and Libra could well trigger global monetary shocks as a secondary effect. Libra will be a vehicle for tax evasion on a global scale, particularly from high inflation countries with unstable politics, a recurrent theme across the emerging markets/Third World.
The people who would exchange US dollars for Libra “deposits” that pay no interest are precisely the people who want to hide or move their money around the world to camouflage its provenance.
Facebook’s business model is based on mining and selling the terabytes of data it collects from its users – and Libra transactions will be no different. Its data mining technologies will give it unjustifiable market power over literally billions of human beings, including some of the poorest people in the world. Technology can be easily abused for illicit ends. For instance, while I was Nairobi last month, I learnt how Somali Al Shabab terrorists used M-paisa mobile money to finance their terrorist attack against the Dusit Thani hotel.
Chris Hughes, who co-founded Facebook with Mark Zuckerberg in a Harvard College dorm, is a fierce public critic of Libra. He believes Facebook’s “mantra” – move fast and break things – as well its obsession with growth and user data, will inflict great harm to the global financial system. Hughes argues that Libra could shift control of the world’s monetary policy from Facebook to private payment processing companies Visa, Mastercard and PayPal, let alone Lyft, Uber and Vodafone. He is blunt in his warning. “If regulators do not act now, it may be too late”. He is dead right.
The world cannot allow a major alt-currency to be self-regulated by its corporate promoters – Facebook-dominated, Swiss-based Libra Association. True, Libra will enable 2.4 billion Facebook users (and any human being alive on earth) to transmit money across borders at a fraction of the cost charged by middlemen such as retail bankers, and exchange houses. While laudable, this enables people all over the world to subvert the capital controls and foreign exchange regulations of their nation-state.
Inflationary policies in my own country Pakistan, 210 million citizens faced a brutal 50% devaluation of the rupee since July 2017. The Indian rupee, fiat currency of a $2 trillion economy that is the darling of emerging market investors, fell from 35 to 74 in the last decade. Yet the solution to this macroeconomic tragedy is not to create destabilizing capital outflows from fragile emerging market banking systems in an obsessive corporate quest for profit and power. The mantra of “disruption” should not be allowed to gut the financial systems of 130 of the poorest, most badly governed emerging nation-states in the world.
Central banking, while not ideal, is essential to maintain the stability of national currencies, combat inflation and smoothen the business cycle. Those who believe the Federal Reserve is the root of all should educate themselves about the periodic panics, busts, bank runs and economic depressions of nineteenth-century America, the ultimate emerging market between the end of the Civil War in 1865 and the Japanese attack on Pearl Harbour on December 7 1941, FDR’s “day of infamy”.
Would Facebook condemn the world’s emerging markets to a pre-central banking era of monetary chaos, a Darwinian struggle for survival they cannot possibly win?
Hughes evoked the Greek debt crisis as an example of the havoc wrought when an emerging market currency (drachma) is exchanged for a foreign substitute (Euro). Greece faced its worst economic contraction since the Great Depression, 25% decline in its GDP and the highest jobless rate in Eurozone. This would be the fate of many nations if the world shifts to a “Libra standard” – stable coin! The world would face not “decentralized governance”, as Facebook touts, but a Hundred Years War of monetary chaos, the mightiest concentration of economic power in human history. So please, Uncle Sam, do the right thing. Do it. Do it now. Ban Libra.
Opinions expressed in this piece belong to the author and do not necessarily reflect the opinions or beliefs of AMEinfo organization and/or staff.