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Facebook’s New Competition: The U.S. Dollar

Photo-Illustration: Jed Egan, Photos: Getty Images

At least it’s not “GlobalCoin.” For months now, rumors, leaks, and speculation have held that Facebook’s newly developed cryptocurrency — the entrance of the most powerful private surveillance apparatus on the planet into a sector created by and for obsessively secretive cypherpunk libertarian cranks — would be called “GlobalCoin.” It felt a bit on the nose. (Was NewWorldOrderCoin already taken?) Instead, the coin will be called Libra … a reference to the currency system of history’s most famous conquering empire, Rome. I personally would have gone with “Facebucks.”

Libra, which was finally, officially announced this morning, is expected to launch in 2020 with Calibra, a digital wallet for securely storing the currency that can be used as a stand-alone app or in WhatsApp and Facebook Messenger. Previous reporting has suggested that Indian WhatsApp users will be first to have access to the cryptocurrency, for no- or low-fee money transfers, and Facebook has apparently, and uncharacteristically, been wooing regulators and central bankers around the world to smooth the coin’s landing.

The Libra blockchain — that is, the shared ledger of all transactions made in Libra — will be maintained by a network of nodes, which verify transactions and store the continuously updated record. These nodes will be operated by outside companies (early partners seem to include Mastercard, PayPal, Uber, and, each of which will reportedly pay $10 million for the privilege, and the money from these licensing fees, the Information reports, will be used to back Libra with a “basket of currencies and low-risk securities from various countries,” keeping its value stable. How, precisely, users will exchange Libra for physical currency remains to be seen, though the most likely option is that Facebook partners with a cryptocurrency exchange, and the Information reports that there are plans for “physical terminals similar to ATMs.”

Facebook is insistent that Calibra will not share “account information or financial data” to it, or to third parties — but that the wallet will use Facebook data to “comply with the law, secure customers’ accounts, mitigate risk and prevent criminal activity.” What this means in practice is not precisely clear, except that Facebook wants to make sure you’re aware that your Libra account balance will not be used to help target you with ads on its main platform.

The coin itself will be governed by an independent foundation, the Libra Association, consisting of representatives from Facebook, financial institutions, nonprofits, merchants, venture capitalists, and the companies running the nodes. Facebook is already working on creating its own private supreme court, after all; why wouldn’t it want its own private, independent central bank as well? This highly centralized structure is very different from that of “traditional” cryptocurrencies like bitcoin, which spurn centralized authority and allow anyone to set up a node for free. And unlike Libra, whose value will be fixed to the aforementioned basket of currencies and securities, most cryptocurrencies don’t maintain fixed exchange rates — which is exactly what makes crypto such an exciting and volatile speculative market.

Libra, by contrast, is intended to be boring because Facebook’s short-term plans for the currency are similarly boring or, at least, straightforward: Facebook wants to enter, and own, the cross-border payments market. If it is indeed launching in India, it’s not as part of a test run but because nearly $80 billion in remittances were sent to India in 2018; with more than 200 million Indian WhatsApp users already, the company is well-positioned to make its apps, and its currency, the method of choice for international money transfers to India — and, eventually, the world.

But domination of the $689 billion global remittance economy is not actually Facebook’s end goal. In fact, it almost certainly won’t make much money directly from cross-border payments, since unlike its competition (payment systems like M-Pesa or remittance apps like PayPal’s Xoom), Facebook reportedly won’t charge transaction fees for peer-to-peer payments. That’s a very bad way to make money, but as Facebook knows well, it’s a very good way to entice new users into your network and, in turn, to convince stores, restaurants, and other businesses to set up to accept GlobalCoin in payment.

This is the medium-term plan for Libra: To compete not just with money-transfer businesses but with credit-card companies, using cross-border payments as the beachhead for all payments everywhere. You receive a no-fee Libra payment from an expat family member, and then use that Libra to pay back a friend, who in turn uses the Libra to pay for a Chicken Maharaja Mac at the local McDonald’s. Facebook here is openly mimicking WeChat, which is both China’s largest social network and also the country’s ubiquitous payment app, an utterly dominant Facebook–WhatsApp–Apple Pay–Venmo–Seamless hybrid.

It’s easy to see why Facebook might want this. There’s a familiar business model in merchant fees (though, if you’re levying payments in the currency that you yourself mint, “taxes” might be a better word), and payments fit much more naturally than advertisements in the privacy-focused, chat-based future that Mark Zuckerberg claims is coming for his company.

But Facebook insists that its merchant fees would only be high enough to cover the cost of fraud risk. The real value of becoming the world’s ubiquitous payment app (outside of China, at any rate) goes beyond the revenue from merchant fees. Facebook’s biggest problem right now — the problem that lurks behind stagnant user growth in Europe and North America — is that it’s just not essential. Like any megaplatform, Facebook wants to be infrastructure: a service so important to daily life that most people have no choice but to use it. But Facebook in 2019 is increasingly easy for Americans and Europeans to quit without particular consequence, in a way that Google, say, isn’t.

Libra could, if it takes off, change that. Payment infrastructure isn’t just (potentially) more lucrative than social infrastructure, it’s much less easy to replicate, either on the business side or on the consumer side. It’s pretty easy to quit Facebook, the app where you fight with your childhood neighbor about politics. It’s much more difficult to quit Facebook, the app you use to pay your rent.

I imagine the widespread adoption of a digital currency on an aggressively centralized and privately surveilled blockchain tied to real-name ID is not really what the bitcoin faithful had in mind when they got into cryptocurrency in the first place. Even so, there’s some excitement about Libra among crypto nerds, who are hoping that Facebook’s backing will normalize cryptocurrency and entice the uninitiated into crypto culture. But the opposite seems more likely to me. Once you’ve got a usable digital currency, why would you want to “get into” other currencies? I use dollars every day, but don’t spend a lot of time buying up euro and yen.

Still, it’s worth asking, at this point: Why a cryptocurrency at all? If the limit of Zuckerberg’s ambition is to be the Western WeChat, or the new Visa and American Express, why does Facebook feel like it needs a whole new means of exchange? It could partner with a global banking conglomerate to undercut rivals’ fees, and leverage its already enormous network to enter the payment sector, the way WeChat or, to a lesser extent, Apple has — all without having to build out an enormous, headache-inducing technical and regulatory apparatus.

But since when has Zuckerberg limited his ambition to competing with mere companies? As far as I know, there’s only one other entity out there developing a blockchain-based digital currency for a billion-plus-member economy: China. The People’s Bank of China has been amassing blockchain and digital-currency patents as it develops its own cryptocurrency — loosely pegged to a basket of other currencies, just like Libra — which could help it more efficiently monitor and control capital flows. (So much for the decentralized, anarchist dream of cryptocurrency.) Facebook doesn’t want to compete with Mastercard, or even with Goldman Sachs. It wants to be the currency platform Mastercard operates on. Facebook’s payment product is a whole new currency because its long-term competition isn’t PayPal or Visa or even WeChat, but the renminbi, the euro, the yen, and the dollar.

There’s long been a segment of crypto nerds for whom the ultimate goal of bitcoin is that it replace the dollar as the global reserve currency, held in mass quantities by monetary authorities and used as the dominant unit of account for international finance. But for most of its still fairly short life, bitcoin has been much too volatile, difficult to use, and unregulated for the idea of a global reserve cryptocurrency to be anything but a wild pipe dream.

But what if — bear with me now — you had a stable cryptocurrency, created with regulator and institutional accession, and already in frictionless circulation among 2.3 billion people? Plenty of economists and central bankers have suggested that a supranational instrument might make for a better reserve currency than one printed by a national monetary authority. John Maynard Keynes’s proposed currency, the “Bancor,” is notable in that it might actually have a worse name than Libra, but it also seems to presage the ambition of Zuckerberg’s project — albeit as the product of an international system of cooperating sovereign governments, rather than as an app created by a Roman Empire–obsessed programmer.

We’ve now entered the realm of wild, dystopian speculation, of course. Facebook has already tried and failed to build a sustainable proprietary payment system, called Facebook Credits, and there’s every chance that Libra could similarly fail. Even its short- and medium-term goals of entering and dominating payment sectors will be difficult to achieve — let alone the unprecedented idea of a corporation’s private digital currency being widely enough adopted and respected to be the foundation of a global reserve currency.

But Facebook, right now, is being very open about its plans to remake the world’s financial systems. People may even welcome that: In the global banking industry, Facebook has probably found the one group of corporations less liked and less trusted than itself. But if you think Facebook is powerful now, just wait until it’s, essentially, the global federal reserve, overseeing a global currency over which it has not just monetary control but a visible, minable record of every transaction made. Maybe GlobalCoin would have been the right name after all.

Facebook’s New Competition: The U.S. Dollar