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Facebook has relaunched its digital currency “Libra,” an effort by the giant social media platform to enter the rapidly evolving market for digital payment systems. It has a new group, Facebook Financial, to take a broader look at digital payments. This is a good move, as the blend of social media app and digital payment makes a strong combination as we move toward a cashless society. Digital payment systems, which use technology to pay or transfer funds, are linked to the ubiquitous mobile phones and already dominate transactions. In the United States and European Union, cash is only used in 30 percent of transactions. Libra’s first launch ran into a wave of disapproval. This points to what Facebook needs to do to make Libra work. It’s not a bad idea; it’s just not ready to compete with government on issuing currency, but it could compete with other digital payment systems.
The move away from physical currency began nearly 90 years ago with the introduction of “fiat” currencies. Some of the criticisms of digital payments echo the critiques of the move from gold- or silver-backed currency to paper currency backed by the full faith and credit of whichever government happened to have issued it. Gold is intrinsically valuable; paper is not. What we use today is a “fiat currency” whose value is set not by silver or the gold stored in Fort Knox but by government decree. Fiat currency is used in all nations of the world. There are still those who pine for the gold standard, but they are deluded.
Fiat currencies are no longer the same thing as cash. In many countries, people no longer carry significant amounts of cash. In the United States, they carry plastic. Plastic is also not intrinsically valuable, but it is accepted for most transactions. Credit cards are the most widely used digital payment system in developed countries, and the card system is lucrative for the issuers, who get a share of every transaction. Digital payment systems or digital currencies like Bitcoin or any other private digital currency hopes to offer similar services at lower cost. But direct cost is not the only determinant of consumer choice in paying for transactions.
Crypto ideologues hope to displace banks and other financial institutions, allowing people to transact instantly, without intermediaries and across national borders, but these efforts have run into issues of trust (more accurately, a lack thereof) and regulation. Libra shares these problems. Payment systems are based on trust, created by accountability, transparency, and stable value. The holder of the cryptocurrency is asked to trust that the crypto “coin” will be accepted by other people in a transaction and will not lose value. Paying with cryptocurrencies is like using a physical commodity for payment, like trading the requisite number of bales of hay for a new car, making them, if nothing else, inconvenient.
In its new form, Libra is backed by “stable coins,” which themselves are pegged to a reserve currency (like the dollar, pound, or euro) in order to provide a degree of stability. This is not dissimilar to paper fiat currencies, which are also backed by central bank reserves. The key difference is that there is greater accountability and transparency in government-issued currency. This is not always absolute, since countries can manipulate the value of their currencies, but there are well-developed exchanges that provide transparency and market disciplines to set valuation. Fiat currency valuation (measured by other fiat currencies) can fluctuate due to market demand, economic conditions, or government monetary policy. For reserve currencies and the currencies of many governments, these factors are relatively transparent and usually predictable. The lack of transparency and stability is one of the chief drawbacks of private digital currencies.
We can put aside the cryptocurrency jargon surrounding Libra, which appears intended to persuade consumers that Libra’s value is not dependent solely on Facebook’s whim, but on some objective process. Libra’s decision to use “stable coins” backed by government-issued reserve currencies is an effort to reassure consumers and reduce volatile fluctuations in the cryptocurrency’s value. The issues of value and trust are central to the acceptance of cryptocurrencies and digital payment systems. Facebook’s changes to Libra are an improvement, making it more like a check written by Facebook that you could offer to trade for goods or services. Some say that Facebook is not a government, so why is it offering a currency? But this criticism is unfair. Whatever else motivates it, Facebook created Libra to make money. Libra is not competing with governments in the issuance of currency. It is competing with credit card companies and mobile payment systems like WePay, Alipay, or Venmo.
By creating its own cryptocurrency, Facebook may hope to underprice credit cards. Like a credit card, Libra offers a digital means to transfer value. Value is determined by the willingness of others transaction parties to accept the Libra in exchange for a good or service. If Domino’s was willing to sell you a pizza for one Libra, that would make Libra worth (when denominated in dollars), about $10. Denominated in pizza, the Libra would be valued at one, but people have become accustomed to using dollars or other currencies to measure value.
Most pizza chains do not accept cryptocurrencies since their value remains uncertain and the infrastructure for their use non-existent. With credit cards, a digital infrastructure largely invisible to customers and vendors ensures a seamless transfer from one bank account to another while reducing transaction and exchange risks. Why carry a currency that no one will accept?
Ease of use is a major problem for all cryptocurrencies. They are difficult to acquire and used mainly for speculative or criminal purposes. Facebook may hope that by linking Libra to its billions of users, it can increase acceptability while finding another way to monetize its customers. But to do that it needs to persuade venders, customers, and regulators to trust and use Libra. A failure to denominate in dollars hurts Libra and helps its competitors. Making Libra more like a credit card and less like a cryptocurrency would help.
Libra is not the most important recent step in the evolution of money. China’s digital currency, issued by its central bank, is more interesting. Americans still carry plastic cards, but the Chinese are well beyond that. Mobile phones have replaced plastic cards in China, using systems like Alipay. Alipay saves a user’s credit or debit card details on their mobile phone (similar to Apple Pay but linked to Ali’s social network, which speeds transfers). Clearing away all the cryptocurrency mumbo-jumbo and one-world financing assertions, Libra probably is an improvement and could offer lower costs than credit cards if the trust and regulatory issues can be overcome, but Alipay is probably still better positioned. China’s approach elegantly solves the issues of trust, infrastructure, and acceptability. Libra is on the right path, but not at the end of its journey.
James Andrew Lewis is a senior vice president and director of the Technology Policy Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s)
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