Views on the News: Facebook cryptocurrency
On October 23, Facebook CEO Mark Zuckerberg will testify before Congress on Libra, or Facebook’s version of a global cryptocurrency. Zuckerberg states that Libra will help millions of people who don’t have access to banks complete financial transactions worldwide, and a coalition of companies called the Libra Association — consisting of 21 members including Spotify, Uber and Lyft — have signed on to use the currency. Zuckerberg’s critics, however, state that Facebook should not be the face of the currency, and call in to question Facebook’s ability to securely handle transactions of cryptocurrency, given its mishandling of private information in the past. What do you make of the potential risks and benefits of Libra currency in comparison to other cryptocurrencies? Should Facebook be the organization to represent it?
Prof. Stephen Cecchetti (IBS)
The stated objectives of creating Libra are to improve the efficiency of payments, reducing costs and speeding transfers; and to improve financial access. While these are laudable goals, it is essential that we achieve them without facilitating criminal exploitation of the payments system or reducing the ability of authorities to monitor and mitigate threats to the financial system. In addition, any broad-based financial innovation should help consumer smooth consumption when income fluctuates. On these criteria, Libra fails. Libra could facilitate criminal uses of finance and could itself threaten financial disruption. Not only that, but for those in advanced economies who use it, Libra will likely add uncertainty to the purchasing power of savings. And, for the countries whose currencies are excluded from the Libra portfolio, it will diminish the government’s seignorage revenue, while enabling capital outflows and, in periods of stress, accelerating capital flight.
Stephen Cecchetti is the Rosen Family Chair in International Finance at the Brandeis International Business School.
Prof. Debarshi Nandy (IBS)
Innovation brings about disruption of existing norms – when these norms were about how we interact with others socially, alarm bells did not go off instantly, rather it took several years to identify problems such as “fake news” and willful misuse of these technologies. Libra, on the other hand, has raised immediate concerns and questions for Facebook. Financial regulators can foresee the potential misuse of financial data and circumvention of regulation, leading to financial instability and increased systemic risk.
Libra claims to improve financial inclusion, efficiency of financial services, and lower costs to consumers. All this has the potential to decrease worldwide income inequality and spur economic growth, only under the assumption of global financial stability – a premise that may not hold if Libra were to become a reality today. At the core of this discussion, is the concept of “know your customer” (KYC) and the use of anti-money laundering systems (AML) by financial institutions, which currently safeguard financial transactions. Libra’s aim is to disrupt this using blockchain technology to lower costs.
However, Libra (and Facebook) need to carefully consider the (perhaps unintended) resulting impact on financial and economic systems due to the adoption of such technologies, that go far beyond just adherence to the KYC/AML standards. This is similar to how “fake news” was not anticipated at the start of the social media revolution, but potentially far more catastrophic without proper checks and balances. Given that some of these problems are already foreseen this time, it should be expected for the Libra Association to address these issues of systemic financial risk upfront, as they continue to build out Libra’s financial system. Without Facebook’s social network however, Libra loses it attraction as a cryptocurrency that can potentially address worldwide wealth inequality.
Debarshi Nandy is a Professor of Finance at the Brandeis International Business School
Prof. Anna Scherbina (IBS)
I covered cryptocurrencies as part of my portfolio at the Council of Economic Advisers. Important concerns were illicit transactions enabled by the perceived anonymity, fraudulent investment schemes, and frequent hacking of cryptocurrency exchanges that resulted in millions of dollars in theft. Facebook’s libra looks like an improvement on the existing cryptocurrencies. By relying on the proof-of-stake rather than the proof-of-work design, it can substantially reduce electricity usage and, more importantly for the wide adoption, reduce transaction costs. Since libra will be pegged to fiat currency, it will be less volatile than other cryptocurrencies, thereby discouraging speculation and fraud. As for concerns about transaction security, policy makers should have similar worries about credit card companies, which are also an attractive target for hackers. Moreover, unlike Amazon, which collects information on an overwhelming number of transactions and has been accused of using these data to directly compete with product manufacturers, Facebook does not currently aspire to enter the product market. And because libra is not going to be perceived to be as anonymous as other cryptocurrencies, it is unlikely to attract as many illicit transactions as bitcoin, monero and Zcash. Finally, if the regulators stop the libra project, someone else around the world will develop an alternative for which the U.S. regulators will have little say.
Anna Scherbina is an associate professor of Finance at the Brandeis International Business School.
Prof. Lynn Browne (IBS)
The problem with Libra is not Facebook per se, but the existence of any widely used private currency that would challenge governments’ primacy in this area. Governments, understandably, want to preserve the integrity of their countries’ currency, control the money supply, and prevent tax evasion and the financing of crime and terrorism. A large, global private monetary system would undermine these capabilities. At the same time, the problems identified in the Libra white paper are genuine. Financial transfers among countries are cumbersome and high cost. Within countries, fees for credit and debit cards and other payments services are also high. Many people remain “unbanked.” And there certainly is a demand for anonymity in financial transactions — for legitimate as well as illegitimate reasons. Thus, there will continue to be proposals for new crypto currencies and digital monies, including proposals from governments and their central banks. But private initiatives, particularly ones as big and bold as Libra, will be resisted.
Lynn Browne is an adjunct professor at the Brandeis International Business School.
Prof. Adam Towvim (IBS)
Facebook’s Libra raises a number of unique data issues related to its historical use of Personal Information, not just because of high profile cases (Cambridge Analytica) but also because of their dominant role in the Advertising ecosystem. First, Privacy/Data Ownership concerns create a headwind for Facebook's Libra stewardship: Consumers and Regulators will have a hard time trusting Facebook to touch critical payment data given the vast amount of Personal Information Facebook already holds on billions of identities. In addition, how will the Libra consortium ensure proper governance of the Personal Information that is shared between Libra consortium members? New Data Privacy regimes like GDPR and CCPA will undoubtedly play a role in addition to the usual Financial Sector regulation. On the other hand, any experienced Marketer will tell you that Facebook is unusually well-positioned to make a cryptocurrency easy for the average consumer to understand and use - to date, cryptocurrencies have not been as easily accessible to the average consumer.Facebook already understands many levels of a mobile user experience (UX) and their app touches our lives throughout our day. Even if they will not pull all of our Facebook Personal Information into Libra, Facebook is skilled at using our behavior and biases to drive a clean and intuitive UX. A cause for hope that it will be easy to use, also another cause for concern on how they touch even more aspects of our personal life.
Adam Towvim is an adjunct professor at the Brandeis International Business School.