When companies are threatened with retaliation by powerful politicians merely for exploring a radical new business idea, it doesn’t bode well for innovation.
That is what has happened in recent weeks with Facebook’s cryptocurrency project, Libra. A quarter of its initial supporters have now backed out. For the payments companies involved, it made sense to protect their current businesses rather than defy politicians over a project with long odds of reaching the finish line.
If this results in the premature destruction of an idea that tries to push the boundaries of finance in important ways, so much the worse. A decade after the financial crisis, the financial system is still overly dependent on too-big-to-fail banks. At its core, it has also been impervious to innovation, despite the flowering of “fintech” at the edges.
This has not been lost on financial regulators like the Bank of England, which appeared to approach Libra from the start with an open mind — though the political backlash against the project has since pushed regulators on both sides of the Atlantic into trying to sound tough.
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From a purely political point of view, it always looked a stretch for Facebook to lead the disruption of a core part of the global finance system. When it was a small upstart trying to connect the world, its “Trust Us” message was easy to swallow. That trust is now in short supply.
There is more to the Libra debacle than this political miscalculation. There have been gripes from some Libra members over Facebook’s early handling of the project. By keeping their heads down rather than addressing the many potential problems that have been raised, the project’s backers have also left a vacuum that has been easy for the doomsayers to fill.
The project itself is also in need of retooling, even before it starts. A cryptocurrency based on a currency basket that does not relate directly to any consumer’s actual life will be a tough sell. And despite efforts to reduce Facebook’s role, important governance issues need resolving to prevent it from becoming a tool of vested interests.
It would be a shame if these early mis-steps cut short further deliberation. There are plenty of substantive issues that need to be aired — even if Libra proves to be a dead end.
Central banks, for instance, have rightly worried about the risks that so-called “stable coins” like Libra could pose to the financial system, should they be adopted at scale. The international Financial Stability Board has been working on some of these problems, and hopes to come out with rules by the middle of next year. If Libra has added a new urgency to the regulators’ deliberations, then so much the better.
The same can be said for the fear that Libra would become a “dark money” network making it easier to do things like launder drug money and finance terrorism. With the rise of cryptocurrencies, such networks already exist.
One answer could lie in national regulation of the “apps” that run on the digital money platform — though the borderless nature of the internet poses an obvious challenge. Regulation of the platform itself could also be a possibility, for instance by capping the size of payments it can handle or enshrining a way to reverse transactions in exceptional circumstances (an idea that is anathema to cryptocurrency purists, but might be a necessary compromise).
