Does Libra Threaten Monetary Sovereignty?

Authored by JP Koning via The American Institute for Economic Research,

Last week, France’s Minister of the Economy Bruno Le Maire declared that “we cannot authorize the development of Libra on European soil.” Several months earlier, Maxine Waters, chairwoman of the U.S. House Financial Services Committee, asked for a “moratorium on any movement forward on Libra.”

If you didn’t know what Libra was, you might be forgiven for guessing that it is some sort of dangerous super-missile or highly volatile chemical agent. What is this dangerous device? It is a payments network. And, with it, Le Maire has said, “our monetary sovereignty is at stake.”

Let’s investigate how Libra might (or might not) threaten France’s “monetary sovereignty.” Libra isn’t just a local Parisian bank that wants to serve French citizens. The group that is building the network — the Libra Association — is headed by global giant Facebook. Libra is striving to connect the entire world via a unique global payments layer. But not a single member of the Libra Association is a regulated bank. Glance through a list of members and you’ll spot the likes of MasterCard, Stripe, eBay, and Uber. Remembering Uber’s “break first” approach to expansion, Le Maire no doubt worries that a horde of Silicon valley interlopers is preparing to trample over French money and payments laws.

However, Libra wouldn’t be the first non-bank global payments network. PayPal, a financial-technology company based in Silicon Valley, has been providing a global payments layer for almost two decades now, one to which many French citizens are connected. With a PayPal wallet, you can pay (or be paid by) almost anyone in the world who also has a PayPal wallet. All that PayPal does is switch two numbers in its database. A Libra wallet will allow people to do the same thing.

There is no inherent reason that a global payments system run by technology companies must elide national regulations. If PayPal manages to serve a global community while complying with the rules of all the countries in which it operates, can’t Libra do the same?

One of the complications is that unlike PayPal, Libra will be implemented using blockchain technology. With PayPal, all transactions are presented directly to PayPal servers to verify. But with Libra’s blockchain, users will announce transactions to a dispersed network of validators for processing. These validators will be Libra Association members. There are certain advantages to this sort of setup, including resiliency. The network exists everywhere, so a natural disaster won’t impair it.

However, critics worry that this technology isn’t mature enough to serve as the basis of a financial network. It could have bugs, or be hacked. That’s probably true. But excluding Libra, and not PayPal, on this basis doesn’t seem fair. New technologies have to start somewhere.

Libra’s blockchain nature may have other, more threatening implications for France’s monetary sovereignty. According to Libra’s white paper, payments that go across the Libra blockchain will remain pseudonymous, as in the case of bitcoin. With bitcoin, there is no connection between the tokens being transferred and the identity of the transferee. Users aren’t quite anonymous, since every transaction can be seen. But they needn’t submit their real identities to use the bitcoin network.

In addition to adopting bitcoin-style pseudonymity, the Libra network intends to be “open access.” Anyone with an internet connection can own the tokens.

But pseudonymity and open access go against standard international anti–money laundering agreements, to which France is a signatory. All payments providers are obligated to get personal information from users and pass this information along with the payment itself. In bitcoin’s case, these rules are difficult to enforce. No one really owns the bitcoin network, and the job of validating bitcoin transactions (known as mining) can be done anonymously. Presumably Le Maire is afraid that Libra’s intention to adopt bitcoin’s anarchic approach to making payments will encroach on French monetary sovereignty.

To satisfy Le Maire, Libra will have to show that it is not trying to be bitcoin. This means that the Libra blockchain will have to stop supporting pseudonymity and re-link users’ personal information to the Libras they transfer. This also means that Libra won’t be able to provide open access.

It will be easy for folks like Le Maire to get their way. Whereas bitcoin validators can stay anonymous and avoid prosecution, the members of the Libra Network are all well-known firms that can be punished for evading money laundering rules.

But the alterations that regulators require Libra to make will likely do harm to the network’s founding principles. In a well-written op-ed, Timothy Lee suggests these changes would

raise the barrier to entry for new Libra-based financial services. That would be significant because lowering barriers to entry — both for wallets and for users in under-banked parts of the world — is one of the Libra project’s stated goals.

Another one of Libra’s odd quirks is that it won’t use national currency units like the euro. Instead, it will use its own artificial unit of account, the Libra, which is defined as a cocktail of other national currencies (50% USD, EUR 18%, JPY 14%, GBP 11%, SGD??!! 7%…. ZERO Yuan). It could be that Le Maire is worried that if both euros and Libras begin to circulate on French soil, Libras will flush euros out.

But simultaneous usage of several currencies hardly seems to be a threat to French monetary sovereignty. Along with other European centers, Paris has long played host to the massive Eurodollar market. These are basically U.S. dollar deposits held at European banks. Yet the presence of a huge pile of dollars hasn’t threatened the euro.

Or let’s return to the case of PayPal. Two French citizens, each with a PayPal account, can already transfer U.S. dollars, or British pounds, or Swiss francs, to one another between each other, on French soil. Libras won’t be that much different. 

Furthermore, Europe already has a history of allowing corporations to create alternate units of account. During the 1970s, banks devised private artificial currency units to help their customers cope with monetary turbulence. French bank Credit Lyonnais, for instance, created something called the International Financial Unit, a basket of 10 European and non-European currencies. Libra is nothing but a warmed-up version of Credit Lyonnais’ IFU. 

That being said, Le Maire’s worries about monetary sovereignty aren’t entirely without foundation. If French citizens begin to set prices in Libras rather than euros, the European Central Bank (ECB) will effectively cease to set French monetary policy. After all, monetary policy is about determining the rate at which the average level of consumer prices is changing. If French prices are expressed in Libras, then it is the Libra consortium that will be in control of France’s consumer price level, not the ECB.

But setting prices in Libras doesn’t seem likely. The euro is a stable currency. Habit keeps the usage of euro pricing locked into place, much like how French is cemented as France’s language. Even if Libra tokens were to co-circulate with euro banknotes and deposits as a form of making payments, we can expect prices to still be set in euros, with Libras passing at their going market rate. And so the ECB would continue to rule the monetary nest.

In sum, Le Maire probably has a legitimate worry about monetary sovereignty. But as conversations between Libra and governments around the world progress, Libra will likely fall in line with respect to anti–money laundering rules. Once that has been achieved, the project should be good to go. Usage of a new monetary unit isn’t much of an issue.

It’s important to separate the genuine worries about Libra from the hyperbole. Facebook is a controversial company these days. But French monetary sovereignty is unlikely to fall at the hands of Libra. Let’s not forget that the existing payments networks — the MasterCard and Visa networks as well as the international correspondent banking system — don’t always provide consumers with low prices. Any new competition will help consumers get cheaper and better payments options.