Few things unite Democrats in Congress, the Trump administration and Federal Reserve Chairman Jerome Powell like opposition to Facebook’s Libra. Instead, they should get behind the new cryptocurrency by crafting effective regulation.
Washington’s grievances are that it could instigate financial instability and become a vehicle for drug dealers and terrorist states to dodge law enforcement and sanctions.
Virtually all this is disingenuous and reflects the insecurity of Washington’s political class.
The financial crisis was denominated in dollars. The schemes, shaky mortgages and shoddy bonds and derivatives that created bubbles in the housing and other asset markets were the work of banks, mortgage brokers and other financial institutions doing business in greenbacks. All were cooked up before Bitcoin.
Libra would be in a class of its own. Unlike Bitcoin, Libra would not be created out of thin air but through purchases with dollars and other currencies that an association, based in Switzerland, would hold in a reserve of bank deposits and bonds denominated in those currencies.
Backed dollar-for-dollar by this collateral, Libra would have much stronger reserves than the euro, yen or Swiss franc, and its value would be more stable than gold and national currencies, including the dollar. Those fluctuate with business cycles, political conditions, trade disputes and the manipulation of governments seeking to gain competitive advantage.
Existing banks and new institutions around the world could take deposits and make loans denominated in Libra much as foreign institutions now do in dollars. However, with proper Swiss and American regulation, those transactions and investments could be tracked as easily as those denominated in francs or dollars and pose no more threat to stability than dollar-based investments.
Beijing has more to fear from Libra, and America much more to gain.
China’s fintech industry is well ahead of ours — it has already developed, through Alipay and its competitors, a virtually domestic cashless economy.
It is a travesty that Americans still must haul around greenbacks — often used to enable tax dodging, gray market purchases — and pay 3 percent for the privilege of using credit cards. The former cheats ordinary citizens and the latter is a useless bankers tax on ordinary folks and economic growth that could be eliminated by electronic money and a reliable blockchain payments system.
Libra would provide such a system that is far less costly to run and susceptible to fraud than the current systems now run by Visa and MasterCard for ordinary consumers and Citibank and SWIFT for cross-border business transactions.
Similarly, Libra would provide a reliable currency and banking system in the Third World to poor folks and small businesses who are underserved and vulnerable to recklessly managed national currencies and unsafe local banks. Secure money and banking are a necessary foundation for economic development and would become accessible on cell phones.
Similarly, Italy and other European economies are hamstrung by shaky banks and a euro that is overvalued for their exports and undervalued for German businesses. Widespread use of the Libra could ignite growth the European Central Bank’s negative interest rate policies have failed to deliver.
Beijing has effectively frozen out foreign competitors to its domestic fintech market, but so far Alipay and others have enjoyed little success in the Third World. Penetration into offshore markets could accomplish a long-coveted Communist Party goal — replacing the international prominence of the dollar with a yuan-based alternative.
If widely successful, Libra — whose backers include Visa, MasterCard and PayPal — could shut those doors forever.
The genius behind the Libra’s architecture is not patentable. If Washington manages to block Facebook’s initiative, Libra’s backers or Western competitors could simply establish a facsimile offshore — establishing a cryptocurrency association in Switzerland or a regulatory haven in the Channel Islands would accomplish that.
If not, Chinese fintech could do the same in some jurisdictions outside China.
American, European and other Western regulators should require that the association back Libra with an appropriate allocation of Western currencies — the dollar, followed by the euro and yen should be prominent to ensure public confidence — and that banks, credit card companies and other financial institutions make transactions traceable as they do now for those in national currencies.
Libra is an opportunity for the American financial industry to leapfrog Alipay and other Chinese fintech, provide much of the world with sorely needed reliable banking and simply make doing business in America less expensive.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.