Private money on the scale of Facebook’s Libra is dangerous and likely contrary to the public good, Yves Mersch, Executive Board Member of the ECB told the ESCB Legal Conference in Frankfurt September 2nd:
“In the field of money, history bears testament to two basic truths. The first is that, because money is a public good, money and state sovereignty are inexorably linked. So the notion of stateless money is an aberration with no solid foundation in human experience.”
Corporations are only beholden to their management and shareholders, Mersch noted, and Facebook’s Libra network, to be controlled by corporate members of the Libra Association, lacks a system of democratic input:
“The second truth is that money can only inspire trust and fulfil its key socioeconomic functions if it is backed by an independent but accountable public institution which itself enjoys public trust and is not faced with the inevitable conflicts of interest of private institutions.”
Mersch has condemned cryptocurrencies in the past. In February 2018, he told attendees at a London forum:
“[Virtual currencies] have neither intrinsic value, such as the commodity content of gold coins, nor extrinsic value, such as the value assigned to traditional fiat currencies by the trusted public issuing authority. They do not even provide the dividend or coupon payments that tie down the prices of equities and bonds. They are in fact a classic Keynesian beauty contest, where investors buy what they perceive others view as the most attractive investment. Like in Mr Ponzi’s schemes, those investors hope for future price gains and believe they will find a greater fool to sell to before the inevitable crash. Under these conditions, [Virtual currencies] exhibit wild fluctuations in value, meaning that they cannot be trusted as a store of value.”
Mersch mentioned his previous criticisms, but focussed his comments on Libra, “Facebook’s newly announced private currency.”
Mersch questioned Facebook’s competence around bearing so much responsibility, given the company’s record of critically mismanaging customer data:
“(Libra) is scheduled for release in the first half of 2020 by the very same people who had to explain themselves in front of legislators in the United States and the European Union on the threats to our democracies resulting from their handling of personal data on their social media platform.”
Hersch called aspects of Libra, “extremely concerning”:
“Libra’s ecosystem is not only complex, it is actually cartel-like.”
This is because Facebook’s proposed money system will be overseen by a cadre of corporate collaborators:
“Libra coins will be issued by the Libra Association – a group of global players in the fields of payments, technology, e‑commerce and telecommunications…(which will) control the Libra blockchain and collect the digital money equivalent of seignorage income on Libra. The Libra Association Council will take decisions on the Libra network’s governance and on the Libra Reserve, which will consist of a basket of bank deposits and short-term government securities backing Libra coins.”
The same companies will likely distribute the coins:
“Libra coins will be exclusively distributed through a network of authorised resellers, centralising control over public access to Libra…similarly to public money Libra will actually be highly centralised, with Facebook and its partners acting as quasi-sovereign issuers of currency.”
In touting a private global currency network, Libra advocates meanwhile, “gloss over… that, because of its nature as a public good, money has traditionally been an expression of state sovereignty”:
“It is no coincidence that, throughout history, sovereign actors have underpinned all credible and durable currencies… the concept of money as a public good and has found its way into statutory definitions of legal tender.”
Libra would add enormously to Facebook’s power while having little accountability:
“Conglomerates of corporate entities, on the other hand, are only accountable to their shareholders and members. They have privileged access to private data that they can abusively monetise. And they have complete control over the currency distribution network. They can hardly be seen as repositories of public trust or legitimate issuers of instruments with the attributes of ‘money.'”
The project also boasts poor design, suggesting Libra’s creators do not really understand functioning currency systems:
“Despite its audacious global currency aspirations, Libra lacks a global lender of last resort. Who will stand behind it in a liquidity crisis situation? Libra is also devoid of the equivalent of a deposit guarantee scheme to protect its holders’ interests during a crisis.”
Libra Association members, meanwhile, said Mersch have reduced their liability surface:
“Moreover, the limited liability of the Libra Association members raises serious questions about their resolve to satisfy the claims of Libra holders with their full faith and credit, as central banks do with public money.”
Mersch then asks why the public would opt for a privately-managed digital proxy of a basket of currencies when they could use the real thing:
“Finally, the fact that Libra is backed by a basket of sovereign currency-denominated assets appears to defeat the very purpose of its issuance as a private currency. Why bank on a proxy when one can put one’s trust in the genuine article?”
Mersch said he has been heartened by global regulators’ response’s to Libra:
“There are welcome signs that the global community is already working together to mitigate Libra’s risks. Both the G7 and the Committee on Payments and Market Infrastructures have evaluated Libra, with an emphasis on its potential use in money laundering and terrorist financing.”
But he also warned that, “Depending on Libra’s level of acceptance and on the referencing of the euro in its reserve basket, it could reduce the ECB’s control over the euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the single currency’s international role, for instance by reducing demand for it.”
Mersch acknowledged that, “some of Libra’s aims are legitimate (such as) reductions in cross-border fund transfer costs…other efficiency gains can also be obtained through established instant payment solutions.”
He noted that the Eurosystem’s, TARGET Instant Payment Settlement service, or TIPS, “a pan-European, 24/7 settlement service for instant payments,” launched recently, and is transferring money with full know-your-customer/anti-money laundering compliance in place:
“By operating in central bank money, and by being embedded in TARGET2, TIPS provides a high-performance payment solution that is safer and more economical than questionable, market-based retail payment innovations.”
Mersch ended his speech with a warning:
“I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favour of the beguiling but treacherous promises of Facebook’s siren call.”