Ideological purity is a common affliction these days. It's also one the cryptocurrency community is particularly prone to. Witness the upset over this week's announcement from Facebook that it is to be the prime mover behind a new cryptocurrency, Libra.
Everyone instantly hated the idea. Real cryptos are about privacy and freedom. They are decentralised and permissionless no one runs them, no one can be prevented from using them and the system never needs reference to a central authority.
Libra is to be none of these wonderful things. It is to be run by an actual organisation the Swiss based Libra Association, made up of Facebook and 27 partners. It is centralised and permissioned and its value will depend not on anything intrinsic to it but on the value of a basket of currencies, something that makes it seem more like an exchange-traded fund than a currency in its own right. Worst of all, the Libra Association is planning to make money from Libra, too.
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Facebook has an obvious interest in bringing the world's financial transactions in-house. But there's another element: the interest from the deposits and government bonds backing Libra will not go to the people holding it. It will be used to pay for the system's operating costs and, once those are covered, to the founding members as dividends. Add it all up and, to anyone of a puritanical crypto bent, this is clearly not quite right.
Libra could be a sovereignty game-changer
There is lots of detail still to come on how Libra will work. While we wait for some of that, it is true that there are things to worry about. One is privacy. Christina Frankopan, special projects lead at colony.io and a senior adviser to Lazard, questions the use of the metadata Libra will throw up, given that Facebook may be able to "triangulate this with other data sets to give them unprecedented knowledge of consumer behaviour and spending".
If you are worried about the way financial apps might use data on your spending patterns, you should be really worried about how a vast social network morphing into a financial network might use it.
Anyone with your social media data can guess what you might buy. Anyone with your financial data knows already. Longer term there are the huge issues of what happens if Libra were to become genuinely successful. How does that affect national sovereignty?
Bitcoin has caused endless angst among central bankers but it hasn't much bothered governments. That's partly because, so far, it has been marginal stuff. But also because it hasn't really acted as a currency. It isn't a particularly effective or scalable means of payment, since almost no one actually uses it. It is a hopeless store of value huge unpredictable swings don't work for most buyers or sellers.
And it has not become a value reference in itself. If you have bitcoin you think about their value not in bitcoin but in dollars. Libra could be entirely different, particularly in the last sense. If it really is based on a basket of currencies and is stable as a result it might not take long at all for us to refer to the value of things in Libras. A Libra could just be a Libra. That is a sovereignty game changer.
Libra could work precisely because it isn't a cryptocurrency
But let's put all this to one side. Stop thinking about Libra as if you were a cryptocurrency expert. Start thinking about it as a consumer and you can see why it might work.
We haven't adopted bitcoin or any other cryptocurrency for all sorts of reasons. We can't quite get our heads around the idea that it makes sense to use something invented by a very shadowy and entirely unidentifiable entity. We can't really understand the way bitcoin is mined (using computers to solve increasingly difficult maths problems). Our minds boggle every time we read about how mining for bitcoin uses as much energy as mining for gold. Then there is the scalability, the volatility and the difficulty of storage and use. Baffling.
Libra could solve all these problems. Facebook might be a bit shadowy but at least it exists as an accountable brand. And while we might not trust it as a standalone backer, we all quite clearly trust the likes of Mastercard, Visa and PayPal (all also founder members of the Libra Association) with our money.
Libra won't be hard to buy and hold. It won't be hard to cash in. It won't be lost to the world if you misplace your randomly generated 12-word password (yes, I have). It won't fluctuate wildly in price: it will just jiggle around a little as national currencies jostle for position. As a result it is unlikely to be treated like a speculative asset or indeed a quasi-religion.
And as for privacy, it is true that the tide is turning on it: people are more concerned about their data than they were. But Facebook has already offered enough privacy promises that I suspect that all but those with the highest of privacy thresholds will be able to convince themselves using Libra is just fine.
For example, the licensed entity will be a subsidiary of Facebook called Calibra. Calibra will never use our personal financial data to sell us stuff unless we give them permission to do so, according to the white paper published by Facebook. It's a fig leaf but it might be enough of one.
Another plus is that given the user base at Facebook, when we start using Libra we will find that everyone else is too. The billions of WhatsApp and Messenger users aside, millions of small businesses and advertisers use Facebook daily.
Finally Libra isn't going to cost us anything. It might bother the purists (and possibly regulators) that users will be forgoing interest. But from the point of view of the user that simply means that the service is almost free at the point of use (just like social media). And recent history shows that we are, in the main, good with that.
The upshot is this. We need a product that fully disrupts the woefully inefficient global payments system and starts to break the power of the big banks. If Libra launches (the regulatory challenges are not small) and works as a frictionless, almost free and very fast global monetary transmission mechanism, it could be that product. However if it is, it won't be because it is mimicking "real" cryptocurrencies. It will be because it isn't.
This article was first published in the Financial Times
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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