18/09/2019
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Home > Legal & Financial > The currency of trust

The currency of trust

Facebook wants your money, actually more accurately, Facebook wants you to want their money, buy giving them your money. We are entering a brave new, and possibly a bit scary world.

You may have heard of Bitcoin, you may even understand it which puts you among a select bunch. Its known as a crypto currency, in that it only exists digitally, and outside the traditional financial institutions of central banks, high street banks, and operated independently of governments, and all their pesky obsessions with regulation, tax and anti money laundering rules.

Facebook is pledging to launch its own currency, called Libra in the first half of next year. Unlike Bitcoin, which has its own wildly fluctuating value, Libra will be a ‘stablecoin’ pegged to a basket of currencies like US Dollars and Euros, and will be backed up with more traditional financial instruments, probably government bonds, so if you deposit a dollar with Facebook in return for Libra, it will buy a dollars worth of US treasury bills, and reverse the transaction if you want to take your money out. It will operate a digital wallet for you to keep your Libra in, and you will be able to pay for goods and services via a wallet app, or by sending a message on Facebook’s own messaging service, or via the Whatsapp messenger, also owned by Facebook. Paying people will be as simple as sending them a message, will be instant, and will be either free of charge, or very low cost. The transaction will be verified, settled and accounted for on a blockchain system called Calibra, which will run as a non profit, and is backed by many established names, like Ebay, Paypal,Uber, Mastercard, Visa, Vodafone, Spotify and others. It is also designed to help the 1.7 billion people around the world who do not have a bank account, or much of a prospect of getting one.

So if Facebook aren’t going to make any money out of it, why bother? Since day one, Facebook’s schtick has been about getting you to stay on their site for as long as possible, constantly drip feeding them information about yourself and your habits, your location, your age, your interests, the people you interact with and the places you hang out. This is all valuable information, literally as they sell it for real money to people who want to sell you things based on all that lovely data. The calculation for Libra is that if you can shop on Facebook too, then you are likely to spend even more time on there, as retailers from giant multinationals, to one person operations are likely to set up an e-commerce presence on the site to tempt you out of some of your lovely Libra. Herein lies the problem for Facebook. It already has an issue with trust, many people have left the network, and it has found itself under constant scrutiny, and criticism for the way it collects data about you, and the way is uses, or sells on this data. It has already been suspected of skewing the US election in favour of Donald Trump, helping the UK decide to plump for Brexit, and plenty more. It may well have been an unwitting accomplice in this, but it hardly matters. Do you really want a company that already knows a little too much about you for many people’s liking to know how much money you have in your wallet, and just how much you spend every month on hemorrhoid cream? Particularly as they have a history of data breaches that have affected tens of millions of users in one hit. How comfortable are we going to be that  during the next breach, the hackers might be able to empty our wallets in the process?

Assuming all of these practical, and reputational issues can be overcome, it will probably be a very efficient way of paying for a coffee or settling online purchases, but it is when people also start using it as a store of value. Moving their wealth from Euros in a bank, to Libra on the anonymous blockchain. A gift for money launderers and tax evaders, which will doubtless lead to the kind of government scrutiny, legislation, and regulation, the absence of which is the attraction for many of using a crypto currency in the first place.

Digitally traded, and settled currencies that operate outside the traditional systems have their attractions, and a lot of upside, and you can bet your bottom dollar, or whatever else you want to call it, that if Facebook is working on one, then so is just about everyone else. Missing the boat on this revolution could be an existential issue for some pretty big names, but currencies since virtually their invention in early human development have only worked if those who use it trust it and those who control it. As soon as that confidence is gone, they spiral out of control, and history is littered with examples. Perhaps trust is actually the only true currency we have ever really had, and Facebook will have to go an awful long way yet before they have enough of that.

 

By Phill McCoffers

The Islander Economics Correspondent