Libra And The "Global" Financial System

What we consider a global financial system is, in reality, hardly global. @kwerb discusses how Libra, Facebook’s new cryptocurrency platform, could disrupt that system, and what tradeoffs it may have to make in the process.https://t.co/x5lEAHF8bI

— Foreign Affairs (@ForeignAffairs) September 16, 2019

Will Facebook’s Libra Change the Way the World Banks? The Templars were originally a Catholic military order that took up residence in Jerusalem, where they pledged to protect Christian pilgrims. They created the economic infrastructure for the Crusades, writing promissory notes in France or England that were redeemable in the Levant. A cipher based on the shape of the cross ostensibly guaranteed the notes’ security. In other words, the Templars created a variant on modern international transfer services, five hundred years before the first central bank......... Today, the demand mounts for a similar system, but on a global scale. Billions of people have no access to banks. Countless others endure high fees and slow transactions, especially when sending money across borders. What we consider a global financial system is, in reality, hardly global. Institutions such as the International Monetary Fund (IMF), the Bank of International Settlements, and the Financial Stability Board provide little more than a multilateral veneer over relationships that are primarily bilateral and dominated by commercial and central banks. Even within borders, moving money involves costly processes of settlement and exchange........... A blockchain-type network creates a public ledger, a universally trustworthy account of who owes what. Just as the Templar cipher verified an otherwise forgeable piece of paper, cryptography will ensure that Libra cannot be spent twice or otherwise duplicated. Such technologically guaranteed, artificial scarcity allows cryptocurrencies to operate as money........ Libra will be redeemable at a fixed price for certain established currencies (such as dollars, euros, and yen). Members of the association will deposit assets in the Libra Reserve as backing any time someone wants to buy more Libra. As a result, whereas Bitcoin fluctuates wildly in value, Libra should remain relatively stable. That stability makes Libra potentially useful not only as a store of value but as a medium of exchange. Users will, Facebook argues, be able to send money around the world as easily as they send messages and videos........ In addition to banking the unbanked, Libra could replace traditional intermediaries in cross-border transactions, such as remittances, which amount to more than $600 billion per year. Libra could also end up reducing the power of central banks in countries with weak currencies or strong capital controls, because it will allow people to move their money out of these countries more easily. ......... Facebook is already in the crosshairs of governments around the world, and the stakes are nothing less than the stability of the global economy....... Much of the current financial system is antiquated below the surface. ........ The country with the most to lose from Libra also has the most to gain from a revolution in the global financial system. That country is China. China bans Facebook and forbids trading in cryptocurrencies (such as Bitcoin) that could circumvent its capital controls. China is also home to the world’s biggest digital payments systems. WeChatPay and AliPay together process as many transactions in a day as the United States does in nine months. They operate only with China’s own currency, the renminbi, and they are centrally controlled, which makes payments easy for the government to access or limit. Facebook’s argument to regulators is that if an American company doesn’t move aggressively into blockchain-based payments, China will. The truth is that Facebook’s entry has accelerated China’s movement in this direction.........

No country is more interested than China in displacing American hegemony over global financial institutions. Cryptocurrency serves that objective.

........ There is also the IMF, whose director, Christine Lagarde, has already hinted at a possible “IMFcoin” based on the IMF-sponsored assets known as Special Drawing Rights......... Money transfer helped the order become one of the wealthiest institutions in medieval Europe—a sprawling financial empire and powerful creditor to kings. After the crusaders were pushed out of the Levant, however, the Templars languished. And then the order collapsed abruptly at the beginning of the fourteenth century.

The French King Philip IV, deeply in debt to the Templars, arrested and tortured many of its members on trumped-up charges of heresy. He eventually convinced the pope to ban the order, coincidentally canceling his debts.

The Templars’ power and wealth were their undoing. Facebook should take heed.