Why you should care
China is the latest to posture against decentralized cryptocurrency, and it won’t be the last.
Recent news that China’s central bank was close to issuing its own cryptocurrency should have given few people cause for surprise. The People’s Bank of China launched its digital currency research lab in 2017, and work on the project has reportedly been going on for five years. It’s fair to assume that the announcement of the digital renminbi has been fast-tracked because of Facebook’s announcement of its Libra cryptocurrency.
Beijing’s reaction is not unprecedented in terms of approach; China is just one of a series of countries posturing against Libra and decentralized cryptocurrency in general. India has recently been mulling outlawing cryptocurrencies altogether. Anyone dealing with them can face a fine of up to $3.5 million and 10 years in jail. The European Union has also hit back hard against Libra. France’s finance minister says it is out of the question that Libra might one day become a sovereign currency. Mark Carney, governor of the Bank of England, says Libra will be subject to the highest standards of regulation.
The widely held concern about Libra is that it will give Facebook too much power. The social network is already in a position where multibillion-dollar fines are seen as pocket change. Having your financial data is likely going to make it even more powerful. Facebook has been responding to this claim. According to David Marcus, Facebook’s cryptocurrency chief, Libra is meant primarily to help unbanked and underbanked people participate in the financial system. Marcus has also said Libra is not designed to compete with national currencies and will not be on offer until it has fully addressed all regulatory concerns and received the appropriate approvals.
Even countries that desperately want to increase digital payments and financial inclusion are likely to reject a currency they can’t control because of the potential downsides.
It isn’t just about Facebook having too much power, though. It’s in the best interest of countries not to have digital currencies out of their control and jurisdiction. Libra, because of Facebook’s backing and the possibility of quick mass adoption, is the cryptocurrency to shut down to set a precedent.
This is not to say that states are against cryptocurrency. They’re against the aspects of it they can’t control. Billionaire Mark Cuban believes Libra is dangerous, and he told the Verge that he fears people will die, “because when you start impacting a despot’s currency manipulation opportunities and their ability to tax and control what they can in their countries, that’s when despots tend to take matters into their own hands.”
Governments might have a hard time tracking cryptocurrency, so the trade-off here seemingly is to have financial inclusion in exchange for macroeconomic and financial instability, money laundering and possibly financing terrorism and drug trade. When Libra is finally launched, even countries that desperately want to increase digital payments and financial inclusion are likely to reject a currency they can’t control because of the potential downsides.
Governments around the world, however, do want the financial inclusion and ability to monitor transactions that digitization of currency brings with it. When you think about it like that, China’s actions start to make sense. China’s proposed digital RMB is going to be highly centralized. “When we think of cryptocurrencies, we think of decontrol,” says Manoj Kewalramani, a fellow in China studies at the Takshashila Institution. “In China’s case, this is an effort at expanding sovereign state control over digital transactions.” Beijing reportedly plans to issue the currency to seven institutions: four large government banks, Alibaba, Tencent and UnionPay. “This could allow Beijing to keep the domestic digital payments ecosystem in check and eventually leverage the strength of its tech giants to influence transactions internationally,” Kewalramani adds.
But will it solve the issue of financial inclusion? Unlikely. People in rural areas will still need access to banking systems for enrollment before they can use digital transactions. High transaction rates will still apply for people who want to make international transfers. Should states have details of domestic transactions, cross-border flow of financial data is going to be more restricted than ever.
Essentially, Libra has exacerbated the need for countries to have their own digital currencies. A global cryptocurrency run by Facebook goes intrinsically against the nature of national interest around the world. So even if Facebook (and its partners) were to somehow pass stringent regulatory tests, it is nearly unthinkable for any country to provide it with the license to operate within its borders.
The world is moving toward centralized digital currencies. It might not solve financial inclusion, anonymity and cheaper financial transactions — Facebook’s stated intent for Libra — but it fits in with national interest. It is national interest that will make sure no matter how good Libra is, there are no takers for it.
Libra, in other words, may be dead on arrival.
Rohan Seth is a policy analyst for the technology and policy program at The Takshashila Institution.