A sign of a sector of the economy becoming too big is that it attempts to dictate government policy. In the financial sector, for instance, markets “discipline” governments by threatening to dump their currencies and bonds if they act in ways investors don’t like. In manufacturing, Airbus has threatened to leave the UK in the event of a no-deal Brexit. And oil companies have historically held sway over their governments’ foreign policy calculations.
But when a sector becomes really gargantuan, it doesn’t just dictate to governments – it aims to replace them.
Silicon Valley tech giants have been uneasy collaborators with governments, as they are obliged to use legal tender to monetise their businesses. When a company uses government-issued currencies, that gives governments the right to regulate and control the company’s activities. And while governments have been weak regulators of Big Tech, that is starting to change. Silicon Valley giants are facing fines and regulatory action for tax evasion, opaque practices, and dominant market positions; second-wave giants like Uber and Deliveroo are also under fire as a result of their employment practices and flouting of regulation.
Enter Libra, a new virtual currency project Facebook announced in June 2019.
Libra is the creation of the Libra Association, an organisation based in Switzerland. Facebook initiated it and brought in 27 other members – mostly Silicon Valley tech firms and payments companies with goals tightly aligned with those of Facebook. (Five of them – PayPal, eBay, Stripe, MasterCard and Visa – left the organisation in the last few weeks, dealing a PR blow to the project amid increased governmental scrutiny.)
Those wishing to use Libra for transactions on Facebook’s platforms would purchase Libra “coins” with fiat currencies. That money would go into Libra’s reserve, to be invested in assets denominated in a “basket” of currencies. The assets in the reserve would be actively managed so as to keep the value of Libra stable vis-a-vis the currency basket as a whole, though it might not be stable against individual currencies. We don’t know exactly what the Libra reserve’s asset portfolio would comprise, but Libra’s technical manifesto suggests that it would include a substantial proportion of “safe” assets such as government debt and cash.
The project could potentially have an enormous impact. Currently, an estimated 2.7 billion people use Facebook and its subsidiaries WhatsApp and Instagram. If all these people adopted Libra as their primary medium of exchange, then Libra would be used by approximately a third of the world’s population. Admittedly, more people currently use the US dollar, but consumers might start exchanging their dollars for Libra in order to pay for goods and services provided by Facebook and its partners – which include e-commerce site eBay and music streaming service Spotify. If a third of the world’s population did this, Facebook and its partners would have in effect established its own financial system, run according to its own rules and subject to no government.
Of course, Libra would still depend on government currencies to keep it stable. But that doesn’t mean governments could control it. Quite the contrary. The Libra reserve would be the largest investment fund on earth, dwarfing even the sovereign wealth funds of oil-producing nations. Buying and selling assets to keep Libra’s value stable would move currency and government bond markets. And since it would outgun central banks, even the mighty US Federal Reserve, there would be little governments could do to protect their economies from such movements.
The Libra reserve could also influence government policy. It could ditch assets in currencies issued by governments whose policies the Libra Association disapproves of. Attempts to control Libra could quickly result in a collapsing currency and rapidly rising borrowing costs.
Again, this is nothing new: big banks and their representatives have been trying to influence government policy for years. But the Libra reserve would have greater market-moving power than any bank. Some academics have expressed concern that Libra could grow so large that central banks would be forced to bail it out if there were a run on its reserve. My concern, however, is not so much what central banks might do in the event of a run on Libra, but what governments might have to do to prevent one.
Back in 2012, the Bank for International Settlements proposed that major governments should both produce enough debt to keep financial markets functioning, and preserve the value of that debt through cuts to public spending and austerity measures. The Libra Association could similarly insist that governments not only produce enough “safe assets” to maintain Libra’s peg, but prioritise maintaining the value of those assets over the wellbeing of their populations. And if the Libra reserve achieved dominance in financial markets, governments might have no choice but to comply.
If Libra became the world’s transaction currency, and its reserve became the dominant player in financial markets, the Libra Association would have the power to allow or deny people the right to transact – something that is currently a government prerogative limited by democratic safeguards. It could exert that power not only over individuals, but other companies and even governments. The Libra Association could break a company that refused to use Libra, or punish a recalcitrant government by denying its citizens access to the transaction services enjoyed by a third of the world’s people.
Many have dreamed of a single global currency that would enable people around the world to transact with each other seamlessly and instantaneously. But if the only way of achieving this is for an unaccountable corporate elite to replace democratically elected governments, surely that’s too high a price.
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