Updated: Sep 21, 2019
The quiet lull of August before central bankers convene for their annual conference at Jackson Hole, Wyoming provides time for thinking seriously about what the Libra proposal tells us regarding the evolution of the economy in the Distributed Age. Policymakers should worry for four reasons: Jurisdiction, Competition/Antitrust, Systemic Risk, and Monetary Policy.
The Libra Economy Demystified
Let’s start with some concrete data. Twenty eight (28) companies comprise the initial Libra Association. If we count Facebook and Calibra as two separate companies, the total is 29. They fall into five categories: consumer-facing goods and services (11), payment services providers (6), venture capital (5), blockchain/cryptocurrency technology (4) and non-governmental organizations (NGOs)(2).
This constellation of companies creates profound policy dilemmas far beyond the well-known data privacy and anti-money laundering issues raised by Congressional and European policymakers this summer.
Four Reasons for Policymakers to Worry —
Distributed Age Challenges
As discussed in this Atlantic Council blogpost, the Libra Association creates jurisdictional challenges for policymakers. By choosing Switzerland as its headquarters, two powerhouse jurisdictions regarding the digital economy (the United States and the European Union) have been shut out from exercising primary oversight authority over Libra. Under certain scenarios, transatlantic regulatory policy competition could ensue as the US and the EU seek to influence Swiss authorities to favor one policy over another.
Swiss authorities will be in the lead regarding creation/issuance of the Libra currency and its management. This is no small task. True to its distributed ledger roots, the Libra Association will create a secondary market for the purchase and sale of Libra tokens through “authorized resellers” that functionally look and sound a great deal like traditional intermediaries (broker-dealers, investment banks, exchanges). These intermediaries will “transact large amounts of fiat (currency) and Libra in and out of the reserve.”
Market operations may thus end up being subject to local laws in BOTH the EU and the US even as decisions about those operations are made at the central headquarters in Switzerland. Libra Association members themselves will remain subject to jurisdiction in their Home countries.
This is just the beginning of the jurisdictional challenges raised by the Distributed Age. The Sovereignty issues are real and deeply problematic.
When individual tasks are split up into different types of entities spread around the world, the jigsaw puzzle of overlapping jurisdictions challenges the ability of sovereign authorities to exercise their responsibilities.
2. Competition/Antitrust Law
Many initially jumped to the conclusion earlier this summer that the Libra proposal must be anti-competitive due to the vertical integration between the issuer of the payment token, the recipient consumers, and the merchants. It is tempting to see the potential for market dominance and pricing abuse given the recent history of competitive problems associated with winner-take-all platform business models (e.g., Google, Amazon).
But it’s just not that simple. Consider the relatively skimpy White Paper released by Facebook (which remains the sole source document). The White Paper indicates that Libra will only operate a parallel payments system, not require payment in Libra. Proving anti-competitive or monopolistic pricing will require real-life examples of price divergences for the same product across currencies used to settle the purchase transaction.
Monopoly may also be challenging to prove, at least initially. Remember that the key to competition law is the definition of “the market” in order to determine whether a company has achieved a dominant or monopoly position in that market.
It is hard to see that the current configuration of companies assembled under the Libra platform create anti-competitive pressures in the market for hotel rooms because a large range of alternative hotel platforms (e.g., AirBnB, Hotels.com) are not included. The same is true for taxi services, even though Uber and Lyft will bristle at the notion that they are taxi services. Ebay may be a massive online platform for used goods, but they are not the only one… Amazon and Alibaba also play in this space and they remain outside the Libra project….at least for now.
3. Systemic Risk
In its simplest form, systemic risk is the transmission of destabilizing agents across boundaries. The best analogy in the physical world is with infectious diseases and chemical chain reactions; linguisitically, policymakers even speak of “contagion risk”. For an excellent and wry long read on systemic risk, see this 2017 Medium post. For an excellent mathematical description of systemic risk, see this post from the London Mathematical Library whose image I happily borrow today.
Traditionally, central banks and financial stability regulators (including multilateral institutions like the International Monetary Fund and the Bank for International Settlements) assess systemic risk vulnerabilities and articulate rules to rein in risky practices at financial firms that can generate systemic risk. Twice a year, the IMF’s Financial Stability Report assesses a parade of horribles denoting global systemic risks. Major central banks publish similar reports regularly.
“Big Tech” creates big headaches because technology companies that avoid serving an intermediary role deprive regulators of jurisdiction.
The Financial Stability Board earlier this year in February, May, and June publicly fretted about the policy challenges raised by such Big Tech companies which increasingly provide intermediary-like functions but sit just outside the regulatory perimeter. This Medium post analyzes those statements and provides a good starting point when considering the jurisdictional jujitsu that policymakers will have to execute in order to address potential systemic risks raised by the Libra proposal.
Policymakers globally have been taking action far more than they have been talking about distributed ledger technology all year as this activity chart indicates:
Cryptocurrency and blockchain enthusiasts will tell us there is no reason to fret because if Libra transactions occur through a distributed ledger then the automatic authentication and instant payments execution eliminate potential systemic contagion risks like bank runs.
But wait….significant parts of this ecosystem will not operate on an instant payments basis. The ecosystem includes significant lending activity at the microfinance level, the retail credit card level, possibly wholesale merchant invoice-based finance AND institutional/VC lending/investment.
Lending requires repayments at specific points in the future. The risk of non-payment (i.e., default) and the consequences of non-payment generate ripple effects across balance sheets and trading platforms.