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A Facebook cryptocurrency offers much to worry about

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Saturday, June 22, 2019 – Page B1

Facebook Inc., the company that brought you fake news and privacy scandals, is now backing a global currency that intends to challenge the world's existing monetary hierarchy.

What could possibly go wrong?

For starters, there is the possibility that Libra, the new Facebook-backed cryptocurrency, will give social-media companies and payments giants even more ability to pry into your life. We've seen what happened when we entrusted Mark Zuckerberg with our personal data. Do we really want to give the Facebook billionaire a potential window on our financial transactions as well?

Then there is the potential for Libra to offer a new channel for dodgy dealings. The white paper published this week by the architects of the new currency says: "The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to this real world identity." This does not encourage confidence.

While the white paper rushes to add that this pseudonymous feature is familiar to regulators, it stops short of noting the obvious rejoinder: Regulators may be familiar with pseudonyms, but they certainly don't like them - especially when it comes to the movement of large amounts of taxable funds.

Looking further down the road, there is the possibility that Libra could grow so big that it would begin to undermine the ability of national governments to set their own monetary policy.

What would happen if the Bank of Canada wanted to raise interest rates to cool off an inflationary surge, but consumers could borrow in Libra at lower rates? What would happen if a country tumbled into an economic crisis and its citizens dumped the national currency en masse to take shelter in Libra?

"If even modestly successful, Libra would hand over much of the control of monetary policy from central banks" to private companies, warned Chris Hughes, who has the distinction of co-founding Facebook with Mr. Zuckerberg back in their student days at Harvard.

In a Financial Times column, he made his position clear: "If global regulators don't act now [to put limits on Libra], it could very soon be too late."

He's not the only one with concerns about the new form of money. "To me it looks like just another version of shadow banking, which can seem like a good deal until it turns out that bypassing regulation also means no safety net," snorted Paul Krugman, the Nobel economics laureate.

French Finance Minister Bruno Le Maire was even more emphatic: Libra must not be allowed to supplant governmentbacked currencies, he said this week.

In the United States, the Senate banking committee has already scheduled a hearing into the Libra plan for July 16.

In Britain, Bank of England Governor Mark Carney insisted in an interview broadcast Friday that central banks will demand regulatory oversight over the new system. "It has to be safe or it's not going to happen," he told a BBC interviewer.

So what happens now?

Facebook has demonstrated an unexpected degree of political sensitivity in setting up the Libra Association, an independent, non-profit organization based in Switzerland, to oversee development of the new currency. It has recruited a couple of dozen players, including Mastercard, PayPal, Visa, Spotify, Lyft and Uber, to help it finalize the association's charter.

Rather than dominating the association, Facebook says it will limit itself to a single vote.

Facebook has also set up a subsidiary, Calibra, to operate Libra-related services and to create a wall between its social and financial ambitions so private information won't be misused.

This all sounds reassuring. But how things will work in practice is still murky. Especially on privacy issues, Mr. Zuckerberg has done nothing in the past to earn trust.

Some founding members of the association appear more dedicated to the project than others.

Consider Creative Destruction Lab (CDL), the high-tech incubator associated with the Rotman School of Management at the University of Toronto. It is the sole Canadian voice in the association.

"What prompted us to do it?" said Joshua Gans, a professor at Rotman and chief economist at CDL. "It was an interesting development in a space that we're involved in. It doesn't, at this stage, require a lot of commitment, so we thought: Let's join and see what happens."

His hope is that Libra can become a platform for fintech innovators in the same way that Apple's iPhone provided a stable platform for app developers.

"If you build a platform that is big and robust, people will be able to innovate on top of it."

Prof. Gans said.

Perhaps so. But innovations don't always have benign consequences. In recent years, they have helped to centralize power in a handful of giant technology companies.

If widely successful, Libra would occupy a key role in the world's financial architecture. It would insert a relatively small group of predominantly techoriented companies as a layer between government-backed currencies and actual users.

At the core of the Libra plan is a scheme for anchoring the value of its blockchain-based money by tying it to the value of an underlying basket of governmentbacked currencies. The holdings of U.S. dollars, euros and other assets would provide Libra with an intrinsic, highly predictable value, unlike rivals such as bitcoin, which have had a wildly volatile history.

But the scheme generates a host of practical questions. For instance: Is Libra a currency or a security?

Facebook and other promoters want to position it as a currency, but it seems equally valid to think of each Libra unit as a security - a share in a fund that holds a basket of underlying currencies. Think of it that way and it would be subject to securities laws in many markets it wants to operate in. So much for simplicity.

For now, Facebook is wrapping the Libra project in a shroud of sanctimony by arguing that the purpose of the new currency is to help the world's unbanked masses take advantage of cheap, instantaneous money transfers.

Fair enough: The lack of any simple, ultracheap way to shift money between people in different countries is a genuine issue.

However, it's not clear that a privately owned and administered currency is the best way to deal with the problem.

One way to expedite money transfers would be for central banks to set up digital versions of their own currencies - something Prof. Gans and others have been advocating for years and the Bank of Canada mulled in a discussion paper in February. If the Libra proposal prods forward such developments, that could be one positive outcome of the current debate.

For now, though, Libra looks like a quintessentially Zuckerbergian project: bold, audacious and full of potential for unintended consequences.

Huh? How did I get here?
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