Facebook's Libra Cryptocurrency: What's the Big Deal?

Hello everybody and welcome back to Breaking the Dollar.

You're here with Everett Millman. Today we have an interesting timely topic about one of the biggest waves that has been made in the cryptocurrency news in quite a while. And that is that Facebook announced it's going to explore or launch its own cryptocurrency. Its own kind of token. And this is the first time we've seen a really big company try and jump into the crypto space. It would be one that is already kind of integrated into the internet technology sector.

If you remember, a lot of people probably don't because our memories are short. But when cryptocurrencies were first becoming a thing, there were a couple of companies that had nothing to do whatsoever with crypto or ICO and initial coin offering. They had no connection to any of that. They purely were marketing and they threw blockchain or Bitcoin or something to that effect into their name. And their stock price started going up overnight. So besides some of those shenanigans, we really haven't seen either a legitimate bank or a major corporation try and get in on the cryptocurrency craze. And Facebook appears to be the first one to do so. It released a white paper, which is basically kind of a technical explainer, this week about its coin called LibraCoin.

Now it's supposed to be what's known in crypto lingo as a stablecoin. And that is to say its price is not supposed to really fluctuate up and down. It's supposed to be kind of anchored to some other reference currency. So the best-known, there already are stablecoins out there. The best-known among them is called Tether, which the name kind of, as the name implies, it is tethered to the US dollar. So technically for every Tether coin or Tether token out there, there is on reserve exactly one US dollar for every Tether. That has come under some controversy or drawn some skepticism. But even today, a few years later, Tether still trades at exactly one dollar and really only fluctuates within one or two cents either direction any given day. So from that standpoint, it has been a success.

Now you might be asking yourself why stablecoins are needed at all. And that's partly because of how the broader cryptocurrency space works. And that is to say, most people have really only heard of Bitcoin, but there are many, many other altcoins out there, other cryptocurrencies that are totally separate from Bitcoin. In fact, there's at any given moment between 1,500 and 2,000 of them that are widely known and tracked. And many of them do different things. They offer different functionalities. So some of them are purely used for payments and transactions. Others are intended to be used as sort of a limited, almost, you can almost think of it like a gift card. It's a currency that only applies within a given sphere. So like having Disney dollars. The difference is that there are these large cryptocurrency exchanges now where you can buy, sell, and trade many different cryptos.

That's where stablecoins come in, is that you can take a token that is technically only applicable or usable on some specific network within one blockchain, and you can trade it for either dollars or another currency, but more commonly, you trade it for Tether. You trade it for a stablecoin that you know has the same nominal value as some other currency so that you can quickly go back and forth. What's intriguing about this whole Facebook coin, Libra coin thing, to me at least, is that it may very well increase awareness of cryptocurrencies in general. I mean, it's obviously given me an opportunity here to talk about cryptocurrencies even if someone has no introduction to the concept, yet at the same time, it's basically the opposite vision of Bitcoin, if you want to be real about it.

Some of the characteristics and qualities that make Bitcoin potentially revolutionary and its intended use are that it is decentralized, meaning no one authority or bank or central bank can control the supply of Bitcoin. It is all set in stone and automated by the mining process, which is another topic that we will get into in later episodes because it's interesting and poorly understood. But what you need to know now is that Bitcoin is sort of a free market currency. The point is that its value is based on whether or not people use it and by its limited supply because every issuing authority, every central bank in the world has mechanisms to control not just the price of money with interest rates, but the supply of money. And Bitcoin is designed specifically to be different than that, that it has this set maximum limit of Bitcoins that will be in existence, 21 million. And we're not quite there yet. We're between 17 and 18 million. We're a bit above that, but nonetheless, the point is that slowly the supply of Bitcoin grows and then it never grows again. That kind of scarcity used to be one of the essential principles that gave money value.

So Bitcoin is trying to do that. It's trying to be peer-to-peer, meaning that you don't have to trust a third party such as a bank or some other financial institution to move your money for you and hold your money for you. You can do it all person to person. And that gives you more freedom as a consumer. It technically is supposed to decrease the chances of fraud because there's no way really for anyone to get in between you and your transaction. There's no counterparty risk you have to worry about or liability. And ultimately, it is supposed to be fully digital and offer all of the benefits and conveniences that come with that. So that's why cryptocurrencies besides Bitcoin are a thing. They're all based off of similar principles of decentralization and encryption.

But Facebook's Libra coin doesn't quite hit the mark. First of all, it is completely centralized, issued by Facebook itself. So in some sense now, Facebook is becoming a bank of sorts. And secondly, because it's supposed to be a stablecoin, that means it has to be tied to something, backed by something. Now by itself, that's not a huge issue. But what is Libra coin going to be backed by? A basket of fiat currencies. So a weighted mix of the US dollar, the euro, and a few other currencies in there are what's going to back the value of Facebook's cryptocurrency. You may be ahead of me and you can see that that really defeats the purpose of what crypto is supposed to be about. If you're just backed by or tied to these other existing currencies, that doesn't pose a challenge to those currencies. If anything, Facebook is really trying to compete with payment platforms like PayPal and Venmo and Cash App, which is a strange use of the crypto concept, at least so far. Because like I said, the whole idea behind Bitcoin is to challenge and replace these centralized currencies, these fiat currencies we have that are backed only by the government's decree.

Well, if Libra coin is just going to be, its value is going to be based off of a basket of other major currencies, which Facebook and their white paper explained that they would periodically rebalance the weighting of each of those currencies in order to achieve price stability in order for it to be a true stable coin. Again, that's been done before. That's what the IMF already does with something called the special drawing rights, which is sort of like a pseudo reserve currency for all the other central banks in the world. Now, the reason I think this is such a big news is not only because everybody's heard of Facebook, even if you don't have one, but because potentially that means that billions of users could be onboarded to Facebook's platform. So maybe there is this newsworthy buzz about how it's going to change everyone's shopping lives online. Something tells me that's not going to be the case. At least it's not a very convincing case yet, not like how Amazon and eBay have kind of transformed e-commerce and online shopping.

But even more than that, unless you've been living under a rock for the past couple of years, pretty much everyone knows that Facebook has been in a lot of trouble for how it handles its users' data, privacy issues, giving your data to third parties. And that has yet to be resolved either. I mean, in Europe, they're getting taken to court. So does it make a whole lot of sense for us to trust Facebook with our money if we can't even trust them with our personal data and our privacy? That doesn't make a whole lot of sense to me. Probably what it seems like Facebook is doing is kind of trying to recreate the existing central banking model. And again, like I said earlier, that's the opposite vision of what cryptocurrencies were originally and currently supposed to be about. They are a challenge to that system. They are a new innovation that attempts to work around and improve upon that system.

Which begs the question, what's wrong with the system? Depending on what media you consume, you may have heard that many, many times. You know, "End the Fed" and central planning doesn't work. Or that may be a concept you have no familiarity with. That it's news to you that the system ain't working or that the system is broken. And I'm here to say that in a lot of ways, it is broken. Central planning has only been attempted in recent history for about the past 100 years or so in the long span of human history. We have only tried to centrally manage how money is created and distributed to this extent since some of the first central banks were invented at the turn of the 20th century. For nearly all of human history before that, with a few brief exceptions, there has always been sort of a "let the market choose the best currency" dynamic going on. Now, like I said, there were brief moments where we did experiment and rely upon currencies that were purely backed by a government decree. For the most part, they were wildly unsuccessful. Up until today, up until right now, every other experiment with fiat currency has ended in the currency dying and its value going to zero. There are definitely some people who will say we are on that path today. We're making the same mistake again.

But really, it seems that central banks and the idea of a centrally planned monetary system and financial system is pretty much universal at this point. It's just a matter of how extreme the measures are that that central authority takes to try and manage its money. The bigger and stronger you are, the more extreme your policies can be. But we see that mainly with the three biggest ones, which are the Federal Reserve in the United States, the European Central Bank for the EU and the Bank of Japan. All three have engaged in unprecedented experiments in monetary policy, such as stimulus measures, which are mainly called quantitative easing. Really, that's a fancy way of saying that the central bank will buy up assets like bonds in order to inject liquidity into the markets. At the same time, they have cut interest rates in many cases below zero. So in Germany, the Netherlands, Switzerland, and Japan, four of the strongest, most stable economies in the world, they have negative interest rates out 10 years. That is a historical anomaly.

We can save the concept of ZIRP, which is zero interest rate policy or NIRP, negative interest rate policy, we can save that for another day because there's plenty to say about it. But what you do need to know is that it's a highly unusual, untested, potentially dangerous policy decision because it really turns the idea of interest on its head. And one of the most troubling things about it is that it's been tried for several years, and it still hasn't really worked. I mean, the whole house of cards hasn't come crashing down yet, but the longer this policy is in place, the less effective it seems to become, which could prompt policymakers to get even more extreme. They'd have to double down, essentially.

So that's one of the major problems you'll hear with the idea of central banks managing their country's money or central planning like in China. They control basically every aspect of economic life. We're not quite to that point here, but again, the Fed is kind of the biggest, baddest central bank in the world. It's got the most leverage, the most ammunition, the most firepower. So even though it doesn't take quite as extreme of a dictatorial take on markets as some of its counterparts in other parts of the world, its decisions have a much greater effect on how everyone else has to play the game, so to speak. Orders of magnitude higher. Everything the Federal Reserve does has ramifications all across the world for other central banks because the dollar is the pervasive common unit for all global finance. It's the world reserve currency. It's the number one exchange medium by a long, long, wide margin above any other currency in the world. That gives the United States a lot of advantages, but it also means that when we use extreme policy tools, the potential fallout is much bigger. And that's the situation we're facing. That was what everyone got really upset about in the financial crisis, and it's why cryptocurrencies became a thing in the first place.

So the more that you hear about Facebook's crypto, the Libra coin, make sure you keep in skeptical eye toward what they're trying to sell you because I did see some comments that either the spokesperson for Facebook or Mark Zuckerberg himself, the CEO, claimed that Libra coin was intended to someday supersede or supplant all other currencies. That sounds like what Bitcoin and other cryptos have been talking about, but that doesn't mean it's actually designed in such a way that it will ever do so because it's not. I mean, how is Libra coin supposed to replace fiat currencies like the dollar and the euro when its value comes from the dollar and the euro? It's just a little backwards, but it's certainly making waves. It's getting everybody more interested in the concept of cryptos. That could be the one big positive that I hope comes out of all of this is that it gets people talking and interested in doing research about why is this happening and why is this a thing? Why should I care? And maybe you'll learn a thing or two about monetary policy and our financial system in general because you're probably going to want to know some of that stuff before the system comes, in all likelihood, crashing down in the next decade or two.

So since this is the first episode, I really don't have anything queued up yet, but in all future episodes, I would like to take questions from listeners about what you want to know about a certain topic or what misconceptions or myths you might misunderstand about money. I think that would not only make this a little more engaging, but it would help me figure out what topics maybe I need to focus on and what kind of questions people really have about these things. So we're going to do a little ask the listener word on the street section at the end of every subsequent episode. So definitely something to look forward to and I appreciate everyone listening out there. Thank you and be sure to catch the next episode of Breaking the Dollar.