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Currency Only Works to the Extent People Trust It

By Tom Bengtson, Publisher

The foundation of currency is trust. The only reason any of us accepts the U.S. dollar as a unit of value is because we have all agreed it has value. This is something we have derived with our minds. Perhaps it was easier to accept the value of U.S. currency when it was backed by gold. Today, however, there is no asset at the foundation of money. Nonetheless, because we trust it, it is a useful medium of exchange.

Trust is the biggest problem Libra is going to have as its backers attempt to turn it into a worldwide currency. While Facebook is getting most of the attention for the cryptocurrency, Libra will actually be run by a consortium of companies — 27 so far, but a group expected to grow to 100 companies and organizations. These are firms such as Visa, PayPal, eBay, Lyft, Spotify and others.

Facebook expects to provide a digital wallet for the new currency, something it is calling Calibra. The Facebook exec heading up the project is David Marcus, previously president of PayPal.

Tom Bengtson

The information I have seen on Libra focuses on the notion that it will give unbanked people (reportedly 1.7 billion people around the globe) an opportunity to use a worldwide currency. Unlike bitcoin, people will be able to obtain and use Libra free of charge. People will be able to send Libra around the globe without the expense commonly associated with existing worldwide currency exchanges facilitated by the likes of Western Union.

We would be foolish, however, to believe that Facebook is getting into the cryptocurrency arena for philanthropic reasons. In one published interview, Marcus said he expects Calibra to eventually offer financial services, including loans. I guess if it’s too much trouble to get a bank charter, then why not just start you own currency and facilitate the circulation of that currency? That way, you get the profit-making potential of a bank without any of the existing regulatory burden.

But it is unlikely they will really get out of the reg burden. Last month, Congress summoned Facebook and other tech giants to testify on a variety of issues, including the new currency. Senators, congressmen and regulators all raised questions. Many of the questions had to do with money-laundering, potential for fraud, capital adequacy and an insurance fund to protect against unforeseen problems. Questions around these issues all need to be answered before this project advances even one step.

There are a lot of smart people who work at Facebook, but I am skeptical they will come up with an acceptable answer to the most important question of all — Can we place our trust in Libra?

And what better way to destroy trust than a security breach. It was only last April that we learned Facebook left personal data for some 540 million users exposed to hackers and unauthorized gawkers. And don’t forget the Cambridge Analytica scandal where the voter research firm got unauthorized access to 87 million Facebook user files.

While Facebook gives people a free service, we all know it’s not free. The price is actually very high, as the company mines our personal posts and user habits to create customer profiles, which it monetizes in a variety of ways. So while people will be able to use Libra for free, I am quite certain it won’t actually be without cost.

Some of us already are weirded out when the subjects of internet searches start showing up in our Facebook feeds. Can you imagine the opportunity for commercial exploitation if Facebook were to gain access to your personal spending habits? The weird would only get weirder.

The engineers at Facebook might be able to overcome the technical hurdles associated with launching a worldwide cryptocurrency, but I seriously doubt the company will be able to overcome a public lack of trust any time in the next decade or so.

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