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Facebook’s announcement in June 2019 of plans to launch a “simple global currency” called Libra to “empower billions of people” to move money around the world with the ease of a text message has sparked predictable skepticism in the Trump administration, the US Congress, and the Federal Reserve. An equally revealing reaction, however, has come from China, which sees Libra as a threat to the comfortable lead it has enjoyed in financial technology or “fintech” since 2013. US officials need to pay attention to China’s response before setting rules that would stifle Facebook’s innovation before it can get off the ground.
As envisioned by Facebook, Libra is a currency existing in digital format that could be used to make payments or money transfers. Unlike cryptocurrencies like bitcoin, which have become sources of boom-and-bust speculation, Libra is supposed to have a stable value, backed by a reserve of safe assets like bank deposits and US Treasury bonds. Libra will be created only when real money is exchanged for it, and it will in turn be destroyed when a holder cashes out into fiat currency like dollars or euros. Though described by many as a cryptocurrency, Libra aims to be something different. The supply of bitcoin, for example, is controlled by computer code, with a valuation that fluctuates wildly. Users of bitcoin have made millions and lost millions. Facebook claims that it will not control Libra and promises that it will hand over currency management to the Swiss-based Libra Association.
Pushed out seamlessly to Facebook’s 2.4 billion users, Libra could transform ecommerce and finance overnight. The idea is powerful, and the backlash was not surprising. Facebook’s dismal track record of protecting user data and privacy has made regulators and politicians uneasy. Fears abound that Libra could give Facebook excessive power, facilitate money laundering, finance terrorism, reduce the ability of governments to manage money supply and economies, and threaten global financial stability. Federal Reserve Chair Jerome Powell raised these concerns at a recent congressional hearing, and Democrats have already drafted a “Keep Big Tech Out Of Finance Act” to make Libra or anything like it illegal.
China’s concerns are quite different. Its top fintech companies have over a billion users accustomed to carrying out commercial and business transactions in what is becoming the world’s biggest cashless society. Chinese fintech companies are among the world’s most valuable. They are already expanding into the United Kingdom and Southeast Asia. With Libra, Facebook could leapfrog China by pushing out its currency to almost 2.5 times the user base of WeChat or Alipay overnight, with a worldwide reach.
Facebook’s new business strategy is exactly how WeChat in China became a super app. Mark Zuckerberg wants to “build more ways for people to interact on top of [private messaging], including calls, video chats, groups, stories, businesses, payments, commerce, and ultimately a platform for many other. . .services.” Thus, ironically, after years of benefitting from copying others, China is wringing its hands over an American tech company copying Chinese innovation.
But if US regulators ban projects like Libra or bog them down with more regulations than are necessary to guard against real risk, the path will be open for Chinese fintech to extend its dominance around the world. Americans do not generally appreciate the extent to which China has innovated in the financial sector and is bound to leverage that innovation to extraordinary global influence. On the other hand, Chinese finance has many weaknesses that could provide an opportunity for American innovation.
Chinese Tech’s Weakness Is America’s Opportunity
WeChat and Alipay turned China into a cashless society where people use their apps for everything, while Americans still use billions of checks and carry plastic cards. So far, Chinese super apps have been truly successful only in their protected home market, where Facebook and Google are blocked and foreign payments companies cannot legally operate. Outside China, Ant Financial and WeChat must start from scratch because they lack the users and ecosystems that made them so successful at home. American tech is the opposite. US tech companies have succeeded wildly beyond American shores.
Facebook’s nearly 2.4 billion total users attest to the company’s enormous advantages in data, users, and technology. There is no telling what additional advantages could accrue from its model being successfully applied to finance. The Libra project signals that American big tech’s timidity over entering finance is coming to an end. Former governor Zhou Xiaochuan of China’s central bank, the People’s Bank of China (PBOC), who is one of the foremost cheerleaders of fintech in China, framed Libra as indicative of a larger movement to create a “currency that's more conducive to globalization.” Globally Facebook has the same strengths that Chinese tech had domestically, so China knows Libra could rapidly make Facebook a financial powerhouse.
That is why Chinese officials see Libra as an economic and geopolitical threat. They have long been unhappy about the dollar’s dominance in the global financial system and are frightened by the prospect of an American company dominating the future world of digital money. Wang Xin, research bureau director at PBOC, said Libra has lent greater urgency to the central bank’s own plans for a digital currency, which have been in the works since 2014, in partnership with Ant Financial. He noted, “We had an early start…but lots of work is needed to consolidate our lead,” and he lumped Facebook in with the US government, warning that Libra could lead to a world with “one boss, the Dollar, America.”
China has the strictest regulation on cryptocurrencies and initial coin offerings in the world, fearing a loss of control that could be posed by rival currencies to the Chinese renminbi, financial risk from speculation, and evasion of its capital controls. But in a striking reversal, Wang suggested that China may loosen its control to ensure China has a home-grown digital currency that would “mainly be used to compete with Libra.” He seems to be fine with anyone but the United States or an American company launching a digital currency, suggesting that individual countries could be forced to issue their own or that the International Monetary Fund (IMF) could issue one based on the basket of currencies in the Special Drawing Rights (SDR), which includes the Chinese yuan.
Another PBOC official, Payments Department Deputy Director-General Mu Changchun, warned rightly that Libra adoption could lead many to dump their national currencies, producing "a deterioration in local people's own economic conditions." He said, “We must prevent [currencies like Libra] from becoming monopolies,” going as far as suggesting that international institutions will need to “control Libra’s circulation and monitor currency exchange rates” or even “lead to the emergence of an international central bank.” In other words, China wants Libra bogged down in as many regulatory hurdles as possible, is warning other countries against allowing adoption in their jurisdictions, and if that fails, suggests an international effort to wrest control of Libra from Facebook.
How Worried Should China Be?
China should indeed take Libra seriously but not treat its success as a certainty. First, China’s government can ensure Libra makes little to no inroads there by banning businesses and financial institutions from accepting, charging, or exchanging Libra. The Great Firewall already blocks Facebook, Whatsapp, and Instagram. The few Chinese Facebook users have no ecosystem to plug into.
Second, Facebook may find it difficult to convert users of social media into Libra holders. Lukewarm user reception for its payments service in Messenger and quick abandonment of Facebook Credits, its first virtual currency project, do not inspire confidence in its ability to drive adoption of its financial products.
Third, the US government has given every indication that it wants to slow down, not act as a cheerleader for Libra. The thinly veiled reference to China in the Senate testimony of David Marcus, head of Calibra, Facebook’s financial services subsidiary, is pushing against broad resistance: “If America does not lead innovation in the digital currency and payments area, others will. If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different." Representative Maxine Waters, a California Democrat and chair of the House Financial Services Committee, requested “a moratorium on any movement forward.” President Donald Trump tweeted that Libra “will have little standing or dependability” and suggested it should be regulated like a bank. Fed Chair Powell said it “raises a lot of serious concerns.” The G-7 is also looking into regulatory issues raised by Libra.
Fourth, it is not clear that Facebook is justified in its claims that Libra will be an improvement over existing digital currency designs. If Libra turns out not to be that innovative, it may not pose a long-term threat to Chinese fintech innovators. So far, Libra seems vulnerable to the same pitfalls of existing digital currencies, including scalability and internal governance problems. The current design hopes to handle 1,000 transactions per second (TPS) at launch, nothing compared with Alipay, which claims to have reached 256,000 TPS in 2017, or Visa, at 65,000 TPS. Anyone who has attended a meeting of 100 people without a designated chairperson could intuit that the governance mechanism, aimed to comprise 100 founding members with each having a tiny official voting stake, is likely to either prove chaotic or be subject to behind the scenes domination by its most powerful and invested stakeholder.
If Libra were to lead China to innovate even more in financial services, the impact could be healthy. But if the Libra challenge leads China to prematurely adopt a still buggy and risky digital currency/blockchain side of fintech, the damage could be significant. American and European regulators should likewise find a middle ground. Blanket bans would leave China with limited competition as its powerful fintech business models expand globally, but important regulatory protections should not be jettisoned in order to compete with China. Unleashing a brand new digital behemoth without thinking the consequences through would be dangerous to all sides.
