Why Facebook’s Currency Is a Good Idea

July 8, 2019 at 9:04 am Leave a comment

The most interesting and potentially consequential thing that happened over the holiday week was that the House Financial Services Committee sent a letter to Facebook’s CEO formally requesting that he put the brakes on their plans to introduce libra, a cyber currency which Facebook plans to administer along with 24 other companies including PayPal and MasterCard.

According to the Luddites, I mean Congressmen, the proposed new currency and digital wallet which Facebook plans to start offering the middle of next year. Facebook’s proposal involves massive “risks” on an unprecedented scale. In addition, the crypto currency could provide an “under regulated platform for elicited activity and money laundering.” Hearings will follow shortly.

It’s time for everyone to take a deep breath and come back down to Earth. The plans of Facebook and its partners are the logical inevitable evolution of currency. In addition, in the short to medium term this has very little to do with creating a revolutionary new currency and almost everything to do with capturing a larger portion of payment transactions. This is a big deal but hardly revolutionary.

First, the only reason we use paper currency today is because crypto currency wasn’t around thousands of years ago when we started seeing a large scale need for the secure exchange of credit that businesses and consumers could rely on. Currency is nothing more or less than a contract, albeit one backed by the full faith and credit of governments, that the paper you have in your pocket will be accepted and honored by the total stranger down the street.

In many ways it has become grossly inefficient. In his book “The Curse of Cash” Professor Kenneth S. Rogoff points out that contrary to popular belief “demand for most advanced country currency paper notes has been rising steadily for more than two decades” precisely during the time period you would expect debit cards to be making money obsolete. According to Kenneth S. Rogoff, by the end of 2015 1.34 Trillion worth of US currency was being held outside US banks. Furthermore, the bulk of this cash is in denominations of $100 or more. This is not an abstract problem. India’s Prime Minister was so concerned by the use of high denomination currencies to facilitate illegal activity that he literally took large denominations out of circulation.

And let’s all stay calm. Facebook’s “currency” is only going to be valued to the extent that it can be converted into common currency. What is so telling to me about Facebook’s announcement isn’t that Facebook wants to create a crypto currency but that its founding members include MasterCard, PayPal and Visa, companies that specialize in facilitating transactions. What really is going on here is not some idealistic quest to create a world without cash but rather an aggressive and smart business move to take a larger chunk of the money to be made off facilitating business transactions. This isn’t something to be feared, it is the free market at its best. If they succeed we will have a better, safer system and if they don’t, all the armchair reactionaries can say I told you so.

Does this represent a threat to your credit union? Yes it does. But the threat is no different than any other multitude of other challenges confronted by the industry as technology once again revolutionizes the way banking is done.

Which brings me back to the Luddites. I would have a lot more sympathy for regulators and our elected representatives if they didn’t insist on moving so slowly in updating our payment system. What Facebook is doing is commonsensical to anyone with a smartphone. I can now go weeks without going to an ATM secure in the knowledge that so long as my smartphone is charged up I can just about pay for anything I need. In fact, Sweden   has already gone a long way towards  phasing out cash. If anything, Facebook’s innovation is, if anything, long overdue.

Entry filed under: Economy, General, technology. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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