Why Policymakers Should Fear Libra
It is currently unclear how popular Libra, Facebook's proposed new global cryptocurrency, might become, and what problems this may cause. But inflation – and policymakers’ reduced ability to control it – has to figure prominently on the list of possible risks.
MUMBAI – Facebook’s new global digital currency, Libra, which the company plans to launch as early as 2020, could transform the world. But no one – including the founders of this ambitious economic engineering project – can fully anticipate the currency’s possible ramifications. And monetary policymakers should be especially worried, because they may find it much harder to control unemployment and inflation in a Libra world.
In the first quarter of 2019, Facebook had 2.38 billion monthly active users. If even a fraction of them begin to use Libra to carry out financial transactions, buy and sell products, and transfer money, the new currency would quickly gain wide acceptance. Already, the Libra Association, a Geneva-based not-for-profit group that will operate the digital currency, counts companies such as Uber, eBay, Lyft, Mastercard, and PayPal among its founding members. Libra could, therefore, become a dominant global currency – but one run by a corporation, not a central bank.
Although Libra is based on the same blockchain technology as other cryptocurrencies, it is expected to be much more efficient. Facebook promises that the Libra system will be able to process 1,000 transactions per second, be user-friendly, and have a transaction cost of virtually zero.