A couple of days back, Facebook announced a ‘soon to be launched’ global currency in a white paper– Libra (based on roman measurement of weight). I think this could possibly be the most important announcement in global finance in decades.
Let’s assume that eCommerce on Facebook’s platforms including WhatsApp, Instagram and Messenger is conducted using Libra. Add to this the transactions handled by an Uber (one of 27 partners) and maybe P2P money transfer by its 2.7 billion MAUs, the value of transactions that are completed using Libra could be hundreds of billions of dollars. So right out of the gate, Libra could be one of the biggest currency platforms in the world. While Libra at launch will be backed by actual currencies like the USD, Euro and Yen, it is important to understand why it may still end up being de-facto currency of the world!
Think about what exactly is money. As a child, I was confused when saw the sentence “I promise to pay the bearer 100 Rupees” on a 100 Rupee note. Why is someone promising to pay me Rs.100 when I am already holding a 100 Rupee note? I realized (when I was much older) that the Rupee note is not the money – the ‘note or bill’ is just a standardized and agreed upon way of representing Rs.100 so that money becomes fungible. It is a guarantee by RBI that what you are holding in your hand is worth Rupees 100 where Rupee is an abstract concept with no inherent value.
Libra, at launch, is going to be backed by an actual basket of currencies like the USD, Euro and Yen. But just like Libra, at one point every major currency was backed by gold. Just like the Rupee ‘note’, the dollar or GBP ‘bill’ didn’t have any inherent value. So, depending on trust (and other factors not worth going into here) in authority issuing the currency, value of the currencies used to fluctuate wildly.
To ensure that currency is backed by something with inherent value, 44 countries (others soon followed), at the Bretton Woods conference in 1944 agreed to peg their currencies to gold. This meant that citizens could go to their central bank, hand in their currency and get actual gold in return. Following this, a lot of countries decided to peg their currency to the dollar – effectively making most currencies in the world pegged to gold.
The peg ended in 1971, when Richard Nixon stopped allowing gold redemption effectively killing the gold peg. While the dollar fell in value by a third in the 70’s, over next few years, it stabilized and remains the de-facto currency for international trade and, most importantly, oil.
The point of this history lesson was that ultimately the determination of what a currency is worth is largely dependent on the trust that currency holders have in the issuing authority. Along with US, all countries abandoned the gold standard – some countries did well and some countries experienced hyperinflation (because governments printed as much money as they wanted). When the trust is missing – sometimes by printing too much currency and eroding its value – a Zimbabwe happens (1.3 trillion Zim Dollar=$ 1USD)!!
So just like the gold standard, while Libra at launch will be pegged to a basket of currencies, we could, at one point, abandon this is peg! I am sure Facebook has thought of this – and so is leaving oversight to an independent non-profit – because there is no way is anybody abandoning that peg if Facebook is in charge!!
In the next decade or so we may be in the era of one unified global currency (except for China of course)!!!