Facebook Libra Highlights Flaws of Fed Foray into Real-Time Payments


More than ten years after the pseudonymous Satoshi Nakamoto published the source code for Bitcoin, and after hundreds of other cryptocurrencies have been introduced, Facebook is the latest entrant in the cryptocurrency market. Yesterday, Facebook launched a new digital currency called Libra that will attempt to combine a decentralized blockchain—the hallmark of successful cryptocurrencies—with the reach of the Facebook community.

As I said upon the yesterday’s launch: “If successful, Libra could have benefits for consumers and small businesses in reducing the transaction costs of electronic payments, but the success of Libra is not guaranteed. Like other cryptocurrencies, it will face many challenges of which the most important is establishing trust in a community of users.”

My colleague Patrick Hedger, a Competitive Enterprise Institute research fellow in technology policy, made the insightful observation that “those that cheer such ventures as commercial spaceflight companies and charities founded by billionaires ought to also welcome Facebook’s efforts to extend the benefits of cryptocurrency to the masses. Facebook’s venture may or may not be successful, but they should be commended for trying, and certainly not stopped or hindered from doing so by regulators.”

Many questions about Libra remain, but its launch helps make the answer to one issue even more clear. The Federal Reserve should abandon efforts to enter in the market for the real-time payments and should say no to those trying to persuade it to start its own digital currency, often called FedCoin.

Facebook and the Libra Association—a consortium of companies from MasterCard to Uber, as well as non-profit groups—that will run the digital currency and its blockchain-based payment infrastructure, is the latest of many private-sector innovations to bring faster, cheaper payment transaction to consumers and retailers across the world. This should obviate any perceived need for the Fed to enter this market due to lack of private-sector innovation.

Concerns expressed about Libra having to do with lax privacy and the “crowding out” of competition—concerns that are most likely overblown or can be fixed with private-sector solutions—would be magnified if the Fed were to create its own payment system and/or digital currency.

Last October, the Fed proposed its own system to process real-time electronic payments, despite the fact that Congress explicitly mandated in the Monetary Control Act that the Fed may only launch its own payment services if “the service is one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity.” This mandate would seem to apply strongly here, as there are many real-time payment options, of which Libra is the latest.

As a coalition of policy groups led by the National Taxpayers Union recently pointed out: “The Clearing House’s (TCH) system currently serves roughly 50 percent of all checking account volume in the U.S., a figure expected to reach two-thirds by the end of 2019, and near ubiquity by 2020. From PayPal’s latest real-time offering, to Mastercard Send, Visa Direct, and Zelle, there are no shortages of existing faster payment options in the market.”

And now Facebook’s Libra aspires to offer another option with great potential. As noted by the Libra Association in its white paper, a main goal of Libra is to “facilitate frictionless payments for more people.”

Ironically, many of those voicing concern about Libra and Facebook’s alleged threats to competition and privacy have been silent about the harms in those areas from the Fed’s proposed entry into real-time payments. As noted by economists and privacy experts, these harms would be real.

For instance, J.W. Verret, associate professor at George Mason University Antonin Scalia Law School, writes in American Banker that “the Federal Reserve’s presence in payments crowds out private-sector competitors from making the initial investments needed to test out more efficient and effective systems.”

On privacy concerns, Drew Johnson, a national director of Protect Internet Freedom and Senior Fellow at the Taxpayers Protection Alliance, writes in Newsmax:

The Fed’s intrusion into the real-time payments system marketplace would allow the government to intercept and store data related to the smallest and most intimate financial transactions occurring between hundreds of millions of law-abiding American citizens. Under the Fed’s real-time payments system, the federal government could learn how much a mother paid for her son’s piano lesson, how friends chose to split a dinner bill, where an individual traveled using a rideshare app, how much a couple spent on concert tickets for their anniversary, and billions of other nuggets of information the government, frankly, has no right to know.

The same concerns would be present if the Fed were to follow the recommendations of academics and former government officials proposing that the Fed start its own digital currency called FedCoin. The arms of the federal government would potentially have warrantless access to all the data in the blockchain, and subsidies and regulation would discourage startups from innovating.

As tech blogger Tony Aube puts it, “Do we want a world where we have an open, global, decentralized, permission-less monetary system? A currency of the people, by the people, for the people. Or do we want a world where governments are in charge of digital money, with the potential for massive abuse and oppression down the road?” Libra—though its success is far from guaranteed—belongs to the bright vision of permissionless innovation, while FedCoin and a Federal Reserve real-time payments system belong to the dark design of centralized control.

Disclosure: I own shares in Facebook, but am still not on Facebook

Competitive Enterprise Institute research associate Gabriel Greenspan contributed to this post.