A recent item in the San Jose Mercury News says that the social-media giant Facebook is planning to announce that it's venturing into the cryptocurrency business with something it has code-named Libra. The earliest and most well-known such currency—Bitcoin—has not exactly taken the financial world by storm. But Facebook is reportedly lining up cooperation with credit-card companies Visa and Mastercard as well as PayPal to make using Libra more appealing than its predecessors.
Most of my readers are probably familiar with the basics of cryptocurrencies such as Bitcoin, which is based on a technology known as “blockchain.” From what I understand, it's a way of guaranteeing that everybody knows what has been done and who owns what, but without anyone being able to trace ownership of a particular unit of currency beyond the person you are immediately dealing with. Anyway, it works well enough to have attracted the attention of investors who have sent the value of Bitcoin on a roller-coaster ride that has enriched a few and impoverished probably just as many. And the fact that most cryptocurrencies are subject to just such wild and unpredictable fluctuations is one big reason that non-speculators have mostly stayed away from them, unless their desire to transact illegal business with untraceable cash has overcome their fear of short-term changes in value.
The way Facebook plans to fix the fluctuation problem is to tie their Libra to a basket of government-issued currencies. So the idea would be that anybody holding 100 units of Libras (or whatever they end up being called—I suggest “zuckers”) could take them at any time and trade them in for a certain fixed number of pounds, dollars, and euros.
That's fine in theory. But if Facebook suddenly finds itself in the position of the Federal Reserve, able to issue as much or as little currency as it wants, and able to say how much the currency is worth, the firm will face temptations that few governments have been able to resist in the past.
The open secret about the U. S. Federal Reserve, and for that matter any entity that issues fiat currency, is that they can print money. Or, what amounts to the same thing, they can loan you money that they don't have until they write you the check, but then you have to pay it back in real cash that you have to earn somehow. This is why you almost never run across a banker in the line at the soup kitchen. The Federal Reserve System is open to numerous criticisms, but at least it has some semblance of being under the control of the U. S. government, and if it went totally crazy one day we citizens would stand a chance of doing something about it before it bankrupted us all.
Facebook, however, as a private (though publicly traded) entity, is under no such restrictions. If the company chooses, it can go the way of the nineteenth-century “wildcat” banks that predated the establishment of the Federal Reserve System in 1913. Back then, every bank that wanted to could issue its own currency, and many of them did. But if you accepted a note from the Second National Bank of Podunk, Indiana, you were taking a chance that it wasn't worth the paper it was printed on if that bank had decided to go on a note-printing spree, which many of them did—and then closed forever, leaving holders of their notes with no recourse.
An entity as big as Facebook isn't likely to vanish in a shower of virtual zucker notes. But there are reasons why sovereign governments typically reserve the right to issue the primary legal tender in their respective domains. As is usually the case with governmental behavior, it has to do with power.
You may have heard the saying, “The power to tax is the power to destroy.” Nobody's saying Facebook will start taxing people and calling it that, but you can certainly picture them charging people for certain services involving their currency. It turns out that the quotation is taken from an oral argument that the great U. S. statesman Daniel Webster made before the even greater U. S. Supreme Court justice John Marshall in 1819. And at issue was the power of a state to tax guess what? A bank.
Bitcoin, or for that matter all the cryptocurrencies lumped together, represent such a small fraction of all the money in circulation today that governments can afford to ignore them. But suppose that Facebook's venture into this business turns out to be really successful. People start getting paid in zuckers instead of dollars. Banks start carrying your account balance in zuckers instead of dollars. On April 15 you write a check to the U. S. Treasury in zuckers instead of dollars—uh-oh, that won't wash. Uncle Sam gets to say how you pay Federal taxes, and he won't take anything but dollars.
If this alleged stabilization business with the currency basket works, maybe there won't be a problem with paying taxes in cryptocurrency. But if governments haven't been able to resist the temptation to tamper with the exchange rate of their currency, my guess is that Facebook won't be able to resist the temptation either. And presumably, Facebook (or whatever co-op ends up running the currency) will be able to determine how many zuckers are in circulation. That right there is a temptation that is hard to resist. Why go to all the trouble of developing a business model and charging customers and paying employees and making a profit, when you can just issue another few million zuckers and there you are? And if the exchange rate stays constant, those zuckers are just as good as dollars or what have you.
No, there are good reasons why any government faced with the advent of an increasingly popular medium of exchange that isn't under its control sooner or later grabs it for itself. And I predict that either Facebook's venture into cryptocurrency will vanish in the welter of other such products without a trace, or if it becomes really popular and lots of people and companies start using it, Uncle Sam will come along and take away Mr Zuckerberg's new toy. Even if they are called zuckers.
Note: For one of the clearest explanations of the Federal Reserve System, and for arguments that actually favor the limited issue of currency or its equivalent by private entities, I recommend distributist author John C. Médaille's Toward a Truly Free Market (ISI Press, 2010).
Karl D. Stephan is a professor of electrical engineering at Texas State University in San Marcos, Texas. This article has been republished, with permission, from his blog Engineering Ethics, which is a MercatorNet partner site. His ebook Ethical and Otherwise: Engineering In the Headlines is available in Kindle format and also in the iTunes store.