As one might suspect from my American Banker op-ed today, I’m not exactly ready to sign up for Libra. According to some, this means that I’ll miss Libra’s totally-cool software and blockchain products and the reduced consumer costs they promise. It could be that Libra indeed cuts costs, but justifying this Facebook venture solely on this single measure of consumer welfare is the new-age monopolist’s dream come true. As my mother taught me, sometimes a bargain is very expensive.
In our recent analysis of the Financial Stability Board’s assessment of decentralized fintech such as Libra, we detail high-level concerns such as concentrated risk nodes and heightened procyclicality. But, bring it on home – why should anyone with a lot to lose from even a small transaction gone astray find value in Libra? Indeed, why should those of us who wouldn’t miss a few dollars for a few hours abandon fiat currencies and regulated financial institutions? Each is far from perfect, but is Libra any better? And, how much better does it have to be for price and speed – assuming it arrives – to trump safety, security, inter-operability, liquidity, transparency, and sovereign backstops?
It’s important to remember one core fact about Libra and, in fact, about many tech-platform finance ventures: If these products expand, providers get the day-one profits and their customers take the up-front risks. Incentive alignment is totally skewed from day one in favor of big tech – nice for them, but a real hazard that policy-makers tolerate at considerable hazard.
One of the risks of financial innovation is that few innovators outside the reach of regulatory-capital requirements put their own money at risk. Sure, there are start-up costs for garagiste innovators, but those for Facebook are negligible given its now-grand resources. Those of its “partners” such as Visa and Uber – $10 million each – are barely even lunch money for these giant companies. The real money at risk comes when Facebook’s users start to give Libra their funds in hopes of fast payment execution or delivery of whatever other financial products Libra proposes. Will customers know how much risk they run to their funds, their privacy, their costs of doing business? Will anyone be watching out for them or waiting, as Jerome Powell suggested on Wednesday, until a whole lot of household wherewithal is at stake?
A while back, I wrote a Financial Times op-ed arguing that financial-technology trials needed controls akin to those demanded in biomedical research. On first glance, the risks in biomedical research and those in a fintech sandbox seem far apart. But money really matters, especially to those who don’t have a whole lot of it. If Facebook and its partners planned to build out what they readily acknowledge to be a prototype with their own money, that would be one set of risks; since they plan instead to experiment on innocent bystanders, it’s ours.