I wrote yesterday about parallel financial systems, like those use by the Italian underworld, and why authorities fear them.
As I reported, news recently emerged that Italian organised crime has been conducting its affairs in lira – which has been officially out of circulation since the euro came to Italy in 2002.
In this case, the parallel system is only used by a small subset of society: criminals. But what would happen if the parallel system eventually overtook the official one?
The promise of a “proper” currency
This is what many crypto and gold proponents want to happen. Believers in both cryptocurrency and gold would like the world’s financial systems to be built on top of an underlying asset that can’t be manipulated.
In the case of gold – you can’t just create more of it out of thin air. So if the world’s currencies went back to the gold standard, there would be no more money printing and no “excessive” debt.
In the case of crypto – or more specifically bitcoin – you also can’t just create more of it out of thin air. There will only ever be 21 million bitcoin in existence. So again, no more money printing or “excessive” debt.
But bitcoin also has the advantage that it’s a lot more democratic than any other financial system that has come before it. Gold is already hoarded by governments, bitcoin is not.
And unlike having a gold-backed currency, bitcoin itself is the currency. You don’t need a whole legacy financial system in place to make it work. It works all on its own. That’s the whole point of it.
Bitcoin and crypto in general takes control and power away from the political and financial elite and puts it into the hands of the people.
At least that’s the idea.
Subverting a direct threat to system
As you probably know, those political and financial elite didn’t take too kindly to bitcoin back in the day. And for good reason. It was a direct threat to their way of life.
But the elite didn’t get to be elite by resting on their laurels. They eventually realised it was better to integrate crypto than to directly oppose it.
Most have lived through the changes the internet ushered in, and seen what happens to industries that face off against superior technology.
And many who are now part of this elite got that way through leveraging technology, like PayPal, Uber and Facebook’s upper management.
So they took some of bitcoin’s technology and ideals and twisted it to suit their own ends.
The main idea behind bitcoin is that it does away with the need for third parties – like PayPal, MasterCard and Visa.
Well, these third parties couldn’t have that. So they made a new version where they were a fundamental part of the network. They would keep the entire network in order and oversee all the transactions – just as they do right now.
But their crypto would go one better than even bitcoin. It would overcome crypto’s biggest hurdle – user adoption.
How would they do that? With a little help from their friends at Facebook.
Facebook would deploy this new crypto to its 2.3 billion users, giving it instant adoption almost everywhere on the planet.
And they would call the currency Libra.
At this point, you have to ask, what advantage does Libra have over any country’s national currency?
Well, the fact that it is controlled by private companies and not a government. That is essentially the main differentiator.
And that may also be Libra’s downfall.
The financial elite are ecstatic… but the political elite are enraged
Within 24 hours of the Libra announcement, political elites all around the world had decried it:
France’s finance minister Bruno Le Maire proclaimed it to be “out of the question” that Libra “become a sovereign currency”. “It can’t and it must not happen,” he said.
The Bank of England governor, Mark Carney, said: “Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation.”
Markus Ferber, a German member of the European Parliament, said Facebook could become “a shadow bank” and regulators should be on high alert.
While the chairwoman of the House Financial Services Committee “requested” that Facebook “agree to a moratorium on any movement forward on developing a crypto-currency until Congress and regulators have the opportunity to examine these issues and take action.”
And US Senator Sherrod Brown, who sits on the Senate Banking Committee, said: “We cannot allow Facebook to run a risky new crypto-currency out of a Swiss bank account without oversight.”
And the G7 nations are setting up a working group to “evaluate the risks of currencies like Libra,” according to the Financial Times.
What I find strange about this outpouring is that there was no such opposition when JP Morgan announced its own cryptocurrency. But then I guess JP Morgan is just one bank, whereas Facebook has $10 million backing from Visa, MasterCard, Uber, Lyft, Spotify, eBay, PayPal and more.
And it also has something else that has the political powers angry – perceived power over their national currencies.
This is where power really resides
This is where things get strange.
Libra will be pegged to a basket of currencies and assets. Which currencies it includes in this basket and in what proportions will have huge political consequences.
Think about it, right now the US dollar is essentially the world’s reserve currency. Well what if Libra really takes off, and becomes commonly used by Facebook’s 2.3 billion customers?
All of a sudden Libra is a very important currency, and what it is backed by becomes very important.
As I wrote earlier, all currencies used to be backed by gold. And this gave gold holders power. It also led to the US enacting Executive Order 6102 and taking all its citizens’ gold under pain of ten years in prison, during the great depression.
Imagine if Libra has a big proportion of the Chinese renminbi in its basket. That certainly wouldn’t make the US very happy.
As you can see, right now Facebook’s Libra poses a much bigger problem to the political elite than bitcoin ever did.
But what does it mean for us?
Well, I’ll get into that tomorrow.
In the meantime, if you have any interest whatsoever in making money from crypto, you need to see my colleague Sam Volkering’s webcast: Beyond Bitcoin.
Sam really couldn’t have picked a better time to go public with this, given all that’s been going on with crypto over the last couple of months.
He covers what is happening to crypto markets right now, why it’s happening, what he believes will happen going forward – and perhaps most importantly, how you can make money from it.
But given the nature of crypto, things move fast. And so Sam’s webcast won’t be online for much longer. So if you want to see what all the fuss is about, click here to watch it now – before it is taken offline.
Until next time,
Editor, Exponential Investor
PS If nothing else Libra has led to some world-class memes being created. Here’s one of the best I’ve seen: