Should You ‘Like’ Libra? (FB)

Facebook’s new Libra cryptocurrency may not be right for everybody, but not everybody has better options. For them, Libra could have real benefits.

Facebook - Libra

There is a time and place for almost everything, but I do not think now is the time for Facebook’s newly announced cryptocurrency – and the place definitely is not here in the United States.

Any currency, traditional or crypto, is based on trust and faith. We trade our goods or our services for something mainly intangible, in the belief that someone will later accept that intangible something for goods or services of approximately equal value. Whether we are talking about gold, or paper, or seashells, or ramen noodles (a common currency in prison), or something as ethereal as bitcoin and its rivals, the two purposes of money are to serve as a store of value and a medium of exchange.

So it strikes some people as odd that Facebook, with some fanfare, yesterday announced its sponsorship of a new cryptocurrency it calls Libra. Facebook has suffered a fair amount of reputational damage in the past few years over its handling of user data and the abuse of its social media platform to disseminate lies and gibberish posing as news and information. By unveiling Libra, Facebook is saying “Trust us.” At the moment, far from everybody does.

As with bitcoin and the other extant cryptocurrencies, I have no intention of touching Libra. I have no reason to do so. My nation’s currency, the greenback, is the anchor of the global financial system. Its value fluctuates, like most currencies today, but it may be the most universally recognized and widely accepted government-issued “coin” since the Roman Empire. Any money I own that I am not using at a particular moment sits in bank and investment accounts that are closely monitored, heavily regulated and, in some cases, government-insured.

I cannot think of any reason why I would give this up. If you find yourself attracted to Libra, or bitcoin, or any of the other cryptocurrencies out there, you should be asking: Why?

The primary buyers of “traditional cryptocurrencies” – a phrase I would not have expected to use for a while – thus far have probably been speculators, shady characters and outright criminals, in that order. There are likely some genuine enthusiasts out there who like the idea of a currency divorced from a particular nation’s government in principle. But the drawbacks to using bitcoin or its competitors are very real.

Only a tiny fraction of global businesses accept bitcoin. Cryptocurrency holders have experienced significant losses when exchanges have suffered cyberattacks or gone bust. And the currencies have little use as a store of value. Their values fluctuate wildly, often as a result of unexplained activity on unregulated exchanges.

Facebook is trying to avoid these shortcomings by recruiting a stable of corporate partners to share responsibility for operating its Libra “nodes.” Members will verify transactions and maintain records of them, decentralizing operations. Some, like Mastercard and PayPal, are already in the money transfer business. I suspect Mastercard’s interest is to protect its existing market share. PayPal could benefit from lower exchange costs, higher markups or both on cross-border transactions. Other backers, like Uber, operate worldwide and must bear significant costs and foreign exchange risks in converting foreign transactions back into dollars. “Owning” the currency in which customers pay would have advantages for such companies.

Another novel twist for those not involved in the cryptocurrency world: Libra will be what’s known as a “stablecoin.” Facebook says that a basket of well-established government currencies will back Libra. This will not eliminate fluctuations in value; in fact, it guarantees that as the currencies in the basket fluctuate against the U.S. dollar, the British pound, the euro, or any other reference point, a Libra’s value will fluctuate too. Yet it could allow Libra avoid, or at least mitigate, the wild fluctuations in value that occur in the opaque markets for bitcoin and bitcoin wannabes. While Libra would not be the first stablecoin, it is poised to become the first that most people encounter.

It is noteworthy that not a single major bank is among the initial Libra backers. Banks do a big business in currency exchanges and other cross-border transactions, so they have an existing business model to protect. But they are also subject to intense regulatory scrutiny. Anything that seems ripe to facilitate money laundering, tax evasion or other financial crimes is a big deterrent for them. Even some members of the consortium that will control Libra have expressed concerns that it could be used to launder money or finance terrorist organizations, The Wall Street Journal reported.

Facebook says that Libra will not launch until the first part of 2020. For all the obstacles against it, I do see potential uses for Libra – just not here in the United States or in places with similarly advanced economies.

Suppose Libra had existed several years ago and you were a Venezuelan with some money. If it were easier to convert your bolivars into Libra than to obtain scarce dollars, you might have used Libra to protect yourself against the value destruction that the socialist Caracas regime has inflicted on its population. There are similar, albeit less extreme, capital-preservation imperatives across much of Latin America and in many other parts of the world. The Libra may also emerge as a workaround for capital controls that exist in China and similar command economies – which is why we can expect such places to tightly control Libra use, if not suppressing and banning it outright.

Still, there are about 7.5 billion people on this planet, and Facebook counts almost one-third of them among its users. That is nearly as much as China and India’s populations combined. For many who live in less-developed parts of the world, Libra may be the best sort of “money” that is readily available. I may not like Libra on my social media accounts, but for this potential use, I am not ready to give it a full professional thumbs-down, either.

About Larry M. Elkin 559 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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