Facebook’s cryptocurrency looks a lot like a money-market fund, a vehicle that has come under intensifying scrutiny from regulators
By Jon Sindreu
The history lesson for Facebook is that just a few impediments to the redemption of a cash-like instrument are enough to stop many people from using it. Photo: Andre M. Chang/Zuma Press For all its crypto styling, Facebook ’s FB 1.13%▲ Libra looks less like bitcoin and more like a 50-year-old type of investment fund that has attracted intense regulatory scrutiny since the 2008 financial crisis. Investors should be skeptical of claims it can escape the same kind of attention.
This is a familiar question raised by sharing-economy disrupters like ride-service firm Uber and hospitality platform Airbnb. How much of what they offer is a new source of value? Or are they just jumping—temporarily—ahead of outdated laws? Libra seems, in large part, a case of the latter.
The so-called currency isn’t really like bitcoin, which allows everyone to record and validate transactions. With Libra, Facebook will—at least for now—decide which organizations get to do that. Also, Libra’s value won’t fluctuate wildly because it will be backed by a multicurrency fund of liquid assets, allowing holders to get actual money back.
The setup looks very similar to the money-market funds that many companies and investors have used to manage their cash since the early 1970s. On top of traditionally fixing the value of their shares at $1 to give them the appearance of actual cash, these funds invest clients’ money in very short-term debt that can easily be redeemed, but still provides some extra return.
With Libra, Facebook will be earning all of that income. Users of the digital currency benefit only from the ease of transfer. The company believes it could be popular in countries where access to banks remains difficult. This week, however, regulators in Japan joined those in the U.S. and the U.K. in expressing concerns about Libra.
Money-market funds only managed to fly under the radar for so long.
In the run-up to 2008, they became an integral part of the shadow-banking system, loading up on paper that was ultimately backed by subprime mortgages. When the value of that paper was called into question and clients started demanding their money, the $1 value per share couldn’t be sustained.
French bank BNP Paribaswas the first to freeze redemptions in its money-market funds in 2007. In 2008, the behemoth Reserve Primary Fund became the first retail money-market fund to admit its assets were worth less than $1 a share. Short-term funding collapsed across the global financial system.
Or take China, where online money has long been extremely popular. Libra seems to have drawn some inspiration from Ant Financial, which runs the payments platform Alipay—akin to PayPal .Users can store money in an online vehicle that has become the world’s biggest money-market fund. When officials started to panic about its systemic importance, the fund tried to control its size through investment caps.
In the U.S. and Europe, regulators have spent a decade tightening the screws on such funds.
Many can no longer fix their shares at $1 and have to impose gates and fees in times of turmoil.
Right before the new rules came into effect in 2016, $1 trillion rushed out of standard “prime” funds and into those that invest only in government debt, which remain more lightly regulated.
The history lesson for Facebook is that just a few impediments to the redemption of a cash-like instrument are enough to stop many people from using it. A related takeaway is that regulators will eventually come up with such impediments when large amounts of money are involved.
And that doesn’t even cover other potential regulatory pitfalls, like anti money-laundering protocols.
If consumers find a use for Libra—which remains to be seen—Facebook will need to grapple with many new problems. Investors shouldn’t be fooled by temporary regulatory loopholes.
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