How Not to Launch a Digital Currency

The story of Facebook's failed effort to launch a global digital currency and payment system is reminiscent of the historic struggle between secular and religious authorities. One clear lesson for other monetary aspirants is that it is risky business to reach for the crown jewel of state sovereignty.

Katharina Pistor

NEW YORK – In June 2019, Facebook made a daring announcement: within a year, it would launch a new global currency, the Libra. 

The idea was to offer an alternative to national currencies in cross-border transactions, and to provide a payment network for billions of unbanked people. 

A strictly digital token, the Libra was to be issued by an association in Switzerland and backed by a basket of national currencies, implying that its creators sought independence from sovereign powers.

But Facebook soon lowered its sights. 

Libra has since been renamed Diem, and the issuing entity has moved from Switzerland to the United States, where it has formed a partnership with Silvergate Bank to issue a token that complies with US banking regulations. 

A project that began by taking its name from a Roman currency and wrapping itself in the image of Caesar Augustus has ended as part of an online financial-services platform based in a corporate office park in La Jolla.

Libra’s quick rise and fall is a telltale case of a premature and ill-designed attempt to challenge the powers that be. 

Among other things, its fate highlights the critical importance of building coalitions that are willing and able to play both offense and defense against challengers.

Facebook and the Libra Association did not invent the idea of digital currencies, which had been around for a decade. 

Nor were they breaking new ground in payment systems. 

Companies like PayPal have been building alternative systems in the shadow of (and often by piggybacking on) existing banking infrastructure for more than two decades. 

This low profile was both a strength and a weakness: it allowed new platforms to expand without raising the ire of regulators; but it also left them dependent on legacy institutions and easy to copy.

As a latecomer to the game, Facebook hoped to use its comparative advantage as a digital platform with more than 2.3 billion users to take digital currency mainstream. 

Building on the “stable coin” fad, Libra was to be tethered to a basket of currencies issued by countries with a reputation for stability, and with reliable backstopping from central banks. 

Its value would track a weighted average of the British pound, the US dollar, the euro, the Singapore dollar, and the Japanese yen, even though it would be issued by an entity outside any of those countries’ jurisdictions.

The regulatory backlash was swift and fierce. 

Within weeks, hearings were organized in both houses of the US Congress, and politicians around the world voiced their disapproval. 

National authorities quickly formed a united front and pledged to scrutinize every aspect of what they perceived as a threat to their monetary sovereignty. 

The Financial Stability Board, which counts the G20 among its members, launched a review of the existing regulatory frameworks and began coordinating the response to Libra and other aspiring global stable coins.

Nothing unites disparate interests like a common enemy. 

Libra’s ambition was more than the world’s leading economic powers could take. 

No matter how much Facebook CEO Mark Zuckerberg pleaded for leniency or fearmongered about China’s efforts to develop a global digital payment system, he could not sway the powers that be.

Facebook was forced to retreat. 

First, the Libra Association started losing key members. 

When Visa, Mastercard, and PayPal left, the writing was on the wall, even though the overall number of members continued to increase. 

To alleviate market and political concerns, Facebook had to renounce its own engagement with the association. 

Then came the ill-fated renaming from Libra (balance) to Diem (day), which has been tainted by copyright issues.

When the Diem Association finally announced its relocation from Switzerland to the US this month, it was hard not to be reminded of Henry IV’s infamous trek to Canossa in 1077. 

Though Henry was emperor of the Holy Roman Empire, he was forced to humiliate himself by crossing the Alps in winter to beg for leniency from Pope Gregory VII, whose authority he had openly challenged by appointing bishops in contravention of a papal decree.

Henry’s challenge to papal authority succeeded as long as he had the German kings behind him. 

But the pope responded by excommunicating Henry, denouncing the other kings’ pledge of allegiance, and lobbying them to deny Henry their support unless he agreed to atone. 

When Henry’s allies wavered, he had no choice but to submit himself on both knees to the pope.

Facebook’s retreat has been less dramatic: a reshuffling of paperwork and negotiations with a different set of regulators are all it took to decamp to Southern California.

Nonetheless, the history of the struggle between secular and religious power, epitomized by Henry and Gregory’s standoff, holds lessons for power seekers today. 

Above all, it is risky business to reach for the crown jewel of state sovereignty – in this case, money. 

If you dare to do so, you should be sure that you and your collaborators are sufficiently independent from the power that is being challenged. 

And you had better have the capacity to backstop your own money, lest it crash when its holders seek safety and rush for the exit.

Monetary incumbents also can learn from Libra’s fate. 

In earthly matters, power is always contested and therefore always temporary. 

With challengers perpetually waiting in the wings, incumbents that do not learn how to control them will eventually have to yield.

Katharina Pistor, Professor of Comparative Law at Columbia Law School, is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

Innovation nation

Firms are rediscovering their love for capex. Good

That is both a radical change and an enormously important one

As the rich world reopens, the contours of the post-pandemic economy are becoming clear. 

The latest trend is a global surge in capital spending. 

Forecasters reckon that overall real investment worldwide will soon be a fifth higher than it was before the pandemic. 

America’s business investment is rising at an annual rate of 15%. 

By 2022 companies in the s&p 500 are forecast to be spending over a tenth more on factories, technology, r&d and the like. 

Barely a day goes by without a large firm boasting about how much it plans to splurge. 

at&t says it will throw $24bn a year at its networks. 

Sony is piling $18bn into an expansion push. 

Semiconductor firms are engaged in one of the biggest capital-spending (or capex) sprees in history.

That is both a sharp change and an enormously significant one. 

Sharp, because before covid-19 managers embraced capex austerity. 

America’s business investment had stagnated relative to gdp for several decades. 

Britain’s was 15% lower than in the late 1990s. 

Even as business profits soared, firms devoted a smaller share of their cashflows to capex and r&d, and more to share buybacks and dividends. 

Significant, because investment in new technologies and business practices is the secret sauce behind higher living standards. 

Weak capital spending contributed to the rich world’s sluggish productivity and growth in the 2010s, and to the gnawing sense that capitalism was misfiring.

Now, though, all that is changing. 

Fiscal stimulus has put money in people’s pockets. 

In America real disposable income per person is 27% higher than it was in February 2020. 

And as economies reopen, people are in the mood to spend. 

Companies can thus be more confident there will be demand for their wares in the next few years—as good an incentive as any to expand capacity. 

Some firms, especially in consumer-facing industries, are low on inventory and are frantically trying to catch up.

Yet capital spending is rising not just because the economic cycle is on the up. 

Firms are also adjusting to permanent pandemic-induced shifts, from an emerging norm of “hybrid work” to greater online shopping. 

The big tech firms, whose products are so important to this shift, have led the investment charge. 

In 2020 they accounted for a third of total r&d spending in the s&p 500; this year they are boosting capex by 30% relative to 2019.

Other companies now recognise that they need to pull up their socks. 

High-street retailers are at last investing heavily in online offerings to compete with Amazon. 

Restaurants continue to improve their dine-at-home service even as dine-in reopens, allowing them to squeeze more sales out of preparing food. 

Consultancies are finding ways to let their staff remain connected when they are not in the office. 

Growth in global shipments of computers for companies will be even faster this year than last. 

All this promises a world in which people get more done in less time.

Firms in some industries still play by the rules of the 2010s. 

Mining companies seem cautious about shelling out in order to relieve supply bottlenecks in commodity markets. 

Big hotel chains appear to have no plans to install rainforest showers in every room. 

And it remains to be seen whether the post-pandemic norm will be one of structurally higher investment spending, or whether firms slip back into their old ways. 

For now, though, stand back and appreciate the global capex surge. 

It promises a more dynamic form of capitalism. 

Nato warns China’s military ambitions threaten global order

Beijing calls alliance communiqué ‘slander’ and ‘a misjudgement of the international situation’

Michael Peel in Brussels and Lauren Fedor in Washington

Joe Biden told reporters that Russia and China were both seeking to drive a wedge into transatlantic solidarity © Reuters

Nato leaders have warned that China poses “systemic challenges” to the rules-based international order in a sign of growing western unease over Beijing’s military ambitions.

Members of the transatlantic alliance convening in Brussels on Monday cited disinformation, Chinese military co-operation with Russia and the rapid expansion of Beijing’s nuclear arsenal as part of the threat, according to a Nato communiqué.

The strength of the statement showed how far relations between the west and Beijing have deteriorated in the 18 months since Nato countries last met. 

Then, the transatlantic alliance had issued a cautious statement about the “opportunities and challenges” presented by China.

On Tuesday, China’s mission to the EU called the Nato statement “slander of China’s peaceful development and a misjudgement of the international situation and their own role”.

It added: “We will not present a ‘systemic challenge’ to anyone, but if someone wants to pose a ‘systemic challenge’ to us, we will not remain indifferent.”

The communiqué from the 72-year-old cold war-era military pact followed a stronger line from the weekend’s G7 meeting, when the club of rich democracies criticised China over human rights, trade and a lack of transparency regarding the origins of the coronavirus pandemic.

Jens Stoltenberg, Nato secretary-general, insisted Beijing was “not an adversary” but said the alliance needed to “engage with China to defend our security interests”.

“There is a strong convergence of views among allies,” he said, adding that Nato was primarily concerned about Beijing’s activities in the group’s Euro-Atlantic sphere of operation. 

“China’s growing influence and international policies present challenges to alliance security.”

President Joe Biden said that Russia and China were both seeking to drive a wedge into transatlantic solidarity.

“The last time Nato put together a strategic plan was back in 2010, when Russia was considered a partner, and China wasn’t even mentioned,” the US president said.

Biden, who will meet Vladimir Putin this week in Geneva, described the Russian president as “bright”, “tough” and a “worthy adversary”.

“I am going to make clear to President Putin that there are areas where we can co-operate if he chooses,” said Biden. 

“And if he chooses not to co-operate and acts in a way that he has in the past relative to cyber security and some other activities, then we will respond. 

We will respond in kind.”

The Nato statement, approved by the leaders of the 30 member states, said China’s “stated ambitions and assertive behaviour” posed “systemic challenges to the rules-based international order and to areas relevant to alliance security”.

“We call on China to uphold its international commitments and to act responsibly in the international system, including in the space, cyber and maritime domains, in keeping with its role as a major power.”

The communiqué pointed to China’s “coercive policies”, its accumulation of nuclear warheads and sophisticated delivery systems and its participation in Russian military exercises in Atlantic waters. 

Another trend troubling Nato allies was the involvement of Chinese companies in critical infrastructure in Europe, such as in ports and via telecommunications company Huawei.

Nato said it would aim for “constructive dialogue” with Beijing “where possible”, including on climate change, a sign of the more nuanced views held by some of the alliance’s members.

The Nato broadside reflected an attempt by the Biden administration to use the president’s first European trip to mobilise allies against China.

The Nato leaders also pressed ahead with efforts to modernise the grouping, originally set up as a bulwark to the Soviet Union. 

Nato will pull back from an era of “expeditionary” international missions, with its forces preparing to leave Afghanistan along with US troops after almost two decades.

The Nato heads of state and government approved a cyber defence strategy and extended powers to invoke the alliance’s Article 5 principle of collective defence in cases of co-ordinated cyber attacks.

Nato leaders also pushed through measures to strengthen the response to attacks on satellites and to build capabilities in emerging technologies such as artificial intelligence. 

Members of the alliance have become increasingly preoccupied with potential military uses of AI and with the activities of China and Russia in space.

Additional reporting by Helen Warrell in London and Kathrin Hille in Taipei 

Why Is America Steaming Out of the Pacific?

The Pentagon chief calls China the ‘pacing’ challenge but is wearing out naval assets in the Middle East.

By Dustin Walker

The USS Ronald Reagan aircraft carrier during a port visit in Hong Kong on Nov. 21, 2018./ PHOTO: ANTHONY WALLACE/AGENCE FRANCE-PRESSE/GETTY IMAGES

The aircraft carrier the USS Ronald Reagan will deploy from its home port in Japan to the Middle East this summer to support the withdrawal of U.S. troops from Afghanistan, The Wall Street Journal reported earlier this week. 

The move came at the request of U.S. Central Command and was approved by Defense Secretary Lloyd Austin.

The Reagan’s deployment undermines the claim—made by the past three American presidents—that the Indo-Pacific is America’s priority. 

It also suggests that the Biden administration is conducting a phantom withdrawal of U.S. troops from Afghanistan—removing boots on the ground to fulfill a campaign promise to end “forever wars,” but replacing ground operations with other forces conducting similar missions at great difficulty and expense.

A carrier has been present in the Middle East for years, which is wearing out the Navy’s carrier force. 

The USS Abraham Lincoln spent more than 220 days operating in the region on a 295-day deployment that ended in January 2020, the longest of any carrier since the end of the Cold War.

The USS Eisenhower, currently operating in the Middle East, is on a “double pump” back-to-back deployment. 

The carrier spent more than 200 consecutive days at sea on its previous deployment. 

It can no longer put off repairs, and due to years of high carrier demand, the only carrier available to backfill it is the Reagan. 

That means the U.S. won’t have an aircraft carrier in the Indo-Pacific for months.

The Pentagon frequently touts the Indo-Pacific as its priority theater; Mr. Austin has said, “China is our pacing threat.” 

Indeed, the 2018 National Defense Strategy said that if necessary, the U.S. should accept risk in the Middle East and other theaters to focus assets and resources in the Pacific.

This move does the opposite and sends a terrible message to Pacific allies and partners: America doesn’t have the will or focus to live up to its commitments. 

This is more firepower for China’s diplomats, who repeat this refrain in capitals throughout the region.

And even as U.S. forces rush to leave Afghanistan, the Biden administration still intends to support the Afghan military with training and surveillance aircraft. 

The administration also plans to continue counterterrorism operations from “over the horizon” locations outside Afghanistan.

Neighboring countries aren’t likely to agree to station U.S. forces. Military commanders will have to rely on strike aircraft operating from distant bases in the region, requiring more refueling aircraft. 

And the requests for carrier presence will keep coming. The U.S. is at risk of replacing a small force inside Afghanistan with a larger force outside.

The Reagan’s deployment isn’t only a question of carrier presence in the coming months, but in the coming years. 

It’s up to Mr. Austin to end the circular logic that an aircraft carrier is always needed in the Middle East—to support troops on the ground, to protect them when they withdraw and to replace them once they have left. 

It’s the same faulty logic some use to argue that a carrier is needed to deter Iran and its proxies from attacking U.S. forces, and needed again to prevent escalation once the attack occurs, despite little evidence that carrier presence influences Iran’s behavior.

All of this is particularly salient as Mr. Austin prepares to present the Pentagon’s budget request to Congress. 

He is asking lawmakers to make hard choices to prepare the military for the China challenge—divesting of certain older platforms to free up dollars to invest in new equipment, for instance. 

This strategy is risky because it assumes America can get by with a smaller force today. 

But it will be doubly so if the Pentagon overburdens that smaller force with unrestrained deployments to the Middle East.

An American strategy that treats the Pacific as the highest priority will require a serious shift in mentality. 

Mr. Austin can start that process by canceling the Reagan’s deployment to the Middle East and showing he’s willing to follow his own advice and make hard choices. 

His tenure began amid questions of whether a former commander in the Middle East was suited to manage a strategic shift to the Pacific. 

It isn’t too late to prove the doubters wrong.

Mr. Walker is a former professional staff member on the Senate Armed Services Committee and adviser to Sen. John McCain.

How China Could Derail the Commodities Supercycle

By Craig Mellow

Workers make iron bars in a steel factory in Lianyungang, in China's eastern Jiangsu province. / AFP via Getty Images

A few words from the Chinese government can go a long way. 

A one-sentence statement on May 23 promised “zero tolerance” for “abnormal transactions and malicious speculation” in commodities markets. 

The local price of iron ore and steel promptly tanked by 7%.

That isn’t the end of the story. 

If China can’t quite command world metals prices, it can certainly slam the brakes on the new commodities supercycle many investors are counting on.

Net long positions on commodities of all types are at a 25-year high globally, says Arthur Budaghyan, chief emerging markets strategist at BCA Research. Developments in Beijing could mean a lot of those bulls get burned.

“Over the next six months, metals will move significantly below current levels,” he says. 

Such a slump would also drag down highflying mining stocks such as Vale (VALE), Glencore (GLEN.UK) and Anglo American (AAL.UK).

China drove the last two metals price surges, in 2011 and 2017. 

It’s driving this one, too. 

The No. 2 economy accounted for a whopping 70% of world iron ore consumption last year and 58% of copper, according to BCA.

The iron ore feeds China’s massive steel industry, which in turn leans on construction demand. 

The top use for copper is power plants and lines, which China is still building out while the U.S. and Europe mostly make do with existing grids.

Beijing has administrative tools for talking down metals prices, starting with the fact that 60% of the steel industry is still state-owned, says Richard Lu, China-based steel analyst for CRU, a commodities research firm. 

“The government has organized a few meetings to reset expectations in the market,” he says.

Speculation isn’t a figment of the regime’s imagination either, adds Alejandra Grindal, chief international economist at Ned Davis Research. Beijing could crack down on burgeoning practices like using commodities futures contracts as loan collateral.

But the strongest effects could come at the macro level, as China tapers pandemic stimulus while metals producers and traders hold full inventories.

“Total social financing,” the standard yardstick for Chinese credit, is “almost back to its original path” from record levels last year, Lu says. 

The government has also signaled cuts in steel production to meet long-term carbon-reduction targets.

The industry, meanwhile, keeps partying like it’s 2020. 

Mills are cranking out steel while they can, and copper imports have surged this year. 

That could mean a shift to oversupply in the second half of 2021.

“They’re removing some liquidity from the economy, and you’ll see the impact on raw materials,” says Rick de los Reyes, portfolio co-manager of the T. Rowe Price Multi-Strategy Total Return fund.

In time, demand for industrial metals is likely to diversify away from China. 

The U.S. infrastructure package under debate in Washington could kick in starting next year. 

More important is the global shift to electric vehicles, which require four times as much copper as their internal-combustion counterparts, and plenty of other metals besides. 

“To go green, you have to go black-intensive first,” says Ole Hansen, head of commodity strategy at Saxo Bank.

For now, though, EVs require just 3.5% of the world’s copper, equivalent to a twitch in Chinese demand, BCA’s Budaghyan points out.

“There’s a lot of excitement about the EV copper story, but I want to be taking the opposite bet,” T. Rowe’s de los Reyes says.