Authored by Frances Coppola via Forbes.com,

Facebook’s Libra cryptocurrency is generating an immense amount of hype. Some hail it as the beginning of the end of sovereign fiat currencies. Others believe it will draw people into the cryptocurrency world, leading them inexorably to place their faith in the One True Cryptocurrency, Bitcoin. And others worry about the effect on central bank monetary policy and the possibility that a run on Libra could trigger another financial crisis.

I think this is all massively overblown. But there is one aspect that should worry everyone – and almost nobody is talking about.

Firstly, let’s look at the claim that Libra could replace sovereign currencies. This is fundamentally nonsense. Sovereign currencies are the vehicle in which governments accept taxes. Unless foolhardy governments accept Libra as an alternative to their own currencies (believe me, this is not a good idea), people will always need sovereign currency. And no, governments are not about to disappear and taxes come to an end. Dream on, crypto-libertarians.

What about Libra replacing sovereign currencies for day-to-day transactions? Facebook says:

In time, we hope to offer additional services for people and businesses, like paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.

"In time?" Dear oh dear. I can pay bills with a few keystrokes on my smartphone, buy a coffee by scanning a contactless card or QR code on my phone, and touch in and out with a contactless card on London's Tube. I can transact using contactless cards or a smartphone all over Europe and in many countries outside Europe too. The Americans who wrote the whitepaper really should get out more.

More importantly, these are not the sort of payments that really matter to people. They are “discretionary spending” – what people do with the money they have left over after they have paid taxes, rent and essential bills. Until landlords, utility companies and grocery stores accept Libra, Libra has no chance whatsoever of replacing sovereign currencies.

To be fair, replacing sovereign currencies is not in Facebook’s interests. It is relying on them to maintain Libra’s value. Libra will be pegged to a basket of major sovereign currencies. If there were a run on one or more of those currencies, Libra would become unstable. So the last thing Facebook wants is people to abandon the sovereign currencies that back Libra. Killing off the dollar and the euro is not on its agenda.

Libra won’t pay interest on its tokens, and they won’t be backed by deposit insurance. So it is difficult to see why anyone would want to hold significant quantities of Libra for transaction purposes. And it’s also uninteresting as an investment. Since Libra will be pegged to a basket of currencies and backed 100% by assets denominated in those currencies, investors would effectively be buying shares in an index tracker fund. Like we’ve never seen those before.

Perhaps the idea is that Facebook (and WhatsApp and Instagram) users would hold small quantities of Libra so they can buy the odd coffee or pay for cinema tickets. But buying Libra exposes them to FX risk. If the values of the currencies in the basket changed, so would the value of their Libra in their own currency. Surely it is much better to keep their money in an insured bank deposit account with a contactless card and a mobile payments facility?

Of course, there are people who don’t have access to banks. Facebook's marketing documentation makes much of the "unbanked:"

For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account and those numbers are worse in developing countries and even worse for women.

In developed countries, people who don’t have access to banks are typically people with very bad credit histories, people who don’t have permanent addresses, people who don’t have identification (e.g. illegal immigrants), people with criminal records. They are unable to meet banks’ “know your customer” requirements, which are intended to prevent fraud and money laundering. Some of these people already use pre-paid cards as an alternative to bank accounts. They load the cards with cash at ATMs, then gradually spend the balance down. This is safer and less cumbersome than carrying cash.

In theory, Libra could be an alternative to a pre-paid card. But Facebook says Libra will comply with KYC/AML requirements. If it does, then it can’t be an alternative to cash or pre-paid cards for people who fail KYC checks. If it doesn't, it will get shut down. Either way, it can't help the unbanked in developed countries.

However, in developing countries where banks are few and far between, but everyone has a smartphone, Libra could be a safer alternative to cash - though even in developing countries, the need to comply with KYC/AML regulations could rain on Libra’s parade. But since the poor don’t have much in the way of discretionary spending power, and generally aren’t interested in making international payments, Libra would need to be very widely adopted to be of much use to them. In effect it would need to replace the sovereign currency for transactions. M-Pesa has achieved this in Kenya - but not elsewhere. Has Facebook considered that the governments of developing countries might put up barriers to adoption of private sector currencies created by rich white men in Silicon Valley?

Libra would, however, make it much quicker and cheaper to exchange emerging-market currencies for dollars. This is not a bad thing, but unless exchanges are efficient, honest (a rarity in crypto markets) and widely available, people could find their money becoming trapped on the Libra platform. And this brings me to a third problem with Libra.

Libra is what we call a “closed-loop” system. You can only spend it on things available for sale through Facebook and its associated apps. If you want to buy something through another platform, you must convert your Libra back into another currency. If it were Amazon that had created this currency, we might not regard this as a major problem. But Facebook is not (yet) a sales platform on the scale of Amazon. Yes, it promotes ads, and businesses have marketing pages. But it has a long way to go to match Amazon or Alibaba for sheer ubiquity. Although Facebook seems to be hoping that lots of new entrants will use Libra’s scripting language to design smart contracts for goods and services to be sold through its platform, the fact that Facebook is so far behind Amazon and Alibaba as a sales platform seriously diminishes Libra’s usefulness.

Some people seem to think that it is not Alibaba that Facebook is trying to compete with, but WeChat. That’s possibly true, but if so, this is a fundamental mistake. The economic world does not run on people pinging money to each other through chat groups (though WeChat would like to think that it does), it runs on merchants selling goods and services, and people buying what those merchants have to offer.

What about the threat Libra could pose to financial stability, or monetary policy? There is a not insignificant risk that in the event of a run on Libra, it will prove not to have the 100% reserve backing that it claims. If that happened, then people would not be able to recover some or all of their money. But that wouldn't necessarily mean central banks or governments would have to intervene. Those shouting about risks to financial stability seem to think that Libra would be so huge that central banks would be obliged to bail it out. The Eurodollar market on steroids.

The Eurodollar market’s collapse in 2008 nearly brought down the global financial system. But it was a wholesale financial market made up of giant banks and corporations moving trillions of dollars around. Libra would be a retail market consisting of people and merchants buying goods and services. Even if they are very large, retail markets don't have the potential to wreck financial stability in the way that wholesale markets do. Regulators should take an interest, of course: financial crises always start in the unregulated sector, and Libra will be in effect a giant shadow bank. But if regulators are concerned about Libra’s effect on financial stability, they already have a solution. Force Facebook to become a regulated bank, subject to capital and liquidity requirements like all other banks. After all, Goldman Sachs had to become a regulated bank in order to gain legitimate access to Fed liquidity. Why should Facebook be different?

The underlying issue here is the unspoken assumption that Facebook is too big to regulate, too big to bail, and too big to fail. Why does everyone think governments will allow Facebook to rule the world?

And this brings me to my real concern about the Libra project. Facebook’s business model since its inception has been to harvest and monetize data. I see no reason to assume that this has changed. So when I find, buried in Libra’s whitepaper, two sentences that imply Facebook’s real aim in creating Libra is to set the standard for global digital identities, my hair stands on end. As Dave Birch, director of Consult Hyperion and an expert on digital identity, puts it:

There are no throwaway remarks in a Facebook white paper that has taken a year to put together. It’s in there for a reason. [Facebook] are actually going to try and fix the identity problem.

Dave seems fairly sanguine about Facebook’s intention. But I am not. We now know just how damaging Facebook’s data harvesting can be. If Facebook became the standard setter for digital identities, it could gain access to all personal data. And that is what it wants. Not control of finance, control of data. And if you think your personal data would be digitally secure from harvesting simply because Facebook said so, you are the biggest sucker in the world.