David Marcus of Facebook’s Libra project posted a Twitter thread yesterday — in response to France and Germany’s repudiations of Libra last week:

About monetary sovereignty of Nations vs. Libra: Recently there’s been a lot of talk about how Libra could threaten the sovereignty of Nations when it comes to money. I wanted to take the opportunity to debunk that notion. Libra is designed to be a better payment network and system running on top of existing currencies, and delivering meaningful value to consumers all around the world. Libra will be backed 1:1 by a basket of strong currencies. This means that for any unit of Libra to exist, there must be the equivalent value in its reserve. As such there’s no new money creation, which will strictly remain the province of sovereign Nations. We also believe strong regulatory oversight preventing the Libra Association from deviating from its full 1:1 backing commitment is desirable. We will continue to engage with Central Banks, Regulators, and lawmakers to ensure we address their concerns through Libra’s design and operations. Separately, I’m looking forward to the Libra Association taking on full leadership of the project soon after its charter has been ratified so I can focus on building Calibra.

There’s no reason not to assume all of this is sincere. However, Marcus is still missing a lot of the point of regulators’ objections.

What could go wrong

Obviously, it’s premature to say that Libra will become a dominant currency, just because Facebook are pushing it.

But — this thing is intended to work at massive scale, and Facebook promoted it as working at massive scale. A small project won’t serve 1.7 billion unbanked people.

What are some of the ways things could go bad if Libra gets huge — even given Marcus’ responses?

Libra knows regulators will demand the reserves keep 1:1 backing, and will monitor the backing to make sure it stays 1:1. The reserves are planned as a basket of national currencies, with the basket adjusted by the Libra Association to maintain the backing.

But a large reserve is a powerful lever in itself. As a basket of national currencies, it carries the threat of dumping market-significant amounts of one currency in favour of another, at the whim of the Association — while maintaining the full reserve.

The basket currencies will be large currencies, like the euro or the US dollar — fairly robust.

But the influence of a popular Libra will be significant. The Libra Association will be able to manipulate demand via the makeup of the basket.

(This may also help the Association make money on the reserve — it’s a huge amount of money to be doing systemic levels of FX trading with.)

The Libra basket will create demand for currencies in the basket — and lessen it for currencies outside the basket.

Countries with reasonable economies, but whose currencies aren’t in the basket, will have some options. Australia will continue to spend up big with the money they get from exporting sheep and rocks. (And the RMIT Blockchain group in Melbourne sees a quid in Libra.) India has already told Libra to go away — “it would be a private cryptocurrency and that’s not something we have been comfortable with.”

Small currencies are in trouble. Who’s going to want a Turkish lira if they can get Libras? A Venezuelan Petro? Even a Brazilian Real?

Those economies will promptly get Libraised — and their monetary sovereignty is trashed. Do you think they get a seat at the Libra Association table?

Dollarisation can already cripple small economies — Libraisation can do it at the speed of crypto.

And just picture the wonders of direct economic warfare, wielding large amounts of Libra!

Libra does need access to the US and Europe. Nobody will want to Libraise their personal finances if they can’t buy the same things with Libras that they could with harder currency — the Libra needs to be tradeable for dollars or euros. So Libra is smart enough to take France and Germany seriously.

Catching up on your homework, way too late

All of this is based on what little information we have — because it really does seem that Libra spent two years in an ivory tower, thinking about this from first principles, and not at any point talking to regulators.

Marcus is only now realising that the regulators could do in Facebook’s exciting new financial product — because, as a “blockchain” dream, it can only work as an end-run around regulation.

Jonathan G. Harris: “David Marcus can’t acknowledge that bbn Libra is just another bank, whose only possible advantage is avoiding being regulated like one.”