Facebook’s Libra will be a disaster for customers

  • By Lewis Panther

A world-leading economist has declared Facebook’s plans for its own currency will be a “disaster”.

Professor Peter Bossaerts, who will be leading a discussion around Ethics, Neuroscience and Behavioural Finance in the Digital World, who will be at FINSIA’s Summit  gave a taste of what to expect when he spoke to InFinance.

The economist who is based at Melbourne University - considered one of the founders of the discipline of neuro economics and how humans perceive and take risks - spoke about the social media giant’s plans for Libra.

Belgium-born Bossaerts, who joined from the California Institute of Technology, called on more science-based analysis of financial regulation years before the Royal Commission.

The academic who co-founded the university’s Brain, Mind and Markets Laboratory, which is running Australia’s first fintech class, is a keen proponent of allowing new technology to flourish. Though he clearly thinks regulation is key to avoiding the need for another misconduct inquiry. The economist’s views on Big Tech companies’ move into banking are where he is most strident.

“Disruption is always taking place in finance,” he said. 

But the financial services sector “should be aware of both the dangers and the opportunities in introducing new disruptive technology.

“You should give these fintech initiatives a chance to actually flourish, and not immediately stop this. 

 At the end of the day, Libra will end up in tears. We know this from the history of currencies

“I'm not talking about Amazon or Facebook using one currency for everything.

“This is, of course, extremely relevant for things like Libra, the new currency that Facebook wants. 

“This could have completely unintended consequences.

“My own thoughts, it's a complicated thing, but I think the assessment is very simple. 

“I don't have to experiment with that, I know exactly what's going to happen. It's going to be a disaster.

“There is a reason why central banks exist, and why they have a monopoly on legal tenders. 

“Anybody who has studied the 19th century US banking situation (and a series of bank failures) knows that it was a disaster. 

“Anybody who studied the precursor of the Euro system, where there were several currencies that were in each of these countries, some of them in parallel, knows it was a disaster.

“At the end of the day, Libra will end up in tears. We know this from the history of currencies.”

Bossaerts says it is simply the ethical thing to do to limit the likes of Facebook and Amazon’s move into financial services.

Referring to the plans for Libra, he said: “I found something completely unethical about this plan that you, as an individual, give up your currency in return for Libra. 

“Those currencies of Facebook or its affiliates could be used to invest, actually earn the interest on that - which is called seigniorage interest.

“Because they have a monopoly on the currency, they basically get your money for nothing, and they can invest it.

“So the interest they earn, and not the person who actually gave up the currency in the first place in return for the money, profits.

“I am, as an economist, vehemently opposed to giving Amazon the status of a central bank. 

“The power they have with their network will mean that people will be forced to use it.

“Every time you have to buy something on Amazon, they will force you to use their currency. So their currency will be legal tender in the Amazon sphere. 

“As a result, they have their own country. I think that's completely un-democratic.

“I think that banking and finance ultimately needs to be regulated, there has to be rules.

“The problem with finance is that, and this has to do with ethics, anything that is not explicitly prohibited, is allowed. And that attitude is just completely wrong.”

*The subject at Melbourne, Foundations of Fintech, has been developed for both finance and computer science students. 

It will be delivered by specialists in finance and economics, decision science and computer science from the University’s Brain, Mind & Markets Laboratory in collaboration with fintech industry partners.

This article was originally published in FINSIA's InFinance magazine. 

The FINSIA Summit will be held in September in Melbourne.