Facebook's Global Currency Strategy: Evolving from a Business to a "Superstate"

The nation-State is the most powerful social structure ever created by mankind. Millions of people linked together for one reason or another draft the laws that govern the social network. The reasons for organizing this network can be arbitrary, such as belief in inalienable rights, or a common language, geography, economy, etc. Thus, bureaucrats and dictators, whether elected or not, draft laws to influence communications, manage social organization, build infrastructure, and make economic decisions for their societies. In this way, the decisions of a few affect the lives of many - for better or for worse.

Facebook oversees a platform that then influences communications, manages social organizations, builds infrastructure, and makes economic decisions for the largest social network ever. While Facebook is accountable only to its own corporate shareholders and is regulated by a number of regulators in the United States and Europe, it is confronting many of the conceptual domains and barriers to its existence that have traditionally been defended by nation States:

Economically, Facebook's current market capitalization of $528.94 billion is roughly equivalent to the 2017 GDP of either Sweden or Poland (derived from the World Bank). However, unlike Sweden and Poland, which mint their own currencies (the Swedish krona and Polish zloty, respectively), Facebook has no monetary sovereignty of its own. And that's about to change.

Facebook's foray into money creation will affect hundreds of millions (if not billions) of users worldwide. Interestingly, similar to the Swedish krona or Polish zloty, Facebook's role in the monetary system could be similar to that of the world's central banks. If the initial reports are true, according to the New York Times, "Facebook could back its currency with dollars, euros and other national currencies held in Facebook bank accounts as a way of guaranteeing the value of the coin." For reference, the value of the Swedish krona is backed by the following reserves:

Foreign exchange reserves are held and sold for various macroeconomic reasons and national objectives. Normally, foreign exchange reserves backing a country's currency (e.g., the krona) are not directly pegged to the value of the currency, as a direct peg would pose the threat of speculative currency attacks or balance-of-payments crises.

From initial reports, it appears that Facebook's main goal is simply to ensure that the value of its currency is stabilized, and that Facebook is attempting to create a unit of account on a digital ledger - or some publicly available ledger - that is "pegged" to the value of a basket of national currencies. that is "pegged" to the value of a basket of national currencies. Just as central banks buy and sell various foreign exchange reserves to stabilize their core currencies, Facebook will operate in a similar way.

In the world of cryptocurrencies, a digital unit of account forms a stable relationship with a national currency and can be called a "stablecoin". While the U.S. dollar is currently the ideal currency to provide a reserve base for stablecoins, Mark Zuckerberg's rivals have pioneered another system: the Winklevoss brothers created the Gemini Dollar.

Gemini Dollar Report, April 2019

Gemini Dollar presents a number of potential innovations on the traditional currency system: such as near-instantaneous, 24 hours a day, 365 days a year, inexpensive, and global transfer capabilities. Traditional money transfer systems, such as SWIFT or Fed Wire, operate only during business hours, can be expensive to use, and can take many days to process business.

Thus, the ostensible business model for Gemini Dollar is that the custodian receives interest on the bank's reserves, which currently stand at the U.S. Federal Funds Rate of 2.51 TP3T. Actual Gemini Dollar users can use that interest as a fee for using the service. Similarly, Circle, another major cryptocurrency company that issues the USDC Stablecoin, has announced its intention to profit from and maintain foreign exchange reserves by "investing these legal tender funds in highly liquid, AAA-rated fixed income securities".

Facebook's stablecoin builds on the current model - where stability is maintained through 1-to-1 dollar reserves or the purchase of AAA-rated fixed-income securities (which are also essentially backed by the strength of the U.S. economy, similar to the U.S. dollar itself) - by taking another A big step forward. When Gemini Dollar buys and sells dollars through accounts backed by state-owned banks, it's a relatively risk-averse and manageable business process.

From a macroeconomics perspective, the United States is the biggest and strongest player on the field. Therefore, Facebook's plan to create a more diversified reserve mechanism in other currencies, such as the euro, could be fraught with long-term risks. As the U.S. is currently the healthiest major economy, it also maintains the highest interest rates, unlike the euro, which is currently struggling in a quagmire of zero and negative interest rates. In addition, the 2.5% interest rate set by the U.S. Federal Reserve (Fed) for the world's strongest national economy remains at an unprecedented low after a decade of economic prosperity.