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David Nicklaus is a business columnist for the St. Louis Post-Dispatch.

Dems pan 'Zuck buck,' want Facebook to rein in currency plan

Facebook CEO Mark Zuckerberg's face is visible on a mock "Zuck Buck" depicted on a screen behind David Marcus, CEO of Facebook's Calibra digital wallet service, as he is questioned by Rep. Brad Sherman, D-Calif., during a House Financial Services Committee hearing on Facebook's proposed cryptocurrency on Capitol Hill in Washington, Wednesday, July 17, 2019. (AP Photo/Andrew Harnik)

As you happily spend your dollars to buy lunch or pay rent, you might wonder why the world needs a new currency.

The answer, according to Facebook, is that existing payment systems cost too much and leave poor people on the sidelines. The social media giant, in short, wants to become the world’s bank by creating a new currency known as Libra.

Like bitcoin and other cryptocurrencies, Libra is built around blockchain technology, which records transactions on a network of computers rather than in a central database.

Facebook’s Libra white paper promises a key improvement over bitcoin: Instead of being created out of thin air, the new currency would be backed by a basket of assets denominated in other currencies, such as dollars and euros. These reserves would be managed by a Switzerland-based nonprofit called the Libra Association.

Despite such protections, and despite Facebook’s lofty aims, Libra looks like a buyer-beware proposition.

Cryptocurrency exchanges and wallets, the online accounts for holding virtual money, have proven vulnerable to hacking. Bitcoin enthusiasts lost more than $400 million when Japan-based exchange Mt. Gox was hacked in 2014.

Facebook doesn’t say how it can prevent similar disasters, or provide insurance to cover losses. Even if it can somehow make Libra hack-proof, the cryptocurrency has other drawbacks.

One is the cost of entry. Currency exchanges typically buy currency at one price and sell it at a higher price. The difference is called the bid-ask spread.

If there are few sellers when you’re trying to buy Libra, the spread will be wide and you’ll pay more. This may be a particular problem for residents of countries with unstable currencies, like Venezuela. They’re among the downtrodden poor that cryptocurrency advocates want to help, but the laws of supply and demand make that difficult.

“There’s nothing magic about software that says you can take something risky on one side of the trade and convert it into something safe,” says Paul Kupiec, a resident scholar at the American Enterprise Institute. “It’s going to be expensive for somebody to make that exchange.”

It’s also unclear how regulators will treat Libra. Agencies like the Securities and Exchange Commission could require it to be registered as a security — essentially a claim on that Libra Association basket of assets — which would give consumers some protection. Short of that, you’re at the mercy of Facebook and the other backers.

“Right now, a Libra promise is as good as the promise that your frequent flyer miles can be redeemed whenever you want,” Kupiec says. “It’s a corporate promise, nothing more.”

Taxes are another matter. The Internal Revenue Service classifies cryptocurrencies as property, and each transaction involving them as a taxable event. Can you imagine the accounting nightmare you’ll have if you use Libra for every Amazon order, Uber ride and Starbucks latte?

In all likelihood, the governments of the world will have a lot to say about Libra’s launch, which Facebook optimistically thinks can happen in the first half of next year. A private currency — even one backed by deep-pocketed companies holding assets in Switzerland — raises important questions about financial stability, consumer protection and the potential for fraud and money laundering, and regulators should demand answers before they allow Libra to roll out.

When (and if) you start seeing ads for the new currency, ask yourself whether it really does anything that you can’t do in dollars using services such as Paypal and Venmo. If the answer is no, then leave the risks to someone else.

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