Libra and the new currency wars
Facebook venture leads the way in ‘fight’ phase on path to acceptance
Acommon saying about the various stages of social acceptance is: “First they ignore you, then they laugh at you, then they fight you, and then you win.” A decade after Bitcoin was born, cryptocurrencies are about to enter the “fight” phase in their quest to become a mainstream means of payment.
That is all due to Libra, a new global digital currency that a Facebook-led coalition plans to launch as early as next year. If successful, Libra is about to shake up the way we pay for things or transfer funds, making them as easy, fast and cheap as sending a text through your smartphone. Anywhere, any time.
But not without a good fight first.
“I am not a fan . . . Facebook Libra’s ‘virtual currency’ will have little standing or dependability . . . We have only one real currency in the USA . . . It is called the United States Dollar!” tweeted President Donald Trump.
“We can’t authorise Libra’s development on European soil,” said France’s Finance Minister Bruno Le Maire.
Taking the heat from regulators worldwide, seven initial Libra Association members — including PayPal, eBay, Visa and Mastercard — have already dropped out. Yet, as the remaining 21 organisations met this week at the Geneva-based headquarters to review the founding charter and appoint a board of directors, the Libra Association is sure to fight back.
Libra is inviting this cold reception from public authorities on both sides of the Atlantic mainly because it would be the first cryptocurrency with a real chance of becoming crypto-money.
To date, all digital currencies have struggled to perform the basic functions of money. For instance, most are plagued by large price variations that make it hard to determine how many, say, Bitcoin units you will need to buy a loaf of bread.
This price volatility also compromises the ability of cryptocurrencies to be a safe harbour for storing your savings.
Importantly, they have failed to be readily accepted as a payment method.
Libra is poised to overcome these past shortcomings. First, Libra coins will be fully backed by a basket of low-volatility financial assets, such as certain banks’ deposits and government securities, to tame abrupt price swings and guarantee safe convertibility.
Second, with the global reach and clout of Facebook behind it, Libra could quickly become a household brand. Even if only a small fraction of Facebook’s 2.4 billion users adopted Libra, it could easily gather hundreds of millions of Libra users.
Were Western depositors to move a tenth of their bank savings to a Libra account, that would amount to a US$2 trillion fund. (America’s biggest bank, JPMorgan Chase, has 50 million clients and US$1.5t in cash deposits.)
For Governments worldwide, a global digital currency becoming a ubiquitous medium of exchange might seem a step too far. Authorities have hitherto looked at them more as a technological curiosity with little financial impact rather than as a private money competitor.
Some countries, including New Zealand, Australia and the US, have even issued guidelines for salary payment agreements in digital coins — as long as related income taxes are paid in the national currency, of course.
All that lenient regulatory treatment would change with Libra. Monetary authorities are naturally concerned about the systemic risks such a behemoth reserve fund might pose to global financial stability and illegal activity funding.
“The size of Facebook’s network means it could be, essentially, immediately systemically important . . . This should be subject to the highest level, the highest expectations in terms of privacy but also prudential regulation,” testified the Federal Reserve chairman Jerome Powell before the US Senate Banking Committee.
Benoit Coeure, from the European Central Bank’s executive board, warned “the bar for regulatory approval will be very high” for Libra to operate in the EU.
Libra project’s leader, David Marcus, is not shying away from these concerns, saying Libra Association is committed to “a collaborative process with regulators, central banks and lawmakers”. It is aware that getting things right will not only win approval from regulators, but also be a key strategy to attract customers.
Instead of fighting the system as most cryptocurrencies vowed to do in their libertarian origins, digital currencies are now fast racing to see which one will receive the full regulatory approval first.
But even if Libra gets that approval, it faces other hurdles. Politicians will not easily surrender their monopoly over public money. At a meeting of EU finance ministers last month, France’s Bruno Le Maire pledged to work on a European public digital currency to fight against “an eventual privatisation of money”.
With Libra’s founding members meeting this week, let us hope the new currency wars will be free and fair. But don’t put your (crypto) money on it yet.