Face­book’s plan to launch the dig­i­tal cur­rency Li­bra in 2020 is up in the air, af­ter the al­liance of key global cor­po­rate back­ers to man­age it showed signs of fray­ing amid grow­ing scru­tiny from reg­u­la­tors across the world, mostly over po­ten­tial money laun

The Korea Times - - FRONT PAGE - By Lee Kyung-min [email protected]­re­atimes.co.kr

New dig­i­tal cur­rency feared to chal­lenge cen­tral banks

Face­book’s plan to launch the dig­i­tal cur­rency Li­bra in 2020 is up in the air, af­ter the al­liance of key global cor­po­rate back­ers to man­age it showed signs of fray­ing amid grow­ing scru­tiny from reg­u­la­tors across the world, mostly over po­ten­tial money laun­der­ing and tax eva­sion.

Pay­Pal, one among the big name mem­bers that signed on for the pro­ject, with­drew Oct. 4 from the 28-mem­ber Switzer­land-based as­so­ci­a­tion set up to govern Li­bra, a move that the Wall Street Journal re­ported was also be­ing con­sid­ered by Visa, Master­card and other fi­nan­cial part­ners.

The tem­po­rar­ily frus­trated dig­i­tal pro­ject comes amid grow­ing ex­pec­ta­tion that the dig­i­tal cur­rency would sig­nif­i­cantly un­der­mine the author­ity of cen­tral banks, as fiat cur­ren­cies in each coun­try would be no match for the tech gi­ant’s easy-to-use al­ter­na­tive backed by its 2.7 bil­lion users, over 84 per­cent of 3.2 bil­lion in­ter­net users world­wide.

Face­book said Sept. 12 (lo­cal time) that it would de­velop Li­bra and Cal­i­bra, the de­fault soft­ware for us­ing it, to “al­low peo­ple to send money around the globe with the same ease as send­ing a photo or text.”

Cal­i­bra is a dig­i­tal wal­let that han­dles crypto deal­ings and pro­tects user pri­vacy.

Once Face­book sets up e-com­merce and var­i­ous other ser­vices payable with Li­bra, cen­tral banks will have no in­ter­me­di­ary role to play, as users will not need to go through the “has­sle” of ex­chang­ing or wiring cur­ren­cies only valid in cer­tain ju­ris­dic­tions, ac­cord­ing to an ex­pert. “Li­bra can and will be­come lim­it­less and bound­less,” Choi Hwoa-in, a blockchain ad­viser to the Fi­nan­cial Su­per­vi­sory Ser­vice said.

Choice of end users?

“Given the fu­ture of cur­ren­cies will be de­ter­mined by end users, a dig­i­tal cur­rency guar­an­teed to en­sure far eas­ier and more con­ve­nient cus­tomer ex­pe­ri­ence will be­come the cur­rency of choice among peo­ple around the world,” the ex­pert said.

While the tech gi­ant said Li­bra will only be used for cross-bor­der pay­ments or in set­tle­ment ser­vices con­cern­ing very small sums, it did lit­tle to defuse con­cerns from the fi­nan­cial author­i­ties, mostly over its po­ten­tial to desta­bi­lize or in­ter­fere with sov­er­eign mone­tary pol­icy.

“Their con­cerns are not only le­git­i­mate but also un­der­stand­able,” Choi added.

“While Face­book claims the dig­i­tal cur­rency would not in­flu­ence in­ter­est rates or yields, the author­i­ties can­not dis­re­gard pos­si­ble cur­rency val­ues plum­met­ing, not to men­tion the po­ten­tial loss of control over the mone­tary sup­ply and abil­ity to im­pose cap­i­tal con­trols among many other con­cerns.”

Also sig­nif­i­cant, ac­cord­ing to Choi, was Face­book’s an­nounce­ment that Li­bra was backed by a 1:1 bas­ket of cur­ren­cies held in a re­serve, 50 per­cent of which would be in U.S. dol­lars.

The re­main­ing por­tion would con­sist of eu­ros, yen, the British pounds and Sin­ga­pore dol­lars, but not in­clude the Chi­nese yuan.

This means that for any unit of Li­bra to ex­ist, there must be the equiv­a­lent value in its re­serve.

“Half the re­serve be­ing held with the U.S. dol­lar and ex­clud­ing the Chi­nese cur­rency amid the on­go­ing trade dis­pute sig­nals the tech gi­ant’s ef­fort to calm down the U.S. govern­ment by of­fer­ing a safe haven of sorts. This means the firm will do noth­ing to dis­or­ga­nize the sta­tus quo where the dol­lar re­mains the world’s re­serve cur­rency,” she said. Con­cerns about price volatil­ity, long raised as a ma­jor short­com­ing of cryp­tocur­ren­cies, would be dis­pelled as Li­bra along­side “sta­ble coins” would have its to­tal amount pegged to other fiat cur­ren­cies, mostly the U.S. dol­lar.

Sta­ble coins, which work as a bridge be­tween the cryp­tocur­ren­cies and fiat cur­ren­cies, can be backed by com­pa­nies us­ing them with a one-to-one equiv­a­lent in U.S. dol­lars, or eu­ros.

Ex­am­ples in­clude Tether coin (USDT), Gem­ini Dol­lar, USD Coin (USDC) and Paxos Stan­dard (PAX).

Un­like other sta­ble coins, pegged to fiat cur­ren­cies, Li­bra can be pegged at a one-to-one equiv­a­lent to a bas­ket of cur­ren­cies in its re­serves.

Mauro F. Guillen, di­rec­tor of the Lauder In­sti­tute at the Uni­ver­sity of Penn­syl­va­nia’s Whar­ton School, said that Face­book’s ini­tia­tive is unique be­cause of its sheer size and the large num­ber of com­pa­nies that have signed up as part­ners.

“If they can cre­ate a trust­wor­thy and con­ve­nient to use cur­rency, it could be­come a sig­nif­i­cant player. I think it is also yet an­other step at ex­per­i­men­ta­tion and at test­ing things out with reg­u­la­tors to see how they re­act. It’s too early to tell,” the Whar­ton School pro­fes­sor said.

An­other key dif­fer­ence is scaleabil­ity. Bit­coin can process only seven trans­ac­tions per sec­ond, while Li­bra is ex­pected to deal with 1,000 trans­ac­tion per sec­ond.

Li­bra, know­ing full well it falls far be­hind com­pared to the Visa network which can au­tho­rize up to 65,000 trans­ac­tions per sec­ond, said the per-sec­ond per­for­mance will be grad­u­ally im­proved.

Nat­u­ral course

An­to­nio Fatas, an eco­nom­ics pro­fes­sor at INSEAD, said Li­bra comes as a nat­u­ral course of tech­no­log­i­cal devel­op­ment, led by agility of fin­techs while their com­peti­tors — cen­tral and com­mer­cial banks — are left be­hind, dragged down by “tra­di­tional and con­ven­tional norms.”

“Li­bra, like many of the other in­no­va­tions in pay­ments com­ing from fin­techs of just tech com­pa­nies, is try­ing to make the pay­ments sys­tem faster and cheaper,” he said.

Fatas said it bears closer mon­i­tor­ing on how the cen­tral banks’ at­tempt to control the dig­i­tal cur­rency, star­ing with the Chi­nese Peo­ple’s Bank of China.

“As pay­ment tech­nolo­gies change fast, cen­tral banks are won­der­ing whether they should take control of the in­no­va­tions by of­fer­ing a pay­ments sys­tem that runs di­rectly through ac­cess of in­di­vid­u­als to cen­tral bank ac­counts — ba­si­cally how Cen­tral Bank Dig­i­tal Cur­rency works,” he said.

In his view, given banks to­day re­main in­ter­me­di­aries of pay­ments, they will not play a role in this po­ten­tial new sce­nario.

“Sev­eral cen­tral banks are dis­cussing this, and the Chi­nese cen­tral bank seems to ready to launch it soon. Al­though de­tails are not clear, we will need to see what hap­pens.”

Korea Times file

A small fig­urine stands on the rep­re­sen­ta­tions of vir­tual cur­rency in front of the Li­bra logo

Choi Hwoa-in Ad­viser to FSS

Mauro F. Guillen Whar­ton School pro­fes­sor

An­to­nio Fatas INSEAD eco­nom­ics pro­fes­sor

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