Will Facebook’s new currency be stopped in its tracks?

Where the problem for economies and financial services is lack of competition, residents of developing countries need to look to their own politicians. The remedy for their woes is not going to come from Mark Zuckerberg, writes Barry Eichengreen.

Will Facebook’s new currency be stopped in its tracks?

By Barry Eichengreen

Where the problem for economies and financial services is lack of competition, residents of developing countries need to look to their own politicians. The remedy for their woes is not going to come from Mark Zuckerberg, writes Barry Eichengreen.

Will Facebook’s new currency be stopped in its tracks? Where the problem for economies and financial services is lack of competition, residents of developing countries need to look to their own regulators and politicians. The remedy for their woes is not going to come from Mark Zuckerberg.

Where the problem for economies and financial services is lack of competition, residents of developing countries need to look to their own politicians. The remedy for their woes is not going to come from Mark Zuckerberg, writes Barry Eichengreen

Plans for Facebook’s proposed “stablecoin”, Libra, appear to be unraveling with the withdrawal of PayPal, Visa, Mastercard, Stripe, eBay, and Mercado Pago as potential sponsors. This is hardly surprising, given growing awareness of Libra’s potential adverse consequences.

If it offers anonymity to its users, Libra will become a platform for tax evasion, money laundering, and terrorist finance. If, on the other hand, its privacy protections are lax, Libra will give Facebook access to users’ most intimate financial details.

Then there are the dangers Libra poses to economic and financial stability. Although Facebook’s stable coin will be backed by a portfolio of “low-volatility assets”, anyone who lived through the 2008 global financial crisis will know low volatility is more a state of mind than an intrinsic attribute of an asset.

If the prices of the bonds in the reserve portfolio fall in response to an unexpected rise in interest rates, for example, those bonds may then be inadequate to redeem all the Libra in circulation. At this point, the reserve will be subject to the equivalent of a bank run. And because Libra operates like a currency board, there will be no lender of last resort.

Libra may also undercut the stabilising capacity of monetary and regulatory policies. If the residents of a country shift out of its national currency, the central bank’s interest-setting policies will be vitiated. To appreciate the consequences, one need look no further than Argentina’s long, unhappy history of financial dollarisation.

Finally, governments that use controls to regulate capital flows will find they are more easily evaded. Their economies will be fully exposed to the foibles of global financial markets. This will be “disruption” with a vengeance.

Libra’s executives have promised they will launch with 100 members, as originally planned, despite the exit of key members in the past week.

Libra’s rollout will require the approval of regulators. Its promoters, claiming significant social benefits, argue tit deserves to be approved. Libra will lower the cost of cross-border payments. It will reduce the expense of remittances. It will provide financial services to the unbanked masses.

While these arguments for Libra are not false, they are superfluous. The cost of cross-border payments is already falling. Ripple, a San Francisco-based company, uses distributed-ledger technology and a proprietary cryptocurrency to facilitate transfers between commercial banks at a small fraction of their earlier cost.

Because Ripple co-operates with commercial banks subject to know-your-customer rules and other regulatory requirements, its payments technology doesn’t pose the same problems as Libra. Banks like Santander already use this technology to connect Europe with the US. They are now poised to connect the US with Latin America.

The Society for Worldwide Interbank Financial Telecommunication (Swift), through which interbank transfers are traditionally made, is not taking this challenge lying down. It has tested a system, Swift gpi Instant, for transferring funds between banks in North America, Europe, and Asia, settling payments in as little as 13 seconds.

Swift gpi Instant piggybacks on payment systems such as Singapore’s Fast and Secure Transfers and the European Central Bank’s Target Instant Payment Settlement. Once the Federal Reserve implements a round-the-clock real-time payment and settlement system in 2023 or 2024, this network will be further enhanced.

While Swift’s pilot doesn’t rely on distributed-ledger technology, which verifies transactions by recording their details in multiple places at the same time, other initiatives do. For example, the ECB and the Bank of Japan have been exploring use of this technology in domestic and cross-border payments in their ‘Project Stella’.

Moreover, there is already considerable progress in solving the problem of serving the unbanked courtesy of telecom-based services such as M-Pesa, which originated in Kenya but is now used from Afghanistan to Albania. Users need only a mobile phone and a contract with their telecom-services provider, not even a bank account. They can top up their balance at the corner store and make payments to anyone with an account.

Platforms such as M-Pesa are also being used to provide other financial services, such as micro-loans. In other words, they already trump Libra when it comes to banking the unbanked.

Criticisms of such services focus on cost. In countries where the dominant telecom firm faces little competition, it can insist on high margins. Here, it would seem, is where Libra could have disruptive, pro-competitive effects.

But this is wishful thinking. The reality is the same telecoms that successfully lobby against entry into their own industry will lobby against regulatory authorisation for Libra. Where the problem for economies and financial services is lack of competition, residents of developing countries need to look to their own regulators and politicians. The remedy for their woes is not going to come from Mark Zuckerberg.

Barry Eichengreen is Professor of Economics at the University of California and former senior policy adviser at the IMF.

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