The reaction in June 2019 to the announcement of Facebook’s planned “stablecoin" was immediate and almost universally negative, owing both to the half-baked quality of the proposal and negative perceptions of the parent company. But while neither problem has been fixed, it may no longer matter: central banks and other more experienced private entities are taking the digital-payments baton.
BERKELEY – Talk about “techlash.” The reaction last June to the announcement of Facebook’s planned “stablecoin,” Libra, was nothing short of neck-snapping. (I plead guilty to having engaged in some snapping, or sniping, myself.) That reaction reflected negative perceptions of the parent company. There were fears that Facebook would exploit consumers’ dependence on Libra to harvest data on their use of it and sell or deploy the data in its own interest, say, to drive additional traffic to its platform.
To assuage such concerns, Facebook created a separate subsidiary, Calibra, to develop the currency. It established an independent Libra Association to provide management oversight. As it quickly learned, however, assuaging concerns is not the same as eliminating them.
It didn’t help that the proposal itself was half-baked. It wasn’t clear that the Calibra team understood the difficulty of holding a stablecoin stable. Its white paper didn’t specify exactly what liquid and safe assets the Libra Association would hold as reserves, for use in buying and selling the stablecoin if its price fluctuated. It didn’t acknowledge that what are advertised as safe and liquid assets can quite suddenly become illiquid and unsafe.
Nor did the white paper acknowledge the risk that Libra might pose to financial stability or the need for a Libra lender of last resort. If Libra remained a vehicle for payments, pure and simple, such concerns could be dismissed. But once it became a consequential global payments currency, an ecosystem of Libra-based securities and derivatives was likely to grow up around it. Sudden changes in the prices of these instruments might then have destabilizing consequences for the financial system, requiring market intervention by the sponsor. Given that Calibra evidently hadn’t considered any of this, it is not surprising that regulators were quick to express concerns.
Finally, there is the danger that a global stablecoin, if successful, would pose to monetary control. In a fully dollarized country like El Salvador or Ecuador, the US Federal Reserve controls local monetary conditions. Analogously, widespread adoption of Libra would put local monetary conditions under the control of the handful of central banks whose currencies comprise the basket to which Libra is pegged. This might be a happy outcome for countries with preferences like those of El Salvador and Ecuador, but not for others that value the ability of their national central banks to tailor monetary conditions to local needs.
On the positive side, the Libra announcement focused attention on two problems: the cost of cross-border payments, and inadequate financial inclusion in developing countries. Inadvertently, it directed attention to the fact that there are already a number of initiatives underway to address these problems, and provided additional impetus to pursue them.
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Already, dramatic change is occurring in the payments sphere. Multinational banks like Santander are using a digital platform pioneered by the start-up Ripple to transfer payments between its branches in different countries in a fraction of the traditional time and at less cost. J.P. Morgan, the leading bank in the payments domain, is preparing to launch JPM Coin, which will use a permissioned (or private) blockchain to transfer funds between different financial institutions in different countries. The Society for Worldwide Interbank Financial Telecommunication has responded to the threat of being disintermediated by developing its own digital messaging service, SWIFT gpi.
Moreover, central banks from Singapore to Europe have established real-time retail payments systems that clear and post transactions instantly, 24 hours a day, seven days a week, and are exploring how they can link these to one another and, by implication, internationally. And central banks like the People’s Bank of China are preparing to launch their own digital currencies and seeking to promote their adoption by banks, firms, and investors in neighboring countries.
In other words, the days when a cross-border payment took five days and cost 5% of the transfer are already over. The prospect of Libra gave central banks, commercial banks, and SWIFT another incentive to develop more efficient mechanisms to execute this function. But the pressure to innovate and adapt was already there, and now the case for Libra as a solution to the cross-border payments problem has become redundant.
Libra is on firmer ground when it comes to financial inclusion. The Libra announcement highlighted arrangements like M-Pesa, through which people in East Africa use their cellphones to make payments and engage in a growing range of financial transactions even if they lack a bank account. But the announcement also highlighted the relatively high cost of mobile transactions, reflecting the fact that such systems are operated by telecom monopolies.
One response is to deregulate the telecom sector and encourage competition. Another would be for the central bank to get into the business of digital-enabled retail payments. The National Bank of Cambodia is an example of a central bank that appears to be moving rapidly in this direction.
Others need to follow. Until governments, regulators, and central banks make progress on the financial-inclusion problem, the argument for Libra won’t go away.
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BERKELEY – Talk about “techlash.” The reaction last June to the announcement of Facebook’s planned “stablecoin,” Libra, was nothing short of neck-snapping. (I plead guilty to having engaged in some snapping, or sniping, myself.) That reaction reflected negative perceptions of the parent company. There were fears that Facebook would exploit consumers’ dependence on Libra to harvest data on their use of it and sell or deploy the data in its own interest, say, to drive additional traffic to its platform.
To assuage such concerns, Facebook created a separate subsidiary, Calibra, to develop the currency. It established an independent Libra Association to provide management oversight. As it quickly learned, however, assuaging concerns is not the same as eliminating them.
It didn’t help that the proposal itself was half-baked. It wasn’t clear that the Calibra team understood the difficulty of holding a stablecoin stable. Its white paper didn’t specify exactly what liquid and safe assets the Libra Association would hold as reserves, for use in buying and selling the stablecoin if its price fluctuated. It didn’t acknowledge that what are advertised as safe and liquid assets can quite suddenly become illiquid and unsafe.
Nor did the white paper acknowledge the risk that Libra might pose to financial stability or the need for a Libra lender of last resort. If Libra remained a vehicle for payments, pure and simple, such concerns could be dismissed. But once it became a consequential global payments currency, an ecosystem of Libra-based securities and derivatives was likely to grow up around it. Sudden changes in the prices of these instruments might then have destabilizing consequences for the financial system, requiring market intervention by the sponsor. Given that Calibra evidently hadn’t considered any of this, it is not surprising that regulators were quick to express concerns.
Finally, there is the danger that a global stablecoin, if successful, would pose to monetary control. In a fully dollarized country like El Salvador or Ecuador, the US Federal Reserve controls local monetary conditions. Analogously, widespread adoption of Libra would put local monetary conditions under the control of the handful of central banks whose currencies comprise the basket to which Libra is pegged. This might be a happy outcome for countries with preferences like those of El Salvador and Ecuador, but not for others that value the ability of their national central banks to tailor monetary conditions to local needs.
On the positive side, the Libra announcement focused attention on two problems: the cost of cross-border payments, and inadequate financial inclusion in developing countries. Inadvertently, it directed attention to the fact that there are already a number of initiatives underway to address these problems, and provided additional impetus to pursue them.
Secure your copy of PS Quarterly: The Year Ahead 2025
Our annual flagship magazine, PS Quarterly: The Year Ahead 2025, has arrived. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Digital Plus now.
Subscribe Now
Already, dramatic change is occurring in the payments sphere. Multinational banks like Santander are using a digital platform pioneered by the start-up Ripple to transfer payments between its branches in different countries in a fraction of the traditional time and at less cost. J.P. Morgan, the leading bank in the payments domain, is preparing to launch JPM Coin, which will use a permissioned (or private) blockchain to transfer funds between different financial institutions in different countries. The Society for Worldwide Interbank Financial Telecommunication has responded to the threat of being disintermediated by developing its own digital messaging service, SWIFT gpi.
Moreover, central banks from Singapore to Europe have established real-time retail payments systems that clear and post transactions instantly, 24 hours a day, seven days a week, and are exploring how they can link these to one another and, by implication, internationally. And central banks like the People’s Bank of China are preparing to launch their own digital currencies and seeking to promote their adoption by banks, firms, and investors in neighboring countries.
In other words, the days when a cross-border payment took five days and cost 5% of the transfer are already over. The prospect of Libra gave central banks, commercial banks, and SWIFT another incentive to develop more efficient mechanisms to execute this function. But the pressure to innovate and adapt was already there, and now the case for Libra as a solution to the cross-border payments problem has become redundant.
Libra is on firmer ground when it comes to financial inclusion. The Libra announcement highlighted arrangements like M-Pesa, through which people in East Africa use their cellphones to make payments and engage in a growing range of financial transactions even if they lack a bank account. But the announcement also highlighted the relatively high cost of mobile transactions, reflecting the fact that such systems are operated by telecom monopolies.
One response is to deregulate the telecom sector and encourage competition. Another would be for the central bank to get into the business of digital-enabled retail payments. The National Bank of Cambodia is an example of a central bank that appears to be moving rapidly in this direction.
Others need to follow. Until governments, regulators, and central banks make progress on the financial-inclusion problem, the argument for Libra won’t go away.