Facebook’s plans to launch digital coin Libra next year has wrong-footed central banks in Asia and jolted some into accelerating their own alternative offerings.
Speaking during Hong Kong’s annual fintech jamboree, Mu Changchun of the People's Bank of China, said he saw Libra, whose social media parent Facebook is banned in China, as a threat.
“Global stable coins definitely pose a threat to the implementation of monetary policy and financial stability, especially to those countries with capital [controls] and a less strong currency,” said Mu, whose title at the PBoC is that deputy director-general at the institute of digital currency.
China, which plans to launch its own digital currency, carefully manages its capital account. And privately owned digital currencies could interfere with such controls.
The Middle Kingdom's ambition to raise the renminbi's stature as a reserve currency internationally could also put it into conflict with Facebook as the main currency underpinning Libra is widely expected to be the US dollar.
Mu said that China had been mulling a digital currency since 2014 to safeguard its currency from popular cryptocurrencies like bitcoin, which are decentralised and beyond government control, but also provide an alternative to the mobile payment companies.
Controlling 96% of all e-money transactions inside China, payment providers such as Alipay and Wechat Pay had become “systematically significant”, he said, and a contingency system was needed in case of failures in their architecture.
CATALYST
With a powerful private entity like Facebook now entering the fray, governments now have yet more reason to bring forward nascent plans for a digital currency.
It's surely no coincidence that the PBoC signalled its intention to pursue a nationwide digital currency at the Bund Summit in Shanghai last month, though no timeline was given. But in some respects, as one IMF representative put it , they and central banks generally are only playing catchup.
Since Facebook unveiled Libra, which is planned for launch in June 2020, central banks have been discussing the matter vociferously at intergovernmental supervisory forums such as the Financial Stability Board, Financial Action Task Force, and Basel’s committee on banking supervision.
Central bankers have also voiced some concerns about Libra’s asset-backing arrangements, anti-money laundering controls, cybersecurity, oversight of cross-border money flows, but above all, the threat to their main function: monetary policy.
“They were complacent,” Prasad Ananthakrishnan, who works in the monetary and capital markets department at the IMF, told FinanceAsia on Thursday. Prior to Libra, central bankers monitored the asset class but did not see the potential for disruption.
“When Libra was announced that really changed how regulators and the international standard setters thought about these issues. That caused them to come to the table, because with Libra there is market power,” Ananthakrishnan said.
The IMF has been actively advising its 189 members on the potential impact of stable coins on monetary policy and pushing for regulators to work together to ensure a sound legal framework for digital coins to avoid problems that could one day cause a major crisis of confidence in the asset class.
Central bankers could mitigate the risk that private digital currencies might blunt monetary policy by adopting public-private partnerships in which private operators keep reserves at the central bank, Ananthakrishnan said.
DIFFERENT MOTIVES, COMMON CAUSE
There are myriad reasons for central bankers to consider issuing digital coins. Sweden is preparing for the advent of a cashless society whereas countries in the Eastern Caribbean such as the islands of St Lucia and Antigua are finding it expensive to issue cash.
Looking to cut costs, the Eastern Caribbean Central Bank in February launched a pilot blockchain-based central bank digital currency, the first of its kind in the world. It is part of a phased public roll-out, but this implementation may not work for every country.
"Whether wholesale or retail, there is no universal model [for central bank digital currencies]," Ananthakrishnan noted.
While their motives and methods may differ, central bankers seem to have found common cause in opposing Libra and are turning talk into action.
“Libra is a big catalyst for the central banks,” said Vachira Arromdee, the assistant governor in the Bank of Thailand’s financial markets operations group, also speaking at Hong Kong’s fintech forum this week.
She added that central bankers have had to swiftly switch gears and develop digital currencies for retail users after studying the possible use of digital currencies in wholesale markets for years. “All central banks have to shift their focus onto how we will operate in a different world,” Arromdee said.
The Bank of Thailand and Hong Kong Monetary Authority are jointly studying the viability of a central bank digital currency for cross-border payments, a project called “LionRock-Inthanon”.
Arromdee said they “hope to finish by the end of this year”. The HKMA said on Wednesday that they will release a joint report before March-end next year.
