When the whitepaper for Facebook’s Libra cryptocurrency project was published in mid-June, it was immediately met with regulatory backlash. Lawmakers and government officials commented that Facebook was too big, that Libra came too fast, and that cryptocurrency, in general, is still too risky to operate on such a large scale. Some regulators called for a moratorium on the project; others said that Libra must never be recognized as a sovereign currency.
But now, central banks may be looking to take one step further. If nothing else, the creation of Libra–and the resulting hype–highlighted a global need for faster, more efficient, and further-reaching payment systems and financial services.
After all, payment systems are lagging behind even in parts of the developed world–for example, in the US, chip-and-pin payments have only been introduced in the last five years, while it has been the norm in most of Europe and parts of Asia for more than ten years. Access to financial services–loans, credit, investments, and more–is still heavily limited in some of the world’s more remote regions.
The spotlight on these issues may be the reason that the Bank for International Settlements–known as the central banker’s bank–said in its annual report that coins backed by tech giants could “rapidly establish a dominant position.”
But rather than explicitly calling for governments to put an end to Facebook’s cryptocurrency project (or similar projects), Agustin Carstens, the General Manager of the BIS, recently said that countries might need to start to seriously consider launching their own digital banknote to fill consumers’ needs before Libra has a chance to.
”It might be that it is sooner than we think that there is a market and we have to create our own digital currencies.”
Indeed, in an interview with the Financial Times, Carstens commented that “it might be that it is sooner than we think that there is a market and we have to create our own digital currencies.”
He also said that “many central banks are [already] working on it; we are working on it, supporting them.”
Some countries have already publicly considered the creation of (or experimented with) such assets. Sweden’s e-Krona, for example; Singapore’s Project Udin and Denmark’s e-Krone have also been quietly explored.
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But Carstens did acknowledge that he isn’t completely sure about the demand for national digital currencies and explained that further developments need to happen in the markets before this can be determined.
“There needs to be evidence for [the] demand for central bank digital currencies and it is not clear that the demand is there yet,” he said. “Perhaps people can do what they want by using electronic wallets provided by banks or fintech companies. It depends on the development of payment systems.”
Policy change is needed either way
If the past is any indication of the future, however, international regulators may take issue with the issuance of national cryptocurrencies. Some national efforts to create digital currencies have already been quashed under pressure from international regulators.
Estonia’s Estcoin, for example, was dropped after EU regulators took issue with the concept of an EU country issuing its own currency; Mario Draghi, president of the European Central Bank, declared that “no member state can introduce its own currency; the currency of the eurozone is the euro.”
Regardless of whether or not regulators change their position on the issuance of national digital currencies, Carstens and the BIS are calling on regulators to engage in some sort of structural reform. He commented that while the regulations that are currently in place may have been suitable for the markets when they were put onto the books, things have changed.
“The effectiveness of very aggressive monetary policy dwindles through time,” he explained. “It will always have some impact, it is effective to combat downturns — but it is not a pillar for higher sustainable growth.”
“[Libra] will ultimately need literally hundreds, perhaps thousands, of licenses from hundreds of different regulators across the globe.”
But even if countries don’t make the decision to release their own digital currencies, a new set of “aggressive” policies could shut Libra down before it even begins.
“It’s a complete disaster from a regulatory perspective,” said Barry Lynn, executive director of antitrust advocacy group the Open Markets Institute, to Reuters. “This is a corporation that’s got fires all over the world with regulators. It’s only going to get worse.”
“They will not get a free pass anywhere,” said Sean Park, Founder and Chief Investment Officer at venture capital firm Anthemis, also to Reuters “And, given their intention to be global, they will ultimately need literally hundreds, perhaps thousands, of licenses from hundreds of different regulators across the globe.”