Skip to main content
Menu

Main navigation

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact
    LOADING...
  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit
    LOADING...
  • Publications
    • Studies
    • Commentary
    • Books
    • Reviews and Journals
    • Public Filings
    LOADING...
  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving

Issues

  • Constitution and Law
    • Constitutional Law
    • Criminal Justice
    • Free Speech and Civil Liberties
  • Economics
    • Banking and Finance
    • Monetary Policy
    • Regulation
    • Tax and Budget Policy
  • Politics and Society
    • Education
    • Government and Politics
    • Health Care
    • Poverty and Social Welfare
    • Technology and Privacy
  • International
    • Defense and Foreign Policy
    • Global Freedom
    • Immigration
    • Trade Policy
Live Now

Blog


  • Blog Home
  • RSS

Email Signup

Sign up to have blog posts delivered straight to your inbox!

Topics
  • Banking and Finance
  • Constitutional Law
  • Criminal Justice
  • Defense and Foreign Policy
  • Education
  • Free Speech and Civil Liberties
  • Global Freedom
  • Government and Politics
  • Health Care
  • Immigration
  • Monetary Policy
  • Poverty and Social Welfare
  • Regulation
  • Tax and Budget Policy
  • Technology and Privacy
  • Trade Policy
Archives
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009
  • January 2009
  • December 2008
  • November 2008
  • October 2008
  • September 2008
  • August 2008
  • July 2008
  • June 2008
  • May 2008
  • April 2008
  • March 2008
  • February 2008
  • January 2008
  • December 2007
  • November 2007
  • October 2007
  • September 2007
  • August 2007
  • July 2007
  • June 2007
  • May 2007
  • April 2007
  • March 2007
  • February 2007
  • January 2007
  • December 2006
  • November 2006
  • October 2006
  • September 2006
  • August 2006
  • July 2006
  • June 2006
  • May 2006
  • April 2006
  • Show More
April 16, 2020 10:52AM

Libra’s Star May Rise Again

By Diego Zuluaga

SHARE

Just over 150 miles separate the Swiss cities of Basel and Geneva. For ten months, their distance has symbolized the gulf between the international regulators of the Financial Stability Board and the Libra Association, a corporate payments consortium led by Facebook. But this week marked a rapprochement, as the Basel‐​based FSB issued its recommendations for the regulation of what it calls “global stablecoins,” while Geneva‐​headquartered Libra announced fundamental changes to its operating model aimed at meeting the FSB’s demands.

Currency symbols floating in between tablets and laptops

Digital Dollars: In Whom Should We Trust?

Online Policy Forum: Watch Here

COVID-19 has exposed the inadequacies of the U.S. payments system. What options are there to innovate and improve? Should we adopt a central bank digital currency, or would private‐​sector digital currencies be superior? Please join us on May 8 for a fascinating discussion of one of the most important parts of the financial system.

Watch Webcast

Although these developments mark a victory for regulators, who vigorously pushed back against Libra after its initial launch in June 2019, they also bode well for Libra’s business success, which government roadblocks are now less likely to hinder. But they also raise troubling questions about the freedom to innovate. Regulators have demonstrated that they will go to great lengths to frustrate initiatives they view as a competitive threat. If Facebook and its partners, with their financial and technological heft, cannot proceed on any terms save those favored by regulators, what hope is there for challengers with less clout?

Libra did itself no favors by initially marketing the project as a “global cryptocurrency”—a label that triggered fears of volatility, money laundering, and a lack of oversight characteristic of other cryptocurrencies. But what most irked regulators was Libra’s plan to use a multi‐​currency stablecoin as its medium of exchange. Although each unit of that stablecoin would have been backed by assets denominated in relatively reliable national currencies, such as the U.S. dollar and the euro, central bankers worried that Libra’s wide adoption could undermine monetary policy. Prudential regulators, meanwhile, worried about the systemic consequences were a globally successful Libra to fail in the future.

I suggested at the time that these worries were probably exaggerated. The stablecoin’s full backing meant that Libra issues and redemptions could not have a disproportionate impact on the supply of money and credit. This fact alone should have assuaged fears that Libra could pose risks similar to large banks or interfered with central banks’ conduct of monetary policy. Nor could malicious actors easily have gotten a hold of Libra coins, access to which would be controlled by the Association’s members—large and financially sophisticated corporations with reputations to protect.

Valid or not, regulators’ concerns jeopardized Libra’s viability, prompting it to release this week’s updated white paper outlining significant changes. The most notable of these is the shift from reliance upon a single multi‐​currency stablecoin for all jurisdictions to the use of each jurisdiction’s national currency unit. There will thus be Libra‐​dollars, Libra‐​euros, and so on for each jurisdiction in which Libra operates.

This new approach offers several advantages. First, unlike the multi‐​currency hybrid proposed in June, the concept of electronic money denominated in established national units has longstanding legal precedents in Europe and North America. Single‐​currency stablecoins are also likely to be more appealing to users, who won’t have to bear exchange‐​rate risk. The single‐​currency approach will make life easier for Libra’s managers, too, as it eliminates the need to alter the stablecoin’s composition in response to user demand in different countries. Finally, because it makes Libra functionally equivalent to PayPal and other electronic payment networks with which they are familiar, the new plan should be less discomfiting to central bankers.

To address concerns about potential abuse of Libra by malefactors, the updated white paper describes several new rules to which network participants will be subject. For example, only financial institutions that follow guidelines from the Financial Action Task Force will initially be able to deal in Libra coins. Other participants will eventually be admitted, but they must undergo periodic compliance checks by external auditors and, in the case of digital wallet providers, will face size limits on user balances and transactions.

Another change from its June plans is that Libra no longer intends to eventually go “permissionless.” Instead, it will continue to limit access to its blockchain (the ledger of all Libra coin transactions) to authorized participants. This change offers much‐​needed clarity. Just how the transition to an open ledger like Bitcoin’s would have proceeded without forcing the Libra Association to relinquish control was never clear. Nor had Libra explained how it would avoid the large electricity requirements for which Bitcoin is infamous. The decision to remain permissioned will therefore please money‐​laundering watchdogs and address one of the few genuine lacunae in the original proposal.

How are regulators likely to respond to Libra’s new offer? If the FSB’s ten recommendations are any guide, their reception will be a lot warmer than last time around. Not only has Libra made structural changes that will turn it into a payments provider much like incumbent ones, but it has also agreed not to launch the new currency anywhere without first meeting local regulators’ requirements. And, like regulated banks, Libra has set out capital and liquidity management policies so users can get their money back in the event of stress or failure.

No private financial innovation has ever faced so much scrutiny before even going live. And that is precisely the problem with this ten‐​month saga. What began as a promising if untested plan for fast and cheap international payments quickly became the target of hyperbolic attacks. That Libra has responded so swiftly and comprehensively says more about how high the stakes are for Facebook and its partners than about the merits of the claims against them. But the precedent leaves one wondering whether other potential innovators with lower stakes will find it worthwhile to proceed at all.

Yet discouraging future payments innovation would be a great loss to us all, as recent events demonstrate. The challenge of getting relief money to households amid the coronavirus emergency has once again exposed the sluggishness of U.S. payments. Digital wallets could have accelerated the flow of funds to Americans who will be getting a paper check instead. For international transfers and the 1.7 billion people worldwide without a bank account, the high cost and slow speed of payments is an even more pressing concern. As they evaluate Libra’s new proposal, regulators should keep in mind its potential to improve on the status quo, instead of focusing only on unsubstantiated risks and the preservation of their own turf.

[Cross‐​posted from Alt​-​M​.org]

Related Tags
Monetary Policy

Stay Connected to Cato

Sign up for the newsletter to receive periodic updates on Cato research, events, and publications.

View All Newsletters

1000 Massachusetts Ave, NW,
Washington, DC 20001-5403
(202) 842-0200
Contact Us
Privacy

Footer 1

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact

Footer 2

  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit

Footer 3

  • Publications
    • Books
    • Cato Journal
    • Regulation
    • Cato Policy Report
    • Cato Supreme Court Review
    • Cato’s Letter
    • Human Freedom Index
    • Economic Freedom of the World
    • Cato Handbook for Policymakers

Footer 4

  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving
Also from Cato Institute:
Libertarianism.org
|
Humanprogress.org
|
Downsizinggovernment.org