Back in June 2019, the announcement that Facebook was leading the development of a digital currency elicited strong pushback from central banks and regulators.
Concerned about a firm of the social media giant’s size and influence taking such a stake in the mainstream global financial system, the backlash from policymakers saw the exodus of several of Libra’s partners, including PayPal, Stripe, Mastercard, Visa and eBay.
However as of April 2020, Facebook overhauled core parts of its digital currency vision. But the question remains: does Libra – even in its watered down form – still pose a threat to central banks?
In the first Libra Association whitepaper, Libra was described as a stablecoin that would have its supply and exchange rate determined by a basket of fiat currencies, similar to what was being implemented at the International Monetary Fund (IMF).
The response the whitepaper initially drew from the press and the markets was phenomenal. Not only did Facebook’s stock prices soar over 27% – its highest monthly gain since July 2013 – but interest in the wider crypto markets also grew substantially, with Bitcoin recording highs of $14k that same month.
The most spectacular reaction however, was the urgency Libra injected into policymakers. Following Facebook’s announcement, the G7 immediately set up a working group on Libra and other stablecoins, chaired by Benoît Cœuré of the European Central Bank’s executive board.
Central banks also sprang into action, moving quickly to act on central bank digital currencies (CBDC) – a topic previously confined to research papers. The Bank of England was one of the first central banks to initiate a discussion on the introduction of a CBDC. It has now published various discussion papers exploring the uses of a CBDC, and inviting private firms to provide feedback.
While many other economies also have the ball rolling for their own CBDC, China is seemingly winning this particular arm’s race. Facebook’s CEO Mark Zuckerberg continues to argue that in the CBDC battle against the digital yuan, Libra could act as a USD proxy and help beat Chinese dominance.
Criticism of the original whitepaper concerning Libra’s potential to endanger monetary sovereignty led to Facebook’s developers altering the design of the project.
Unveiled on 16 April 2020, Libra 2.0 will no longer be a separate digital asset. Instead, it plans to run digital versions of single currencies, such as a Libra dollar or a Libra euro, that would be fully backed one to one by cash or cash equivalents.
Interestingly, the revised Libra proposal indicates that if a CBDC such as the digital dollar becomes available, the Libra network could not only be directly integrated, but also scrap its own version of single-currency digital coins. An analogy that author and digital money expert Dave Birch wrote in a recent article, is that Facebook is telling Federal Reserve: “You can be NASA and we’ll be the Space-X of money.”
Should the Libra project have sailed through as initially planned, it would have been an unquestionably implicit threat to central banks. This is not to say the remodelled Facebook-led project is being written off by governments and regulators.
Despite the dramatic downgrading of the scope of its initial vision, the goal of Libra is similar to that of stablecoins, as it endeavours to be more useful than fiat money and transform the digital economy by making fin-tech and banking services more accessible to the global population, especially its unbanked part.
And still, the assumption from many regulators remains that Libra is a deeply cynical attempt by Facebook to exploit its size and wealth of data to further monetise its users and influence how they transact and live their lives.
Whatever you may think of Facebook’s Libra proposal, its initial prospectus and subsequent redesign have left an indelible mark on the payments industry and on the very nature of monetary authority. Some 80% of central banks are now proactively looking into CBDCs because of it.
In addition to incentivising central banks, Libra has also prompted competition from the private sector such as the Andreessen Horowitz-backed Celo Alliance and the Google and Gates Foundation-backed Mojaloop Foundation.
Dante Disparte, head of policy and communications at the Libra Association, believes all of this benefits the Libra project and its mission. He recently said: “I think there would be nothing better for the world and for poverty alleviation if, in fact, we started to trigger a bit of a space race on compliance to address the 1.7 billion people who are unbanked and underbanked. So from my point of view, there is no monopoly on this work. Let others enter this process and let the race begin.”
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