ECB Exec: Libra has been a "wake up call" for central bankers

ECB Exec: Libra has been a "wake up call" for central bankers

ECB executive board member Benoit Coeure says that the arrival of Facebook's putative cryptocurrency Libra has been a "wake up call" for central banks, and that public authorities should step up co-operation on the development of central bank backed digital currencies (CBDC)

In remarks to a conference in Luxembourg, Coeure says global stablecoins are "the natural result of rapid technological progress, globalisation and shifting consumer preferences".

Notwithstanding the threats to financial stability and monetary sovereignty posed by private currencies, Coeure lifts the curtain on more disruptive forces created through the hypothetical formation of "digital currency areas", networks where payments and transactions are made digitally by using a currency specific to the network - be it a fiat currency or not.

At one extreme, cooperation would cut across continents and lay the ground for the rise of a truly global private digital currency, although Coeure stresses this would be a long way off. More conceivable are digital regional currency areas, arising from a journey that would be "long and full of perils" and ultimately entailing a risk of fragmentation of the international monetary system.

The potential for currency substitution would pose significant challenges to public authorities.

"The “stablecoinisation” would likely start in economies with stubbornly high inflation or weak institutions," theorises Coeure. "The decline in the prime legal tender would, in turn, undermine the effectiveness of monetary policy in these economies. But unlike 'traditional' currency substitution, 'stablecoinisation' would potentially relegate key policies that belong to the public sphere to private payment system providers - an outcome which citizens clearly cannot accept."

In facing up to the challenges, Coeure calls for closer central bank coordination to reap the benefits of recent technological advances more quickly and more efficiently.

"Much in this spirit, the ECB and the Bank of Japan have already joined forces to examine the possible use of distributed ledger technology in financial market infrastructures," he says. "The next natural step would be for global central banks to join forces and jointly investigate the feasibility of CBDCs based on common technical standards."

Comments: (5)

Chetan Ghadge
Chetan Ghadge - Wipro - Pune 18 September, 2019, 14:212 likes 2 likes

Creation of alternate global digital currency is about politics,  governance and ultimately power . It is not about technology and economics. That is why world leaders are worried that facebook might become more powerful than they are if it manages to create a global currency used by billions of people world wide. 

Time will tell how things evolve.


Dinesh Katyal
Dinesh Katyal - Financial Data Exchange - San Francisco Bay Area 18 September, 2019, 14:36Be the first to give this comment the thumbs up 0 likes Well said! Who would dictate the number and amount of Libra released into the market?
Arjeh Van Oijen
Arjeh Van Oijen - Icon Solutions - Amsterdam 19 September, 2019, 17:55Be the first to give this comment the thumbs up 0 likes

The Libra is a stable coin that can only be acquired by bringing in a deposit in a fiat currency. From that perspective it does not create a new asset or money, it is only another appearance of fiat currency, similar to bank notes. The interesting part is that it is not linked to one fiat currency (like most stable coins), but to a basket of multiple fiat currencies. The most well known basket currency so far has been the ECU (European Currency Unit, which was the stepping stone to the Euro), another one is the SDR. Important benefit of a basket currency is that the rate movements against the individual fiat currencies in the basket are smoothened and less volatile than the rates between the fiat currencies. At the end of the day the total value of all Libras that have been sold, must be covered by the deposits that have been made by the buyers of the Libra in the different fiat currencies.

Dinesh Katyal
Dinesh Katyal - Financial Data Exchange - San Francisco Bay Area 20 September, 2019, 04:10Be the first to give this comment the thumbs up 0 likes

That part isn't really all that problematic. The key problem is the supply of this 'stablecoin'. Will Libra continued to be issued as long as fiat money can be deposited, or is there a finite supply of Libra? If the latter, who controls how much is released. If truly a derivative currency that is pegged to the basket, how does one prevent unilateral devaluation of a component of the basket from destabilizing the 'stablecoin'? ECU required significant monetary controls on the way to Euro. 

Chetan Ghadge
Chetan Ghadge - Wipro - Pune 20 September, 2019, 04:33Be the first to give this comment the thumbs up 0 likes

And when Libra is systematically large then who knows you dont need fiat currency deposits to back it. Libra becomes the new currency if global economy.