As news leaks out about a possible 2021 launch for Facebook’s digital currency Libra, a senior European Central Bank official warns: “What is at stake is nothing short of the future of money”.
Facebook’s Libra cryptocurrency is readying to launch as early as January, the Financial Times reported on Friday, citing three unidentified people involved in the project.
The Geneva-based Libra Association that will issue and govern Libra plans to launch a single digital coin backed by the dollar, a significant scaling back from its recently revised plans to to issue a series of stablecoins backed by individual traditional currencies, as well as a token based on the currency-pegged stablecoins.
The news has alarmed central banks, which are currently at a minimum of two years out from creating their own digital alternatives.
ECB board member Fabio Panetta, speaking today at a Bundesbank-convened future of payments conference, argues that the impending revolution in payments “requires us to stand ready to reinvent sovereign money”.
Speaking directly to Facebook’s stablecoin strategy, Panetta warns: “Stablecoin users are likely to bear higher credit, market and liquidity risks, and the stablecoins themselves are vulnerable to runs, with potentially systemic implications.”
He says the risks could be mitigated if the stablecoin issuer were able to invest its reserve assets in the form of risk-free deposits at the central bank, as this would eliminate the investment risks that ultimately fall on the shoulders of stablecoin holders.
“This would not be acceptable, however, as it would be tantamount to outsourcing the provision of central bank money,” Panetta states. “It could endanger monetary sovereignty if, as a result, private money – the stablecoin – were to largely displace sovereign money as a means of payment. Money would then be reduced to a ‘club good’ offered in return for the payment of a fee or membership of a platform.”
The ECB is mustering support for the creation of a a digital euro, with multiple experiments underway across EU markets and around the world.
In Europe, the ECB and the national central banks have started preliminary experimentation through four work streams.
“First, we will test the compatibility between a digital euro and existing central bank settlement services (such as TIPS),” outlines Panetta. “Second, we will explore the interconnection between decentralised technologies, such as distributed ledgers, and centralised systems. Third, we will investigate the use of payment-dedicated blockchains with electronic identity. And fourth, we will assess the functionalities of hardware devices that could enable offline transactions, guaranteeing privacy.”
Speaking at the same conference, German finance minister Olaf Scholz urged the central banking community to pick up the pace.
“On the digital euro, I think we should work very hard. It is nothing where we should wait and see,” Scholz remarks. “(We) should be able to decide at any time that now we should do something with a digital euro.”
“What is at stake is nothing short of the future of money,” Panetta concludes. “As private money goes digital, sovereign money also needs to be reinvented. This requires central bank money to remain available under all circumstances – in the form of cash, of course, but also potentially as a digital euro.”
November 27, 2020, Published on Finextra