Lock the stable coin door after the source is locked
Do you remember Libra, the global currency that Facebook proposed some time ago? It got some pretty negative reactions from central banks, regulators and many other stakeholders. Visa Inc. V, MasterCard MA, and PayPal PYPL left the first group of Libra Network members, and things got a little quieter. Then the Libra Association produced a revised version of their Libra White Paper, adding “stable coins” in national currencies to the original plan for a single Libra currency based on a basket of currencies.
This White Paper contains an interesting offer from the Consortium to the world’s central banks. The consortium hopes that “as central banks develop central bank digital currencies (CBDCs), those CBDCs could be integrated directly into the Libra network so that Libra networks no longer have to manage the associated reserves.” Well, the Libra Association has renamed itself Diem Association and plans to launch its first USD dollar stablecoin in early 2021. So it’s time to look into this offer.
There is no need to waste your own resources on CBDC, Libra said. If a few billion people around the world are storing their digital currency in Facebook, Instagram and WhatsApp wallets, why build an alternative? Use us. You set the guidelines for inclusion and so on. We’ll do the heavy lifting. You can be NASA of Money and we will be Space-X.
Stable coins. Helen Holmes (Instagram @ The Office Muse).
A member of the board of directors of the European Central Bank (ECB), Fabio Panetta, referred to the issuance of such stable coins at an event recently convened by the Bundesbank on the future of payment transactions and stated that the risk of such coins should be minimized by a there is a reserve in central bank money that something like a Facebook “would be synonymous with the outsourcing of the provision of central bank money”. But why is that such a bad idea? As my good friend Simon Lelieveldt (an electronic money expert) told me, we tend to assume that the ECB would be the issuer of a CBDC, but nowhere does its mandate say that: it is a political choice, an issue we make will return to the bottom.
Stable coins come. Whether provided by Diem or others, the cat is out of the pocket, the genie is out of the bottle, the horse is blown. The question for the world’s central banks is not whether or not there should be digital currencies, but how best to deliver them. In this context, outsourcing is a viable option. Recall the Mondex experiment in the 1990s: it was the Bank of England that controlled the issuance of the digital currency, but the Mondex system itself and the Mondex cards issued to consumers were provided by commercial banks.
It looks like outsourcing is about to start again, but not with banks. Given the Diem Association’s plans to launch a USD “Stablecoin” (I’ll insist on calling it a “Facebuck”) soon – subject to obtaining a variety of licenses and ratings – the time has come to speculate on the effects of such a stablecoin.
Personally, I can see the attraction of such a stable coin. The ability for me to send money to a cousin in Australia by sending a couple of facebucks directly from my Facebook Novi wallet to her Instagram Novi wallet would be useful and convenient. The ability for me to buy shareware from a Swedish software developer and pay instantly by broadcasting Facebucks over WhatsApp would boost trade and the economy. Joking aside, Novi and Diem could actually be a viable global alternative to SWIFT to the satisfaction of regulators with a good user interface, customer experience, and API.
Dollar and dominance
Perhaps more importantly, however, US dollar stablecoins – whether from central banks themselves, commercial banks or cellular operators, or others like the Diem Assocation – would also bolster the US dollar’s global dominance over digital competitors (including everyone’s favorite unstablecoin) (Bitcoin) in the post-pandemic world where online transactions are the new normal.
The German finance minister called Diem “a wolf in sheep’s clothing”. If you look at it, what Diem is proposing is basically what is already allowed under European e-money regulation. Assuming Diem segregates customer deposits and keeps them in the form of bank deposits and other appropriate asset classes, spending a digital dollar (or euro or pound) is no big deal. What the minister and others may be concerned about is the loss of monetary sovereignty if European citizens choose to move their cash holdings from euros to dollars, regardless of whether they are brokered by Diem, Circle or anyone else.
If you want to get an overview of currencies, competition, and what eminent historian and senior fellow Niall Ferguson of the Hoover Institution refers to as “Cold War 2”, take the time to read this conversation between Ferguson and CoinDesk listen to Michael Casey. As the author of one of the best books on financial history, The Ascent of Money, Ferguson has a very broad and well-informed perspective on these subjects, and I have quoted him more than once in my book on the subject.
In this conversation, Ferguson notes that one of the lessons of history is that with globalization, there is a tendency for a particular currency to become the dominant currency, the primary currency, for trade transactions. In the 19th century it was the British pound, in the 20th century it became the US dollar, and in the 21st century it will be … well, who knows, but when globalization gets into a period of obvious crisis it will be talked about not previously. Ruchir Sharma, the chief strategist at Morgan Stanley Investment Management, recently wrote that in the post-medieval era only five currencies would have topped the list: those of Portugal, Spain, the Netherlands, France and our United Kingdom. That reign lasted an average of 94 years, making the dollar long overdue for a fall.
Public or private? Local or Global?
Many people think that the only thing keeping it in place is the lack of a successor. Referring to China as the place where the new world can be forged, Ferguson says, “If I’m right and this trend continues, and they become increasingly dominant not only in domestic consumer payments in China, but increasingly in payments around the world.” “Then we The” tectonic plate of the international monetary system “may begin to shift and I could no longer agree.
Ferguson also cites former Bank of England Governor Mark Carney’s call for a synthetic hegemonic currency (SHC), which he considers more plausible than Diem as the future of the international financial system. It would be a victory for John Maynard Keynes from Beyond the Grave. As you will recall, Keynes advocated an SHC (the “bancor”) from the outset of the current international monetary regime and argued (correctly) at the time of Bretton Woods that the absence of such an international reserve currency would provide control to the United States (at the expense of the United Kingdom).
In Ed Conway’s excellent book on Bretton Woods “The Summit” (New York Times review), he talks about how the top dollar gave America what the late French President Valery Giscard d’Estaing did ” exorbitant privilege of borrowing called in its own currency. However, finances are not the only reason the coming Cold War is vital to the US (and the West as a whole) and currency control is important.
Former French President Valery Giscard d’Estaing takes part in a so-called “Franco-German Young Leaders” … [+]
AFP via Getty Images
Currency competition is about politics because using the dollar to conduct global transactions gives the US unprecedented leverage for “soft power”. As Ferguson puts it, “I think we are probably largely underestimating how extraordinarily effective this lever was. It was, in fact, a much more effective US foreign policy weapon than the US Army and Marine Corps boots on the ground.” Hence, an e $ (whether a NASA Digital Dollar or a Space-X Facebuck) should be a major political discussion in the United States right now, and a priority for in-depth management, just as an e € should be for Europe and an e £ be in the UK after Brexit.
Ferguson ends the conversation with Casey by quoting the end of Hillaire Belloc’s famous poem “Jim” to ask the audience: You may not like a financial system in which the US is dominant, but imagine an international currency and financial system in which China is the dominant player. What if transactions around the world are potentially under the control of the Chinese Communist Party?
Whatever your policy is, it is worth thinking about. Will a future US administration with a global perspective accept the compromise of an SHC to stay in control or can they put a digital dollar into global orbit first?