European central banks reject Facebook Libra, accelerate digital currency plans

It hasn't even launched and Facebook's Libra is already changing the world.

On 13 September France and Germany released a joint public statement which reads, in part:

"France and Germany reaffirm their willingness to tackle the challenges raised by cryptocurrency and so-called stable coin projects: financial security, investor protection, prevention of money laundering and terrorism financing, data protection and financial and monetary sovereignty... France and Germany consider that the Libra project, as set out in Facebook’s blueprint, fails to convince that those risks will be properly addressed. We believe that no private entity can claim monetary power, which is inherent to the sovereignty of Nations."

The statement came out of a European Central Bank (ECB) meeting in Helsinki, after which European Central Bank board member Benoit Coeure said Libra was "a wake up call" for the organisation, and that it was time to look at pushing the ECB TIPS payment system further.

TIPS is the EU's 24/7 real-time payment system. It launched in November 2018, with the aim of allowing instant transactions at a set cost of a fraction of a euro cent, but it's so far only available with euros and adoption has been slow.

"We also need to step up our thinking on a central bank digital currency," Coeure added.

According to an ECB official via Reuters, the EU's digital currency project would allow consumers to use electronic cash which would be directly deposited at the ECB, without need for bank accounts, financial intermediaries or clearing counterparties.

Following that, on 16 September Libra representatives will also be meeting with the Committee on Markets and Payments Infrastructure, of which Coeure is the current chairman and whose representatives include senior members of dozens of central banks.

Bertrand Perez, director general of the Libra Association, remains unphased, saying on 12 September that Libra will role out in 2020 as scheduled and that all the regulatory kinks and opposition from central banks can be ironed out before launch.

Moving parts

There are a number of interesting things to keep an eye on here.

Regarding Libra

Can Libra ever satisfy central banks, or is it dead in the water?

Based on the issues specified by France and Germany, it looks like Libra's main problems may boil down to a catch-22. Essentially, the statement says Libra cannot:

1. Be a private entity with control of monetary powers on a massive scale. It seems clear by now that simply using a basket of fiat currencies as its reserve is not enough to satisfy regulators in this department.
2. Operate without addressing money laundering risks. Simply requiring AML/KYC for the Calibra wallet is similarly not enough to satisfy lawmakers here.

In the end, the solutions to each of these problems may be mutually exclusive. Solving the first problem means becoming a wide open public network, but solving the second problem means retaining tight enough control of the network to prevent money laundering.

This is because one of the things about actual digital cash as a bearer instrument is that if there is a way to freely and anonymously move and spend digital cash on a public network, and if anyone can develop no-ID wallet apps and payment systems for these kinds of networks, it gets really difficult to prevent money laundering.

Navigating this dichotomy will be tough, but Libra is also in the same boat as many other cryptocurrencies here. The main difference is that no one really uses cryptocurrency payments yet, while Libra stands to get immediate traction after launch.

Since its reveal, Libra has helped usher in a lot of regulatory developments in cryptocurrency. And given the tough problem it now faces, it's safe to say Libra will have more impact on the cryptocurrency space in the near future.

Regarding ECB digital currency

Around the time it launched, commentators were suggesting that Libra's launch would help usher in a new era of central bank digital currencies (CBDCs). Now it looks like that is exactly what is happening.

Libra's reveal has seen European central banks accelerate digital currency plans in an effort to hold on to "customers". Exactly the same thing happened in China, where ongoing plans for a digital yuan were unveiled as a direct result of Libra.

But there appear to be some big design differences between the European and Chinese CBDC models.

China's national digital currency uses a multi-layered model, where customers hold funds at commercial banks, and those banks can then issue the digital currency to users. It's basically like a Chinese yuan collateralised stablecoin, where commercial banks issue coins to customers, and hold full reserves at the central bank to back those coins.

But Europe's plans are much more radical. According to the ECB official cited by Reuters, European Central Bank is picturing a system where customers directly deposit funds at the central bank, and then receive digital currency based on that. This cuts banks and other intermediaries out of the process completely. Unsurprisingly, ECB officials have said some resistance from banks can be expected.

Everything is still in flux, but it's clear that Libra is already changing the world.

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Disclosure: The author holds BNB, BTC at the time of writing.

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