G7 to cryptocurrency stablecoins: “Nice job, but we’ll take it from here.”
Stablecoins like Libra have a lot of risk factors. Some are easy to solve, some are almost impossible.
Primarily spurred on by Libra, the G20 and G7 have separately addressed stablecoins in the last week.
The G20 reportedly said in a press release:
"While acknowledging potential benefits of financial innovation, we agree global stablecoins give rise to a set of serious public policy regulatory risks. Risks such as money laundering illicit finance, consumer and investor protection, need to be evaluated and addressed before stablecoin projects can commence operation."
"We ask the IMF to examine macroeconomic implications, including monetary sovereignty issues in its members, of global stablecoins."
The gist of the G20's formal thoughts is that they won't let stablecoins go too far until their risks have been systematically addressed.
"Policymakers have expressed concerns over various risks stablecoins pose. Until they are addressed, stablecoins should not be issued. That was something agreed by the G20 members," said Bank of Japan governor Haruhiko Kuroda.
In what's likely not a coincidence, the G7 working group on stablecoins has released a report at about the same time, the gist of which is that smaller stablecoins like Tether are a danger to those around them, and larger stablecoins like Libra are a danger to everyone.
Per the report:
"Stablecoins, regardless of size, pose legal, regulatory and oversight challenges and risks related to:
- Legal certainty
- Sound governance, including the investment rules of the stability mechanism
- Money laundering, terrorist financing and other forms of illicit finance
- Safety, efficiency and integrity of payment systems
- Cybersecurity and operational resilience
- Market integrity
- Data privacy, protection and portability
- Consumer/investor protection
- Tax compliance
Moreover, stablecoins that reach global scale could pose challenges and risks to:
- Monetary policy
- Financial stability
- The international monetary system
- Fair competition"
The G7 believes that no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed.
So, what we now have here is basically the list of problems which need to be solved before stablecoins can hit the big time.
Solvable and unsolvable problems
There's a fundamental difference between the G7's problems with small stablecoins like Tether, and the problems with Libra-like global-scale stablecoins (or GSCs as the working group has dubbed them).
The first batch of problems, such as market integrity, tax compliance and money laundering, are solvable. It's possible to build frameworks that allow for the issuance of G7-friendly small stablecoins, and in many cases, these systems already exist.
For example, as Libra pointed out in its response to the G7 letter, the Libra Association "will ensure the application of data protection laws, including GDPR, to its activities" in an effort to solve that "data privacy, protection and portability" bullet point.
But it doesn't have an easy answer to the second batch of problems, or any way of reassuring people that it's not a threat to the international monetary system.
As French finance minister Bruno le Maire said in the latest episode of the European Central Bank's 10 things I hate about Libra series:
"All Facebook would have to do would be to decide to use more or fewer dollars or euros to affect the exchange rate between the euro and the dollar, and thus have a direct impact on trade, industry and nations which use the dollar or euro as their base currency."
By using a basket of fiat currencies as its backing, Libra had hoped to assuage worries of monetary policy interference. Instead, using that basket just ended up sparking the same concerns in a different way.
It's doubtful whether Libra or any other GSC will ever be able to convincingly address that second set of problems. And maybe that's the point – that there are intrinsic and unsolvable problems with global-scale stablecoins.
"Nice job, but we'll take it from here."
Overall, the G7 report concluded that stablecoins are the bee's knees in principle and that their emergence has highlighted the shortcomings of existing cross-border payments systems, but that the nature of the risks they raise means a real solution should come from the public sector.
Paraphrased, it says, "Nice job, Libra, but we'll take it from here."
"Recent GSC initiatives have highlighted the shortcomings in cross-border payments and access to transaction accounts, and the importance of improving access to financial services and cross-border retail payments," the G7 report concedes. "However, it remains to be seen whether GSCs will indeed be able to overcome the shortcomings of existing payment systems. Moreover, their adoption is, as yet, uncertain [due to the risks they raise]."
"The public sector should redouble its efforts to reduce frictions in international payments and support measures to improve financial inclusion. It is critical that such work be completed in a timely manner and in a way that is best able to support efficient transactions and innovation going forward."
But it's somewhat concerning that it takes a wakeup call like "recent GSC initiatives" to highlight "the shortcomings in cross-border payments and access to transaction accounts, and the importance of improving access to financial services and cross-border retail payments."
The benefits of digital currency are largely self-evident, and most central banks the world over have been exploring digital currency since Bitcoin was in diapers. But it's only now that Libra emerges as potential competition that there's a push to actually implement those digital currencies.
One of the reasons central banks are now scrambling is because they didn't do it sooner, all in the name of risk aversion.
You can't separate resistance to Libra from the rise of central bank digital currencies, and you can't separate either of those from the stark realities of the current international economic slowdown, a focal point of which is the fact that economic stimulus and monetary policy as we know it just isn't working as intended, and that in many ways the current global financial system is very poorly designed.
Doing nothing isn't always the safer choice, and among all the risk analysis taking place around stablecoins, one factor that's not often considered is the risk of stagnation.
There's the risk of central bank agendas being co-opted by commercial banks at the expense of consumers, there's the risk of central bank economic mismanagement, there's a risk of corruption in economic policy and there's the risk that all these innovative plans will be quietly shelved once Libra no longer appears to be a threat.
Disclosure: The author holds BNB, BTC at the time of writing.
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