Is libra tipping the crypto scales?

When Face­book announced plans last year to cre­ate its own dig­i­tal cur­ren­cy, called libra, it was only a mat­ter of time before law­mak­ers, already riled by the Cam­bridge Ana­lyt­i­ca scan­dal, would push back.

Appear­ing before Con­gress in Octo­ber, Face­book founder and chief exec­u­tive Mark Zucker­berg laid out his pitch for libra: while politi­cians in the Unit­ed States sat around debat­ing the issue, the rest of the world wasn’t wait­ing. Chi­na, he warned, was already mov­ing quick­ly to launch a sim­i­lar idea. The abil­i­ty to shape the future of cryp­tocur­ren­cy, and by exten­sion pre­serv­ing America’s glob­al finan­cial lead­er­ship, was at stake.

Mark Zucker­berg tes­ti­fy­ing before the House Finan­cial Ser­vices Com­mit­tee last Octo­ber about Face­book’s plans for libra

Facebook’s pro­pos­al of a glob­al dig­i­tal cur­ren­cy, backed by a reserve of real assets includ­ing US dol­lars, could bring finan­cial ser­vices to the 1.7 bil­lion peo­ple around the world with­out access to a bank account.

Law­mak­ers have been reluc­tant to get on board. In ear­ly-March, Bloomberg report­ed that Face­book and the Libra Asso­ci­a­tion, a group of pri­vate com­pa­nies sup­port­ing the project, were rethink­ing the idea, poten­tial­ly turn­ing libra into a pay­ments plat­form, which mul­ti­ple coin issuers could use.

“They start­ed out very ambi­tious and they’ve just slow­ly scaled back,” says Meltem Demirors, chief strat­e­gy offi­cer at Coin­Shares, a dig­i­tal asset man­age­ment firm. “This is a very long game and they need a start­ing point. Face­book has spent a lot of mon­ey and a lot of resources on this ini­tia­tive; they need to get some­thing off the ground, so for them this is the most log­i­cal start­ing point.”

It was not just law­mak­ers get­ting worked up about Facebook’s dig­i­tal cur­ren­cy plans. Many cen­tral banks around the world were also spooked into action. A Jan­u­ary sur­vey from the Bank for Inter­na­tion­al Set­tle­ments showed that the num­ber of cen­tral banks plan­ning to roll out a dig­i­tal cur­ren­cy in the short term had shot up to one in ten from one in twen­ty a year ear­li­er.

“Cen­tral banks wouldn’t be hav­ing this con­ver­sa­tion if it wasn’t for libra,” says Jahon Jamali, man­ag­ing part­ner at Sar­son Funds, a cryp­tocur­ren­cy and blockchain finan­cial advis­er. “Libra’s plans real­ly served as a wel­come wake-up call.”

Central bank concerns

A rea­son some cen­tral bankers are ner­vous is because it is slow and expen­sive to send mon­ey across bor­ders through exist­ing pay­ment mech­a­nisms. Facebook’s dig­i­tal cur­ren­cy would poten­tial­ly change that by allow­ing users to send tokens instant­ly, any­where in the world. If peo­ple stopped using their domes­tic cur­ren­cies in favour of libra, it could chal­lenge the sov­er­eign­ty of their own finan­cial sys­tems.

“What libra and oth­er inno­va­tions offer is effi­cient inter­na­tion­al pay­ments, but also glob­al reach and that is quite alarm­ing because, if it could become an equiv­a­lent pay­ment sys­tem, it could reduce the effi­ca­cy of cen­tral bank mon­e­tary pol­i­cy and it could bring prob­lems for finan­cial sta­bil­i­ty too,” says Gabriela Gui­bourg, econ­o­mist and head of analy­sis and pol­i­cy in the pay­ments depart­ment of Sweden’s Riks­bank, the country’s cen­tral bank.

Cen­tral banks wouldn’t be hav­ing this con­ver­sa­tion if it wasn’t for libra. Libra’s plans real­ly served as a wel­come wake-up call

Swe­den is one of a hand­ful of coun­tries cur­rent­ly devel­op­ing their own dig­i­tal cur­ren­cies. Uruguay and the Bahamas both have projects in advanced stages, but it is Chi­na with its plan to issue a dig­i­tal yuan that could have the biggest impact.

Ash­ley Eber­sole, part­ner at law firm Bryan Cave Leighton Pais­ner, says you can divide cen­tral banks that are think­ing about cryp­tocur­ren­cies into two camps.

“One is coun­tries that recog­nise the fal­li­bil­i­ty of phys­i­cal fiat cur­ren­cies: they wear out, they have built-in trans­ac­tion costs,” he says. “So coun­tries like this have exper­i­ments to sup­ple­ment their fiat cur­ren­cies with dig­i­tal cur­ren­cies with the thought that maybe they will move fur­ther in that direc­tion. Then there are oth­er places that say we see this com­ing and we don’t want to be left behind.”

Crypto world response

But what does Facebook’s report­ed change of focus poten­tial­ly mean for the future of cryp­tocur­ren­cy? Not much, says David Pel­leg, pro­fes­sor of finance and dig­i­tal cur­ren­cy, at Kent State Uni­ver­si­ty in Ohio.

“If Face­book said libra coin has failed, that doesn’t change any­thing about the out­look for dig­i­tal cur­ren­cies,” he says. “I don’t know which dig­i­tal cur­ren­cy will be suc­cess­ful, but there will be a dig­i­tal cur­ren­cy that will be wide­ly adopt­ed which will allow for bil­lions of micro-pay­ments at a real­ly low price.”

Some crit­ics of the project also claim Facebook’s dig­i­tal cur­ren­cy is not a true cryp­tocur­ren­cy because it would be con­trolled by a con­sor­tium of pri­vate com­pa­nies.

This argu­ment is short­sight­ed, says Jamali. “We’re not going to have mass adop­tion of cryp­tocur­ren­cies unless every­day folks start using them and libra, how­ev­er it plays out, could be a great asset to sup­port the adop­tion and nor­mal­i­sa­tion of dig­i­tal cur­ren­cies,” he says.

Dig­i­tal cur­ren­cy experts are also scep­ti­cal that it will be cen­tral banks which dri­ve adop­tion and dic­tate the future of cryp­tocur­ren­cy.

“We get a lot of tourists who vis­it bit­coin land and blockchain land,” says Demirors. “We had this in 2017 when every cor­po­ra­tion want­ed to put every­thing on a blockchain. That hasn’t real­ly mate­ri­alised and the same thing is now hap­pen­ing with cen­tral banks.”

One thing that could ulti­mate­ly put some cen­tral banks off is the cost. “If you’re using dis­trib­uted ledger tech­nol­o­gy, then the com­put­ing pow­er need­ed to do that is just mas­sive,” says Eber­sole. “You might say if any­one is going to do that then a cen­tral bank could do it, but if you’re talk­ing about expand­ing this to any kind of scale, it just gets mas­sive­ly expen­sive.”