60 percent of the world’s population could shift to Facebook’s Libra.
The world is at a turning point. Financial crisis seems to be rearing its ugly head, trade wars are heating up, and currency crashes are a normal occurrence. In the midst of these financial uncertainties, central banks are making frantic decisions, a few on the offense, many in defense.
Central Bank policy, in the modern age, has moved from its traditional ethos of strengthening domestic currency and reducing inflationary pressure, to be a tool to take other countries’ economies hostage. With the digital age in full swing, some countries have even tabled the notion of digital currency, that would replace or work with conventional central bank liabilities, cash, and commercial deposits, in an attempt to strengthen, or instead weaponize macro-economic tools.
This stark deviation from the norm of relying on paper-money wasn’t caused by the first mover of the Occidental markets or the revolutionary tact that frequently emerges in the Oriental world, it came from the throngs of the free-market, from a private giant. Facebook, with the launching of their cryptocurrency job, Libra, caused several jitters in the market. From other technology giants sniving at a missed opportunity to lawmakers coming out at a more rebellious and authoritative manner, the responses to Libra have been’sensitive,’ to say the least.
The concern, however, shouldn’t be on the loud outbursts of large markets to Facebook’s Libra, but the quiet undertone embraced by the poorer countries at the prospect of a private firm’s creation of a currency that could circumvent their market.
Dong He, the deputy director of the Monetary and Capital Markets, IMF and Yan Liu, the assistant general counsel at the legal department, IMF, at the UnChained podcast stated that the financial system is concerned about the effect Libra could have on world markets. Although, this effect isn’t streamlined uniformly across the big and small countries, in accordance with the IMF executives.
While larger more’mature,’ economies, can surmount the macro-economic ramifications of a private digital advantage, either through regulatory tightening or via financial manipulation, smaller markets will not fare well, he commented. The more’weaker economies,’ going through enormous inflation and, at times, the adoption of a foreign more secure currency would be threatened by the Libra.
“For weaker currencies, for example, for markets that still endure high inflation, I believe danger [posed by Libra] is more apparent.”
The backdrop of Facebook using its massive community, immense customer base, and far-reaching ambition presented by Libra of becoming a premier universal digital currency for the world’s unbanked, lots of whom are from the’poorer countries,’ needs to be contextualized when looking at the above debate. In that light, the prospects of the private Menlo Park-based company upending the fiscal system of the poorer economies appear radical, but by no means unimaginable.
Regulators have acknowledged the seriousness of Libra, particularly in light of the way the electronic asset is backed. Per its whitepaper, fiat currencies and government deposits from many countries will be used to collateralize Libra, and the same will be changed during times of economic uncertainties to maintain stability. This would provide users a currency that would be backed by a great number of government liabilities, and one that people could rely on to maintain value.
On the opposite side of the spectrum, people in countries that are not so financially secure and that require a currency that can maintain its peg, would choose the reliability of the Libra complete with its electronic infrastructure, universal-backing, not to mention the’consortium,’ of 28-companies that would finally build on the Libra-network.
Hiromi Yamaoka, the former head of the FinTech branch at the Bank of Japan [BoJ] eluded to this effect of Libra on economically weak states. It might cause”monetary policy,” to be”severely undermined,” but this effect will be diverse. Yamaoka stated,
“It will not be a huge issue for countries that enjoy strong market trust in their currencies.”
The warnings of private businesses undermining economies, particularly the poorly performing ones, isn’t restricted to Japan. Bruno Le Maire, the French Finance Minister speaking before the country’s Senate voiced his concern that the private currency could compete with a”sovereign currency,” like the Euro.
Perhaps the most well-known and hard-hitting parts of criticism against Libra came in the Federal Reserve chair, Jerome Powell who stated, prior to a US congressional hearing, that the Libra project would be halted until Facebook addressed crucial issues regarding monetary instability and the effect on country’s monetary policy.
In addition to central bank chiefs, economists are also looking at Libra with suspicious eyes. Sir Paul Collier, a professor of economics and public policy at the Blavatnik School of Government, Oxford University who penned the expression”The Bottom Billion,” referring to the countries worst affected by poverty, spoke to AMBCrypto regarding Libra’s effect on the developing world.
He referred to Libra’s claim of”financial inclusion,” as”considerable,” but it does pose,”dangers for fiscal policy in the BB [Bottom Billion].” Sir Paul cautioned,
“My fear is that it might make countries more prone to crisis as people panic and change into Libra, so that demand for the currency suddenly collapses. I am worried that Facebook is forging ahead without thought or consultation with African central banks.”
The name”Libra,” chosen by Facebook, in the professor’s view, suggests that”freedom from government is the objective.”
Based on the regulator’s concerns, Libra could pose a more potent threat to poorer countries which have seen currency devaluations on a regular basis, either for economic reasons or political motives. Countries like Argentina, Turkey, have seen their respective fiat currencies plummet against the dollar because of political-mismanagement, Venezuela, Zimbabwe have had ongoing financial tensions resulting in a skyrocketing inflation rate, while other war-torn regions in Africa and the Middle East also have seen a protracted slump in their national currency.
Let us look at two key foundations for these countries to welcome the possibility of private-stable-global governments backed digital currency:
- One of the principal objectives cited by Libra was the growing remittance market, hence Facebook’s [now abandoned] choice of India as the maiden Libra market. The Indian diaspora, for example, sent back around $80 million in 2018 alone.
- Another cornerstone of the Libra project is the popularity of Facebook and Messanger, particularly in these [relatively] economically-backward countries. The Global Digital 2018 report stated that 90 percent of the 191 million African social media users used only Whatsapp and Messanger, both Facebook-owned applications and two prominent proposed channels of Libra.
Tendai Tomu, writer of”Libra in Africa: The Way Facebook’s Libra is going to disrupt Africa,” told AMBCrypto that the two may be a match made in heaven just yet.
In the face-off between Libra and countries with weak economies, African countries will be the”most affected,” stated Tomu alluding to the strong universal backing of Libra. However, the author contended that the good that Libra can bring forth will ‘outweigh the bad.’ Many countries in Africa have moved to’dollarisation,’ because of corruption, civil wars, and economic mismanagement, referencing the example of Zimbabwe’s economic meltdown.
“So yes Libra might be a threat to poorer economies, but it might actually be a better wicked as compared to other anecdotes.”
On the topic of regulation in the continent, Tomu stated that African regulators will not”embrace Libra that easily.” In his opinion, Libra will adopt a”wait and see strategy,’ where they will look to America and Europe to adopt a regulatory framework to deal with the digital assets payment endeavor rather than be the”first movers.”
The foundation is set, both in need and in desire. In demand, the remittance market, and channels of distribution, among others are well structured for the increased adoption of Libra. In desire, the countries that are the most in want of Libra are those that have seen bad economic cycles, with growing inflationary pressure resulting in national currencies falling in value.
Dong He and Yan Liu stated that their views are not the views of the International Monetary Fund [IMF].