Facebook’s Libra Marks End of Light Regulatory Touch on Digital Currencies
(Bloomberg) -- A revolution is coming to central banks and it requires a fast response, according to the man charged by the world’s biggest economies with looking into the rise of digital currencies.
Benoit Coeure, speaking before the release of a Group of Seven report on so-called stablecoins -- virtual currencies pegged to real assets to limit their volatility -- urged swift action in setting the “highest regulatory standards” for private initiatives. He also said he’s “personally pretty sure” that digital tokens backed by public authorities will be part of the future.
“The nature of money will change,” Coeure, who sits on the board of the European Central Bank, said in an interview in Frankfurt. “We’ve got to adapt so we can reap the benefits of technology.”
Bitcoin and its like have long been on the minds of policy makers concerned with safeguarding financial stability. While they’ve often disdained digital tokens as poor substitutes for money, some have also adopted a “sandbox” approach in which financial technology innovations are lightly regulated in limited areas. Central banks in countries such as Sweden and China have even experimented with their own versions.
But stablecoins have become a hot topic in just a couple of years and Facebook Inc.’s June proposal for Libra, which has the potential to compete with the world’s monetary system, has channeled efforts to respond.
“Until recently, we’ve taken a sandbox approach to fintech regulation under which we could afford to give projects a chance and see how risks materialize,” Coeure said. “But now we have an elephant in the sandbox, so that approach doesn’t work anymore.”
Libra would give 2.4 billion users worldwide access to instant payments, though its future looks tenuous after a quarter of its interested partners, including Visa Inc. and Mastercard Inc., dropped out amid pushback from regulators and lawmakers.
The G-7 report -- due to be presented Thursday, four months after being commissioned by the French presidency of the group -- doesn’t provide ready-made solutions on how to regulate stablecoins, Coeure said. Instead, it’s meant to guide the technological and regulatory debate, from anti-money laundering to data-protection and privacy, through to the definition of money and monetary sovereignty.
“The report offers a framework for exploring these and related topics,” he said. “It helps to structure the discussion.”
The Financial Stability Board, a group of regulators who identify weaknesses in the global financial system and propose solutions, will work on possible frameworks and approaches to be presented for consultation in April. Coeure said international coordination is crucial and urged the International Monetary Fund to share its expertise.
“The stakes are probably higher in small, open, developing economies” which can be heavily exposed to the dollar for trade and remittances, he said. Stablecoins might be cheaper and faster, but they also risk higher costs if monetary-policy transmission and monetary sovereignty are jeopardized. “‘Dollarization’ can easily morph into ‘stablecoinization’.”
The 50-year-old Frenchman, who lost out on the race for the ECB presidency this year, also warned that with the biggest players in digital-money innovations outside Europe, time is of the essence.
“We’d better act fast here, because we don’t want this new world of payments to be dominated solely by U.S. and Chinese actors,” Coeure said. “Europe has a particular interest in developing its own approach and standards so it can be safe and efficient at home and attractive as an international reference.”
At the Bank of England, Governor Mark Carney has suggested an even bigger ambition should be considered -- replacing the dollar’s role as the international reserve currency with a Libra-like stablecoin.
Coeure said the aim is not to make stablecoins go away by governing them into oblivion.
“Neither the Commission nor the ECB intend to make Europe a no-fly zone for stablecoins,” he said. “But stablecoins will have to meet the highest regulatory standards and adhere to broader public policy goals. When we talk about people’s money, there is no trade-off between innovation and safety.”
He is also convinced that monetary authorities have a role to play in offering central-bank digital currencies as demand for banknotes -- the only legal tender -- dwindles. At the same time, public institutions shouldn’t enter unfair competition with the private sector.
“As long as CBDCs are using new technologies to do what we already do -- issuing money -- in a more cost-effective way, I’m all for it,” he said. “But if that implies a world where the central bank is crowding out private banks and attracting all deposits -- a world where the central bank is disintermediating private financial intermediation -- then that would not be a place where we want to be.”
What he doesn’t want is a return to the era before the 17th century foundation of central banks -- Sweden’s Riksbank and the BOE leading the way -- with money only issued by commercial entities and regulated by competition between those entities.
“Our economies are so complex that you need trust in the currency to be anchored in the rule of law,” Coeure said. “A social convention isn’t enough.”
©2019 Bloomberg L.P.