Where a retail digital currency could thrive

Where might a retail-digital currency thrive? We ask as Facebook’s Libra was a wake-up call for central banks and global policymakers, and there’ll be at least one or two contemplating launching such a currency of their own. We’ve examined global indicators to discover what might be coming next, and where.

The concept of retail digital currencies is now being taken far more seriously, not least by us, for numerous reasons. They include financial inclusion and arguments about the public nature of money to efficiency and costs. And in this article we take a global perspective and ask ourselves where in the world could be most receptive to a digital currency infrastructure. We’re only providing broad-brush, tentative answers using the World Bank’s Global Financial Development Database. Crucially, a global perspective based on a limited set of composite indicators merely identifies countries where demand for more, better and cheaper financial services might be highest. That is not sufficient to establish a business case for launching a digital currency.

Financial inclusion 1: broaden access to digital money

Introducing a digital currency, not reliant on existing systems but built as a standalone infrastructure which preferably extends across borders, makes the most sense in countries where access to, and usage of, existing digital means of payment is limited. The world map below shows access to digital money, measured as use of bank accounts, cards, electronic and mobile payments. Access is relatively broad in most developed economies, look at China (thanks to Alipay and WeChat Pay), Kenya (thanks to the mobile payment system M-Pesa) and most of South America. Africa and southern Asia stand out as areas where access to digital money could be broadened.

Chart 1: Access to digital money

Dark green: relatively highest access. Dark red: relatively poorest access. Grouping of countries based on deviation from global mean. Source indicators are access to bank accounts, pervasion of credit and debit cards, adoption of electronic payments, and usage of mobile phones to pay. Source: ING calculations based on World Bank Global Development Database. 

Financial inclusion 2: broaden access to credit

For businesses developing digital currencies, it may be attractive to offer (micro)credit as well. Platform companies have non-financial data on their consumers and suppliers, which they may use to assess creditworthiness fast and accurately. For less developed countries, improving access to credit may accelerate economic development. Most credit opportunities concentrate again on the African continent. In contrast, it is noteworthy that some countries in South-East Asia which score low on access to digital money, do offer relatively broad access to credit.

Chart 2: Access to credit

Credit to private sector as % of GDP. Dark green: relatively highest ratio. Dark red: relatively lowest ratio. Grouping of countries based on deviation from global mean. Source: ING calculations based on World Bank Global Development Database. 

Efficiency and cost reduction

Scope for efficiency gains and business opportunities are bigger when the incumbent banking system is less efficient. The map below – though based on a small set of indicators whose significance should not be overestimated – shows that in most developed economies, the banking sector is relatively efficient. The Middle East and North Africa region also scores well, and thus lends itself less well to digital currency disruption from this perspective. Sub-Saharan Africa and Latin America show the weakest results.

Chart 3: Banking sector efficiency

Dark green: relatively highest efficiency. Dark red: relatively lowest efficiency. Grouping of countries based on deviation from global mean. Source indicators are banking sector cost-to-income ratio, net interest margin, overhead-to-total-asset ratios and the Boone indicator, a measure of competition. Source: ING calculations based on World Bank Global Development Database. 

Facilitating remittances

Sending money home across borders can be an expensive business, and an integrated infrastructure next to the current correspondent banking system could offer a new, cheaper and faster channel. The remittance market is growing at an astonishing rate: if we exclude China, remittances now outpace foreign direct investment (FDI) flows. Moreover, the global average cost of sending payments currently stands around 6.84% of the sum sent. To assess the importance of this to a domestic economy, we look at the inflow of remittances over GDP. The map below highlights in green the countries for which remittances are a relatively important source of income.

Chart 4: Importance of remittance inflows

Dark green: relatively high remittance inflow to GDP ratio. Dark red: relatively low ratio. Grouping of countries based on deviation from global mean. Source: ING calculations based on World Bank Global Development Database. 

So, what next, and where?

What can we conclude from our highly abstract analysis? The general picture that emerges is that there is most scope for improvement across Latin America, sub-Saharan Africa and parts of southern Asia, although for different reasons. In Africa, access to credit is most limited. In South America, efficiency and cost of finance offer opportunities. In southern Asia and Central America, a cross-border digital currency infrastructure might primarily be in demand to facilitate cheaper remittances.

Yet whether the introduction of a digital currency would be a successful or even sensible next step in the countries concerned, cannot be determined just by comparing a few global indicators. Relevant domestic circumstances are, for example, poverty levels, trust in and acceptance of intangible payment instruments among both merchants and the public, the presence and reliability of power and communications networks, and the applicable regulatory framework, to name just a few.

The introduction of a digital currency really requires a country-by-country approach

From a technical perspective, a digital currency infrastructure can only thrive if it is connected to and integrated into domestic and international systems, against manageable operating costs. This requires cross-border coordination and harmonisation by regulators, for instance, to agree on a digital identification method. Technical standardisation is also needed to avoid creating a new infrastructure which may develop into another difficult-to-maintain legacy a few decades down the road.

To conclude, while global analysis yields insights in the possible use cases for digital currencies across regions, the introduction of a digital currency really requires a country-by-country approach, taking into consideration local needs, circumstances and policies. Nonetheless, we note that demand for digital currency is more likely to rise in those places where the financial system is less developed and more fragmented.

This article first appeared on ING THINK

Wat kan de facebookmunt Libra nog redden?

Mark Zuckerberg, de baas van Facebook, moet morgen voor het Amerikaanse congres verschijnen. Daar moet hij zijn digitale munt, de Libra, verdedigen. Sinds de lancering van de munt in juni is er veel kritiek op de plannen van Facebook. Gaat het Zuckerberg lukken om het congres te overtuigen dat de munt kan werken? En ligt er een rol voor Nederland weggelegd in dit verhaal? Wouter van Noort, tech-journalist van NRC en Teunis Brosens, econoom van digitale zaken bij ING, vertellen het in De Nieuws BV.

Kijk (jawel) naar de radio-uitzending:

Of alleen audio:

Game over for Libra? The G7 report lays down the rules

Today’s G7 Report on ‘global stablecoins’ confirms authorities’ concerns with Facebook’s proposed digital currency Libra. We still see a way forward for Libra, but is Facebook willing to take that route?

Libra represents a breakthrough in digital currency thinking

Facebook may have underestimated the pushback it received on Libra, but the proposal has at least one major achievement: it has greatly accelerated the debate on digital currencies and has jolted authorities in thinking about the implications of global currencies for monetary policy and financial stability. This morning, the G7 published a report on ‘global stablecoins’, and while the report covers more than just Libra, it is clear that the workstream would not have existed, had Facebook not launched its proposals earlier this year.

The problems authorities see with global stablecoins are basically twofold: practical, and fundamental

The problems global authorities see with global stablecoins are basically twofold. Firstly, there are practical demands in the area of fighting money laundering, fraud, terrorism finance, but also, for example, with security, data protection and privacy. Any institution dealing with money should comply with such demands. Authorities have made clear that Libra has not yet fully provided satisfactory answers in these areas. But that may change in the future. The fact that a number of experienced payment processors have left the Association is not helping Libra here and could mean a further delay in its timetable. But Facebook has the financial power to buy external expertise where needed and should be able to address practical matters should it wish.

Fundamental issues pose a more existential threat to global stablecoins

Secondly, there are more fundamental issues to address. A stablecoin launched on a global scale, and denominated not in domestic currency but (as in the case of Libra) based on a basket of existing currencies, has profound implications for financial stability and monetary policy. When economies abandon their domestic currencies and move to global stablecoins, the ability of domestic central banks to set monetary policy is greatly reduced.

As we show elsewhere, countries are already faced with an “impossible trinity”, meaning they cannot achieve free cross-border capital mobility, monetary policy autonomy and exchange rate management at the same time; countries have to choose two out of these three. Wide domestic adoption of a global stablecoin reduces this policy menu still further.

With a global stablecoin, there is no-one to call to discuss monetary policy consequences

Capital mobility is enforced by the stablecoin, while monetary autonomy is restrained by the limited use of domestic currency by residents. A country then may be left with the option of trying to manage its exchange rate vis-à-vis the stablecoin, to retain some influence on competitiveness. That is not an attractive prospect for central banks. Even for those countries which are highly dependent on the dollar for trade and external financing, at least with the dollar they can phone the Fed and discuss implications of Fed policy for their economies. With a basket-based stablecoin, there is no-one to call.

Moreover, a global stablecoin held by many agents (say a modest share of Facebook’s 2.4bn users), quickly becomes a systemic institution itself. Even if it does not set monetary policy itself, by its sheer size its buy and sell actions will have profound implications on financial markets. A “bank run” on such a stablecoin could have wide repercussions and might necessitate a bailout should confidence in the payments infrastructure deteriorate. Finally, global stablecoins will bolster the platforms they are traded on, adding to bigtech competition worries.

The problems stablecoins pose, depend on their use case

So it is with good reason that authorities want to think through all the implications of a stablecoin, such as Libra, which has the potential to grow big very fast. G7 Working Group chairman Benoît Coeuré emphasised authorities do not want to ban stablecoins before it’s clear how they would actually operate in reality. But at the same time, such coins should not jeopardise public policy goals, including monetary policy and financial stability.

The G7 poses high demands, but does leave some room for global stablecoins

The G7 report does provide an opening for Libra. It notes that the impact of a stablecoin is bigger when it is used as a store of value. The Libra association has emphasised that Libra is primarily intended for use in remittances, and to provide the unbanked with a digital means of exchange, and that it assumes people will move in and out of Libra quickly. If indeed Libra can credibly guarantee authorities that the coin will only be used as a means of exchange, that might provide a window to move discussions forward. The problem here is, is the Libra association able and willing to provide such guarantees? How will it force people to exchange their Libras for fiat currency? What if the Libra association decides that in a few years’ time, it is useful as a store of value after all?

There might be an easy way out, but Libra appears unwilling to take it, for now

An obvious solution that would take away a lot of objections is to abandon the idea of a global stablecoin, and to instead issue €-Libra, $-Libra, etc. In this way, the locally denominated Libras would easily fit existing e-money regulations, and central banks would retain their current control on local currency. Abandoning the global denomination would also, in our view, not reduce the gains to be reaped from operating a single digital global infrastructure.

Blockchains such as Ethereum show that it is very easy to operate tokens representing different assets and currencies on a single ledger. So far, however, Libra appears unwilling to let go of the idea of a single currency. So long as Libra clings to that idea, we think it will face strong opposition from central banks. We look forward to seeing what Facebook’s CEO. Mark Zuckerberg has to say on this at his Congressional hearing next week.

This article first appeared on ING THINK

OMFIF Podcast: Libra and its potential role in the global monetary system, Part I

Facebook’s plans for a global cryptocurrency have caused a stir among regulators and finance ministries. The company sought to announce Libra before launching it to gather feedback from regulators and central banks on the proposed economic design and regulatory frameworks. However, it has exacerbated speculation on its impact and purpose. Christian Catalini, co-creator of Libra and head economist at Calibra, and Teunis Brosens, lead economist for digital finance and regulation at ING, join OMFIF’s Bhavin Patel to explore Libra’s position in the global monetary system. They discuss how it differs from other currencies and payment systems, how the reserve works, its impact on emerging markets and the risks to monetary sovereignty.


Banking disrupted by FinTech and BigTech

Today banks are facing competition from non-bank firms whose core strategy is based on technological innovation – Big Tech and Fin Tech. What is in store for the future of banking?

Watch Nicolas Véron’s introduction of a Geneva Report on the topic, followed by panel discussion featuring Kabbage’s Sam Taussig and myself:

Introducing the 22nd edition of the Geneva Reports on the World Economy, co-author and Bruegel scholar Nicolas Véron lays out the challenges that traditional banks are facing given modern technology. Discussions began with an overview of traditional banks, defined by their government charter. While engaging in many activities, in essence, a bank’s business is to take deposits and make loans. These roles are being challenged and the definition becomes an increasingly blurry line with the emergence of FinTech and Big Tech. The Geneva report therefore explores the question: Does technology challenge big banks?

FinTech companies excel in speed, customisation, and are digitally adept. Bigtech companies including Facebook, Apple, Google, and Amazon in the United States, along with Baidu, Alibaba and Tencent in China, boast an enormous scale of reach, and have both public trust and data. Banks remain the upper hand in customer experience, and their policy base gives them the ability to lobby. Véron encourages everyone interested to read the report in order to better understand the dynamics posed between these groups. He then recognises how early we are in the stage of competition, and that many questions are yet to be answered: How will banks evolve? How will banks embrace FinTech? How will policy respond?

The Geneva report outlines previous banking evolutions and identifies underlying themes. What is new with this challenge is how big Big Tech truly is. Libra gave a wake-up call to policy makers that FinTech will continue to grow, and policy needs to be implemented. Véron again encourages all to read the report to further understand the challenges and implications of banking competition.

Opening up the panel to a discussion, Teunis Brosens, lead economist for digital finance and regulation at ING, remains confident that banks will not go away. He poses the question whether Big Tech firms are willing to become banks or not. Emphasising the regulatory role of traditional banks, Brosens sees the next steps to moving forward as a levelling of the playing field both in local and global spheres specifically in terms of data sharing.

Sam Taussig, head of global policy at Kabbage, an Atlanta based small business credit platform, expands on his view of the future of banking, agreeing that traditional banks are not obsolete. From his perspective, customers will use FinTech’s user friendly interface, who will be backed by the regulatory base of a bank. The main concerns here are of anti-trust and data ownership.

Rebecca Christie, a Bruegel scholar, posed questions of redlining and regulation. She questions how intra-bank competition will affect this evolution, and whether fees will remain a setback for banks. After a discussion led by Christie, the floor was opened up to Q&A where the panel shared their thoughts on shadow banks, the need for specialised licenses, and the role of central banks in creating cryptocurrencies.

Notes by Larissa Nowjack

Meeting notes first appeared on Bruegel

Facebook’s Libra is here. Should you Like it?

After months of rumours, Facebook finally unveiled its digital currency plans – and they did not disappoint. The social media giant’s plans are far-reaching and have already attracted some well-known partners to back it. Is Libra really the best of the libertarian cryptocurrency and traditional corporate worlds combined?

When the social media giant with close to 2.4 billion people using the platform each month, launches a new digital currency, there is reason to pay attention.

Facebook’s Libra, clearly has the potential to quickly achieve vast scale, setting it apart from any other cryptocurrency and virtual or gaming currency around.

Facebook is well aware that in order for Libra to be successful, it needs to open it up, which is why it is seeking the support of other corporate backers and has announced that Libra will launch as an independent entity in 2020. Facebook apologises that the current state of technology doesn’t allow a digital currency to be simultaneously scalable (process hundreds/thousands of transactions per second) and be fully decentralised – without consuming half of the world’s electricity. Indeed, technology hasn’t yet made all this possible, but the status quo makes it very convenient for Facebook to launch Libra in a comfortable centralised way, whilst grabbing the world’s attention with the launch of a cryptocurrency on blockchain.

From a technical perspective, the current centralised governance means using a blockchain architecture is unnecessary (to add to the confusion, Libra claims to be a blockchain without blocks). But if indeed, Libra is to make good on its promise to start moving towards decentralised governance in 2025, then it makes sense to start on a blockchain right away.

How will Libra work?

The plan is for the Libra network to operate independently from Switzerland, but users will need a Libra ‘wallet’ to interact with it, and that wallet will be domestically regulated. Facebook is building the Calibra wallet, and contrary to Libra itself, Calibra will be wholly owned by Facebook. This makes sense: the value for Facebook is not in the Libra currency itself; the transaction data are the real treasure trove.

This data will be generated by the wallet app and Facebook claims it won’t mingle transaction data with its other data without user consent. The Calibra app will probably make efforts to get this consent by offering superior functionality.

The biggest question right now is, how will regulators react? An e-money license (which Facebook already has in Europe) may not be enough for the Calibra app. Given that Libra is not denominated in domestic currency, but reflects a currency basket, it is probably more like security from a legal perspective. This takes us right back to the discussion that has been haunting cryptocurrency for years: is it a security or something else?

What about central bank and regulators?

And there is more. The digital coin will be backed by a full reserve of low-risk safe assets, including government bonds. But the world’s supply of safe assets is limited. Central bank buying government bonds has increased scarcity in various parts of the world including the eurozone. If Libra becomes successful, it could develop into a significant buyer of government securities, which could potentially further push interest rates into negative territory. Germany, Switzerland, take note.

For years, central banks have been deliberating about cryptocurrency and central bank digital currency (CBDC). But with the introduction of Libra, Facebook has now accelerated this discussion significantly. It might be prudent and wait for regulators to formulate their view, or it may take the US-based ride-hailing service Uber’s approach and just launch, forcing regulators to respond (“shape a regulatory environment”, as they put it)

In any case, lawmakers and supervisors will have to decide quite quickly what Libra is, and how it should be regulated.

There are many more issues to think about. For example, the exchange rate risk users and businesses would face, how secondary market liquidity will hold in challenging times, and the impact all this would have on competition in various sectors.

While a lot remains unclear at this stage, Facebook has clearly started a new chapter on digital currencies. Over to policymakers for a response.

This article first appeared on ING THINK

Who should worry when Mark issues the Zuck?

Is Facebook’s GlobalCoin worth the hype? Launching platform currencies is nothing new in itself. Yet the sheer scale that a Facebook coin could achieve should give businesses, competition authorities and (central) banks some food for thought.

What is GlobalCoin?

When Bitcoin was launched in 2009, it was heralded as the digital currency that would make banks and other traditional intermediaries obsolete. But lately, it’s been established behemoths that have been announcing their own coins. Earlier this year, JPMorgan announced its “JPM Coin” for wholesale purposes, and today brought more news on Facebook’s project to launch its own “GlobalCoin”. What to make of this?

It is important to clear up two misunderstandings.

  • Firstly, coining a nice name for a platform currency sounds like clever marketing, which is well understood in some corporate boardrooms. Establish vague associations with cryptocurrency, and headlines are guaranteed. But, strictly speaking, cryptocurrencies are decentralised. This means that the money supply and the infrastructure are managed by the collective userbase, which in practice is represented by interest groups such as miners, developers and exchanges. On the other hand, with Facebook’s coin, there is one centralised party which issues and manages the coin on its own platform. Facebook could also manage the exchange rate of its coin to traditional fiat currencies, such as the euro and the dollar. So referring to GlobalCoin as a cryptocurrency is wrong, or at best irrelevant. How Facebook implements the coin at a technical level, on a blockchain or otherwise, is not relevant from an economic or monetary perspective.
  • Secondly, GlobalCoin as a currency issued on a platform, is nothing new. Many games have had their own virtual currencies for a long time. Prepaid telephone cards are another example. We know such currencies from the non-digital world as well. At a concert, you often need to buy custom coins to pay for beer. So nothing really new here. And because virtual currencies are not a new phenomenon, they are subject to well-established existing regulations. Indeed, Facebook acquired an “electronic money institution” license in Ireland in late 2016 and is allowed to issue and manage virtual currencies throughout the EU using that license.

“Nothing to see here people, please move on”?

Not quite. Even though Facebook’s currency project is nothing new in itself, the scale that a coin on Facebook’s platform could achieve is something to reckon with. It is clear where Facebook is getting its inspiration from. The Chinese WeChat app has been dubbed an “app for everything”. It includes a pay functionality, which means users can basically do everything on the platform and in the app. For Facebook, adding its own currency would provide a powerful incentive for its users to stay on the platform and to transact with suppliers there, paying them in Facebook’s virtual currency. This, in turn, would incentivise business suppliers to be present on Facebook’s platform and accept its coins, to avoid losing a significant chunk of their customers.

So while banks may find themselves disintermediated, business suppliers may in contrast be bound to Facebook’s platform. Competition authorities around the world are therefore probably watching Facebook’s moves closely. Central banks are probably watching, too. Launching virtual currencies on a modest scale has a negligible impact on monetary policy and financial stability. But if a lot of transactions end up being handled by what is, in effect, a foreign currency (insofar as its exchange rate is managed vis-à-vis a basket of currencies), central banks might want to think again.

This article first appeared on ING THINK.

Fintech, bigtech and banks

At Bruegel’s conference “Rethinking industrial policy in the digital age“, I was asked to provide a bank’s perspective on digitisation. Please see below my intervention.

If you are not keen to watch my head talking for 11 minutes, the summary is:

  • There is a tension between innovation and the financial regulatory framework;
  • “Unbundling” of banking, outsourcing, and a national supervisory framework add to complexity and fragmentation;
  • The data sharing embedded in PSD2 provides a template for a broader, cross-sectoral data sharing framework.