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.

Een taxonomie van monetaire alternatieven

Dit artikel is verschenen in ESB (104)4769, pp12-13, januari 2019.
Er zijn voorstellen voor monetaire hervormingen in alle kleuren en smaken.  Een taxonomie hiervan schept inzicht in zulke curieuze begrippen als Vollgeld, Positive Money, full-reserve banking en narrow banking.

De afgelopen jaren zijn er diverse ideeën, alternatieven en hervormingsvoorstellen voor het traditionele financiële stelsel ontwikkeld.
Veelal is de leidraad dat het bij geld en betalen om maatschappelijk essentiële nutsfuncties gaat, die voor alle burgers altijd beschikbaar moeten zijn. Uitgangspunt is vaak ook een zekere onvrede met de wijze waarop geld, betalen, maar natuurlijk ook sparen en lenen, in het huidige financiële stelsel zijn vormgegeven.

De ontstane ideeën laten zich ordenen naar de mate van centralisatie die men voorstaat, zie figuur 1. Aan de ene kant van het spectrum vinden we cryptovaluta, aangevoerd door Bitcoin, aan de andere kant ideeën zoals volgeld die terug te voeren zijn op het Chicago-plan uit de jaren dertig.
Het huidige stelsel zit daar tussenin.

Taxonomie van geldsystemen naar mate van centralisatie (klik voor leesbare uitvergroting)
Taxonomie van geldsystemen naar mate van centralisatie (klik voor leesbare uitvergroting)

Een wereld zonder instituties

In het ideaalbeeld van cryptofans zijn er geen centrale instituties. Tien jaar na de lancering van de Bitcoin zijn nadrukkelijk, naast de mogelijkheden, ook de beperkingen van een dergelijke wereld gebleken. De afwezigheid van centrale instituties blijkt besluitvorming stroperig te maken. Er worden
bittere stammenoorlogen uitgevochten, met een versplintering van het veld tot gevolg.

Ondanks het ideaalbeeld blijken ook in de decentrale cryptowereld markten een neiging te hebben instituties te organiseren, zoals mining-collectieven, centrale platforms (beurzen) en portemonneediensten. Zonder regulering en toezicht hebben sommige hiervan de potentie de markt te domineren.

Ook hebben cryptobeleggers op een pijnlijke manier geleerd dat het tegenpartijrisico volledig bij hen ligt. Bij talloze hacks zijn klanten veel geld kwijtgeraakt: de door bijgehouden teller van de hackschade staat inmiddels boven de 2,5 miljard dollar. Achter veel initial coin offerings (ICO’s) bleken zwendelaars te zitten die er met het geld vandoor gingen. Beleggers genieten in deze gevallen nauwelijks tot geen gereguleerde bescherming, en hebben dus geen middelen om hun recht te halen.

Bij kredietverlening in de cryptowereld zouden ook het kredietrisico en het renterisico, die in de traditionele wereld door de bank gedragen worden, volledig bij de klant liggen. Libertijnen zien dit als een voordeel: laat mensen maar hun huiswerk doen en op de blaren zitten als het misgaat. De praktijk leert echter dat veel mensen hun prioriteiten elders leggen, en dat juist de cryptomunten tot speculatieve bubbels leiden. Het volledig decentraal beoordelen en spreiden van risico’s blijkt nog niet zo simpel te zijn.

Centrale geldschepping, decentrale kredietverlening

In veel volgeld-voorstellen wordt er geredeneerd dat als de geldschepping wordt ‘genationaliseerd’, de kredietverlening juist sterk kan worden geliberaliseerd, en daarmee in principe gedecentraliseerd. Het ‘nationaliseren’ van geldschepping betekent dat bancaire kredietverlening niet meer met geldschepping gefinancierd kan worden. Dit roept de vraag
op: hoe dan wel? Het antwoord kan variëren van peer-to-peer crowdfunding tot kredietverstrekking van overheidswege. De leidraad zou wat mij betreft telkens moeten zijn: op welke schouders komen de risico’s te liggen die nu eenmaal bij bankieren horen?

Decentrale kredietverlening plaatst een grote verantwoordelijkheid bij het individu als geldverstrekker, en zou idealiter de concurrentie en daarmee de markefficiëntie moeten bevorderen. Maar het individu kan de risico’s maar
beperkt overzien, zeker financiële risico’s die zich over een langere termijn uitstrekken. Individuen kunnen zich er bovendien nauwelijks tegen indekken. Groepsvorming geeft de mogelijkheid tot het gezamenlijk dragen van risico’s. Zo kunnen er collectief risico’s genomen worden zonder dat
individuen alles in de waagschaal hoeven te stellen.

Er zijn daarentegen ook volgeld-voorstellen die overgaan tot volledige centralisatie, waarbij kredietverleners door de centrale bank gefinancierd worden. Het nemen van risico’s is essentieel om als samenleving vooruit te komen. Risico’s spreiden en delen is de essentie van bankieren en verzekeren, en van het collectieve element in ons pensioenstelsel. Maar moet dit principe zo ver doorgevoerd worden dat alle risico’s volledig bij het collectief liggen? Dat zou een efficiënte bestemming kunnen belemmeren van schaarse financiële middelen in de economie – de nadelen en valkuilen
van centraal geleide economieën worden ons tot op de dag van vandaag gedemonstreerd.

Tot besluit

De uitersten op het spectrum van centralisatie zijn niet erg werkbaar of aantrekkelijk. Het huidige financiële stelsel zit op dit spectrum ergens in het midden. En dat is dus niet voor niets. Maar dat betekent natuurlijk niet dat het denken nu klaar is. Hoe het bankenlandschap er ook precies uit gaat zien, we weten dat er altijd behoefte zal blijven aan betalen, sparen en lenen. Goed bankieren in de toekomst zal antwoord moeten geven op de vraag hoeveel risico acceptabel is om groei te faciliteren, hoe we krediet goed toewijzen en hoe we de risico’s goed delen. En ook dan weer zullen de beste antwoorden bestaan uit een mix van private en publieke, van individuele en collectieve elementen.


Buitink, P. en R. van der Linde (2019) De econoom aan zet voor de bankrekening zonder ­kredietrisico. ESB, 104(4769), 21–23.

Dawnay, E. (2017) Sovereign money initiative – The background to the national referendum on sovereign money in Switzerland.

Dyson, B., G. Hodgson en F. van Lerven (2016) Sovereign money – An introduction.

Hayek, F.A. (1990) Denationalisation of money: the argument refined. Hobart Paper (special) 70. Londen: The Institute of Economic Affairs.

Kay, J. (2009) Narrow banking: the reform of banking regulation.

Nakamoto, S. (2008) Bitcoin: a peer-to-peer electronic cash system.

Cryptopodcast: wat doen de banken?

Deze week was ik te gast bij BNR’s @CryptocastNL. Met @Misssbitcoin en @hmblank bespraken we cryptocurrency, blockchain, en de rol die banken hier misschien kunnen spelen:

Deze week te gast in de 28ste aflevering van de Cryptocast: Teunis Brosens, econoom bij ING. Met Teunis bespreken we de rol die weggelegd is voor banken om hun klanten te voorzien in behoefte én het hoofd boven water te kunnen houden. Ook geeft hij een kijkje in de toepassingen die banken gebruiken om aan de achterkant verbeteringen toe te kunnen passen. Daarnaast spreken we over of bitcoin geld is en hoe cryptocurrencies er in haar meest optimale vorm uit zouden zien.

Kijk op de BNR-site of luister hier.