On the 9th July, the Deputy Director of the People’s Bank of China, Mu Changchun, released statements about Facebook’s Libra blockchain based currency and wrote a piece in Caixin. He echoes many other members of financial bodies who have warned that it could disrupt current practices.
Libra and monetary policy
Mu made the point that once Libra starts being used for credit sales and consumer loans, as Facebook has already alluded to, then it generates a money multiplier. Hence the reserves that back the original Libra created, won’t be enough to keep Libra stable. Mu believes that central banks should be involved in controlling the multiplier and reserve requirements.
Additionally, for countries which have an unstable currency, there will be a strong incentive for citizens to switch to Libra, which could exacerbate domestic currency depreciation.
Mu said that the currency must abide by financial regulations, in a similar commentary to France’s Francois Villeroy de Galhau. The central bank officials agree that Libra has been unclear about how it will abide by anti-money laundering and anti-terrorism laws. And he believes the onus of “know your customer” (KYC) is being delegated to financial institutions making Libra’s role in KYC unclear.
The central banker believes this policy also clashes with the privacy offered by other cryptocurrencies, which only require a pseudonym. He thinks that as a subsidiary of Facebook, Calibra may be able to access private identity data. In a similar vein, he wonders if Libra will actually run on a blockchain, as its current goal of 1000 transactions per second will not meet predicted demand.
Impact on Yuan
Yesterday, Wang Xin, a Director at the PBOC, gave his opinion on Libra at a conference in Peking University. He confirmed as Mu alluded to today, that the central bank is stepping up its research in cryptocurrencies and the impact of Facebook’s token.
“If the digital currency is closely associated with the U.S. dollar, it could create a scenario under which sovereign currencies would coexist with U.S. dollar-centric digital currencies, ” Wang explained.
“But there would be in essence one boss, that is the U.S. dollar and the United States. If so, it would bring a series of economic, financial and even international policy consequences,” he continued.
“In the longer term, the yuan will be damaged by Libra if it’s not convertible,” Mu told Bloomberg.
The PBOC adds itself to the growing list of bodies commenting on Libra’s impact. The central bank joins the finance arm of the U.S. House of Representatives, which last week asked for Libra’s operations to be put on hold. The Bank of England, the U.K. financial regulator, the Governor of the Bank of France de Galhau, and leading Chinese economist Zhu Min have all added their views on the currency.
The CEO of Facebook subsidiary Calibra has added his response to the mostly critical commentary in a post on Thursday.