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Contrasting views of 3 central banks on digital currency, stablecoin sovereignty threats

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Yesterday the EU Blockchain Observatory and Forum held a series of discussions about central bank digital currency (CBDC). Three central bankers from the European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of Canada had different perspectives on the threat that Facebook’s Libra might present to monetary sovereignty.

The ECB was concerned about relying on dominant companies such as Facebook-backed Libra. Japan says its cashless payment sector is so competitive that it’s unattractive to stablecoin organizations. Meanwhile, Canada’s primary concern is dollarization, whether that’s a Libra USD stablecoin or a U.S. Federal Reserve digital dollar. The Canadian perspective was illuminating.

The ECB doesn’t want foreign domination

Ulrich Bindseil, ECB Director General of Market Infrastructure and Payments, presented the conventional perspective that Libra, with its Facebook audience, could potentially become a dominant player. This is an issue when combined with the fact that the companies behind Libra are for-profit. The implication was that this contrasts with the public good aspect of central bank money.

He also highlighted that even if the Libra network primarily circulated central bank digital currencies, that might still be an issue. “Competition and sovereignty issues remain in the sense that we wouldn’t want to be dependent on a few very powerful foreign companies,” said Bindsell.

Japan’s cashless payment sector is ‘war’ 

Meanwhile, Yutaka Soejima, the Bank of Japan Deputy Director General and Head of FinTech had a more relaxed perspective on Libra. That was because he believes that Libra would hesitate to join such an intensely competitive market. “In Japan, the competition for cashless payment services is quite tough,” he said. Payment service providers are aggressively using points reward systems to attract users. And points are incredibly popular in Japan. 

But the situation is not much better on the retail merchant side. “The campaign for the merchant side is also overheating,” said Soejima. “For example, some payment service providers do not charge acquiring fees for a fixed period. So they don’t have any source of income.” The reason for the aggressive competition is to attract users to other business lines in their ecosystems. Soejima referred to Facebook’s advertising business and said “it (ad income) is not enough to survive in such a severe total war.”

Canada is concerned about dollarization

In terms of concerns about monetary sovereignty, “I typically view this as a low probability but catastrophic event,” said Scott Hendry, the Bank of Canada‘s Senior Special Director, FinTech. The catastrophe being usurping the Canadian dollar would make it impossible to implement monetary policy.

But on the bright side, “the efficiency gains that are possible in the type of payments Libra is after, probably means that it’s not going to take over a huge part of the payments landscape,” said Hendry.

He believes the two critical factors in assessing the risk are whether the stablecoin is in the country’s unit of account and whether the issuer is regulated. For a local currency stablecoin, if the regulation is effective, he doesn’t see a big difference between a stablecoin and commercial bank money.

“The structure of a stablecoin is different. The technology is supposed to be irrelevant. Our regulations are supposed to be technology agnostic. So we can deal with it with some modifications so that it can be offered in a safe manner,” said Hendry. Provided it does not use another unit of account, “from a monetary sovereignty perspective it’s not a risk.”

His bigger concern is that Libra will only offer a handful of currencies and not a Canadian Dollar in the early stages. “By the time they get to the point of maybe offering that currency, those economies could be Libra-ized. And that would come with serious problems,” said Hendry. He explained that before Libra evolved its strategy, all countries were concerned about Libra’s first design iteration featuring only a basket currency because Libra was in nobody’s unit of account. Now the design includes four individual stablecoins in USD, EUR, GBP, SGD.

“If there’s a U.S. dollar CBDC or a U.S. dollar Libra, the implications for Canada are basically the same. It would potentially lead to the dollarization of the Canadian economy,” said Hendry. That was highlighted eight months as a possible motivation for a Canadian CBDC.

If the Canadian dollar started to lose its status, it would be important to assess citizens’ motivation to move away from the Canadian dollar. It might be that they’re being bribed with points to use something else. Or it may be part of a social media platform, where there are things that just aren’t available in Canada.

Hendry concluded, “a CBDC might not be the best response. There are probably going to be all sorts of responses to keep people using the domestic monetary unit of account.”

The key takeaway is the contrasting perspectives and policy issues for each country. The differences potentially apply to both CBDC designs and stablecoins. That makes it all the more remarkable that three weeks ago, seven central banks, together with the BIS managed to issue one combined document discussing CBDC. And it also begs the question of what type of global coordinated regulatory response to Libra there might be, beyond buying time.


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