Financial authorities around the world are heightening vigilance in response to Facebook’s initiative to develop a new digital currency Libra. It seems that it will take a considerable amount of time before Libra's draft regulations are finalized.
Thorough discussion on Libra’s regulations
As of 2018, Facebook has approximately 2.7 billion users or up to 37% of the world's population. If they all begin to use Libra on their apps, it has the potential to rapidly spread around the world as a means of payment, unlike other virtual currencies (cryptographic assets) currently in the market. The financial authorities around the world are on high alert at this point. It is because they are strongly concerned that Libra is a great risk that may make the financial system unstable, reduce the effectiveness of monetary policies, and be used for crimes such as money laundering.
Facebook, on the other hand, emphasizes the social significance of Libra as a platform to help low-income people in emerging economies who do not have bank accounts, as they can use their smartphones to transfer money and access other financial services at low cost.
It is also important for financial authorities to enhance the convenience of users by actively incorporating various innovations created by private companies into the financial industry. In light of this, financial authorities should not easily crush the concept of Libra, nor is it likely that they will do so in reality.
It is important for financial authorities to take time to create a regulatory framework for all private digital currencies such as Libra, which have the potential to spread globally as a mode of payment.
Importance of secure environment for using digital currency
In fact, if Libra is launched and widely used as a means of payment, the key role of financial authorities is to guarantee its security and to create an environment where users can use it with confidence. Maintaining the stability of payment systems is one of the important roles of central banks.
Unlike cash and digital currencies issued by central banks, in the case of private digital currency, if the company that issues and operates it goes bankrupt or does not have sufficient reserves to convert it into cash, the value of the digital currency may substantially decrease and, in the worst case, become worthless. Such concerns prevent people from using the digital currency with confidence.
In order to avoid this situation, it would be effective to take regulatory measures like requiring companies issuing digital currencies to have sufficient capital and to manage them with safe assets so that their reserves do not decrease significantly.
In the case of Libra, when it is issued and managed by the Libra Association, the amount of Libra reserves is increased by the same amount. Libra reserves consist of safe assets such as bank deposits and bills in major currencies. However, the problem is that if the depositor’s bank fails, the reserves will be affected.
Allowing possession of central bank current accounts can be an alternative
As a means of enhancing the security of digital currencies, it would be an option for central banks to allow issuers of digital currencies to hold central bank current accounts. As central bank current accounts are the safest financial assets, it would increase the safety and reliability of digital currencies. In addition, even if a firm issuing digital currencies suffers from financial trouble, the central bank can help avoid bankruptcy by providing liquidity to the firm’s current accounts, just like bank bailouts.
In exchange, the central bank can closely monitor the activities of digital currency issuers or provide guidance regarding sound management.
In that case, private digital currencies, such as Libra, would be officially certified as social infrastructure and be given a more public status. Such digital currencies can be said to be an intermediate form between pure private digital currencies and central bank digital currencies issued by central banks.
Alipay and WeChat Pay are major platforms that already have a retail payment system in China. The country’s central bank (People's Bank of China) has them hold central bank current accounts. When reviewing regulations for Libra, one should also study the existing Chinese policies.
Nomura Research Institute, Ltd.
Corporate Communications Department