Mark Zuckerberg had barely settled into his seat in front of the US House of Representatives financial services committee in October when the grilling began.
No niceties were afforded the Facebook chief executive. Very quickly, members from both sides of the political divide went on the offensive. Facebook, he was brusquely told, should be broken up. Libra, its cryptocurrency project, was being deserted by its backers and he should put it on hold until a regulatory framework was in place.
Announced with a fanfare in June, Libra has rapidly become the benchmark for governments’ attitudes to crypto assets. Although politicians and regulators have kept up with developments in so-called stablecoins, Mr Zuckerberg’s intervention with Libra — promising cheaper and faster money transfers — concentrated minds.
Investors view cryptocurrencies with a mix of curiosity, scepticism and fascination. Curiosity, because any disrupter deserves attention, particularly one based on the application of blockchain to such a fundamental part of global finance as currencies; scepticism, because the technology is in its infancy, has low adoption and is up against strong and durable fiat currencies; and fascination, because these barriers have not prevented wild speculation on cryptocurrencies.
Libra has pushed interest several notches higher. Facebook brought not just its globally recognised brand to the opaque world of cryptocurrencies but also a host of banks, payment providers and other financial institutions, which all supported its project.
The ensuing backlash from regulators, which questioned whether Libra could provide consumers with safety and privacy and the market with financial stability, took backers by surprise. This prompted an exodus, with Visa and Mastercard among those leaving the project.
If regulators were passive in the early years of cryptocurrencies, they are active now.
The EU is concerned about the perceived threat to the sovereignty of the euro and other currencies. It has made clear it will not welcome or make provision for cryptocurrencies “until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed”.
But, conscious that blocking digital currencies is futile, the EU and other regulators appear ready to use regulatory muscle to ensure that they can control their introduction with minimal disruption. The European Central Bank is working on a digital currency that could be an alternative to private providers.
One overarching reason for the EU’s willingness to engage with the concept of digital currencies is the threat of China, which would like to challenge the pre-eminence of currencies such as the dollar and the euro. In October Chinese tech stocks with an interest in blockchain soared after President Xi Jinping described it as a “core technology” that required support.
Analysts note that some central banks, such as those in Switzerland, Singapore and Canada, have looked at adopting a digital currency, while the Riksbank in Sweden, where the use of cash is rapidly declining, has an e-krona project. They think, however, that the People’s Bank of China is most likely to be first to launch a digital currency.
Central banks may adopt digital currencies at different speeds but it is how they interact that is likely to be the key to success.
In August Mark Carney, Bank of England governor, proposed a “synthetic digital currency” to be issued by central banks as the eventual replacement for the US dollar in international transactions.
The Bank for International Settlements aims for co-ordination. The Basel-based institution, owned by 60 central banks, has appointed Benoît Cœuré, an ECB board member, to head a unit to pool resources to produce digital currency models that central banks could adopt.
There is plenty to consider. Laws and regulations would need to be amended by each country establishing a digital currency; central banks would need their digital currencies to be part of their investment portfolios as well as their reserves; they would also need to reassess gold reserve allocations.
This regulatory activity may make it look as if would-be private providers such as Facebook will be shut out of the revolution. Mr Cœuré and others insist, however, that they envisage a system where private providers are licensed to issue digital currencies through applications fully underpinned by the reserves of central banks. That would guarantee the security and integrity of digital transfers.
Facebook and others would probably have to sign up to tightly regulated processes to win a licence. That may sound anathema to the principle of open access that underpinned Facebook’s social engagement tool but it might be a price worth paying for a seat at the digital currency table.
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