Beat Libra at their own game: The argument for central bank digital currency

In June of 2019, Facebook publicly announced that they had been working on a cryptocurrency project for some time, named Libra. The idea was a novel one: a consortium of global corporations that would collaborate to create a digital currency ‘transforming the way money moves around the world’. During the announcement, Facebook proclaimed that Libra would be run by a non-profit association and that the value of the cryptocurrency would be based on a basket of dominant fiat currencies, making it a kind of stablecoin. Many of the world’s most powerful payment companies were even founding members, including PayPal, Stripe, Visa and Mastercard–bringing industry expertise, global settlement networks, and banking relationships around the world.

For a brief moment, it seemed as though the future of money had been unveiled, but within 4 months, each of the payment giants withdrew from the project due to U.S. regulatory backlash. And while the backlash was warranted, one can’t help but wonder, why aren’t more countries creating their own digital currencies? After all, Libra was created to solve a problem.

Payments, especially cross-border payments, are complex, expensive and are fundamentally not global in nature. In fact, to send a payment from the U.S. to China requires the use of correspondent banking, a cumbersome process that often takes 2–4 business days. Using a fiat-backed digital currency, Libra could send global payments instantly, for less, without the volatility of a cryptocurrency. However, the idea of a global digital currency managed by the likes of Facebook, Uber, Shopify, and Spotify (yes, the music streaming app)… leaves much to be desired.

The government’s time to act is now

The notion of a digital currency issued by a central bank, once a mere theoretical concept, is quickly gaining popularity around the world. And regardless of where you stand on the debate of whether Bitcoin is in fact a currency, the leading crypto can be credited for popularizing the topic, with Libra reinforcing the need for such innovation. Prior to the creation of Bitcoin, the majority of the world’s policymakers would likely never consider pursuing a digital currency, but according to the Bank of International Settlements, at least 80% of central banks surveyed in 2019 are now actively researching CBDC, with 20% of the world’s population on pace to have access in the coming years.

China, the global leader in digital payments, is arguably the farthest along, currently testing their digital Yuan in four major cities. Interestingly, China’s digital currency, not Libra, may be the newest threat to America’s dominant role as global monetary hegemon.

However, China is not alone, with countries like Thailand, Saudi Arabia, South Korea and the Bahamas, all actively pursuing their own CBDC projects. Still, the majority of the world’s most advanced economies continue to research and debate the merits of digital currency, instead of looking at how to best build what now seems like a necessary and inevitabile innovation.

The benefits of CBDC

For those wondering if there are any other benefits to issuing a CBDC, other than speed and cost, look no further. Issuing digital cash has the potential to:

• Decrease the cost of issuing new cash (no more printing bills)
• Improve the availability and quality of access to financial services (financial inclusion)
• Decrease money laundering, counterfeits, fraud, and tax evasion
• Improve efficiency through lower transaction, settlement and reconciliation costs
• Refine the use of monetary policy through real-time data monitoring and adjustments

While there are various options for a CBDC, each country must do their own due diligence in evaluating their own requirements. Doing so will maximize the benefit for their constituents. Still, it is time that the global currency leaders (USD, EUR, GBP, JPY, etc.) take action and lead this forthcoming digital transformation.

Trust is earned, Facebook, not given

Facebook seems to be in the news on a consistent basis, but never for the right reasons. In 2018 a major security flaw in Facebook’s platform was found that made it possible for websites to extract personal information from the profiles of various users on the platform. In early 2019, it was discovered that a bug left users vulnerable to sites looking into who users were or were not communicating with. Unfortunately for Facebook, these were not isolated incidents, but rather, part of a long line of security issues that the social media giant had been dealing with.

Then, in fall of 2019, payroll data for 29,000 Facebook employees was stolen from an employee’s car. This data included banking information, names, salaries, and Social Security numbers–the kind of information that a digital currency provider must keep private and secure. The Libra Association will face many hurdles in launching a globally accessible, digital currency, but arguably none will be more difficult than gaining the trust of both the public and regulators.

Taking charge of the future

In 2018, the now former Managing Director of the IMF, Christine Lagarde, delivered a moving speech about the past, present and future of money, urging nations to embrace change and take charge of their future. Two years later, the issuance of CBDC cannot simply be viewed as a response to cryptocurrencies, or the Libra Association, but rather, a purposeful move to better the payments and banking ecosystem for all. Digital currency can be a first of its kind, an opportunity to not only reduce costs and friction, but improve the lives of billions. However, for this to come to fruition, governments must take action, and must look to beat Libra at their own game: innovation, transformation, and collaboration.

In Lagarde’s words, “We need to harness change so that is fair, it is safe, it is efficient, it is dynamic, it is inclusive.” CBDC is the only option that embraces this vision and enables policymakers to guide the future of money. Any other path yields this opportunity to those who hope to profit from it.