Will Facebook’s Libra Displace Fiat Currencies?
By Nicola Borri on ALTCOIN MAGAZINE
It’s only been a few days since Facebook unveiled its plan for a new cryptocurrency, Libra, and many think it could be a game changer. Libra, with the gigantic Facebook’s user base (more than 2 billions users worldwide), the stability of traditional currencies, like the dollar or the euro, the low transaction costs and high security of cryptocurrencies, poses a serious threat to fiat currencies, central banks and sovereigns, and traditional intermediaries, like bank and credit card companies.
The high bitcoin volatility is not well suited to some of the main functions of money, i.e., being a medium of exchange and unit of account. This is why, in the recent past, several “stable” coins have gained widespread popularity, like tether which is fully backed by U.S. dollars. Similarly, Libra will be backed by a basket of fiat currencies, as well as other assets and deposits. However, while the credibility and reach of tether ultimately depend on just one crypto exchange, Bitfinex, Libra is backed by a multi-billion dollar company, with a vast user base and a web of agreements with companies like PayPal, Uber, Visa, and Mastercard.
We think Libra’s characteristics make it especially a threat for the future of the currencies issued by emerging countries where the high level of inflation erodes most of their value. So far, people in these countries have used stable alternative fiat currencies, like the dollar in Latin America, in cash transactions and as a store of wealth. In the near future, they might choose Libra, which will be anchored to the value of developed countries’ currencies, with lower transaction costs, and the possibility of bank-like accounts. However, if Libra will successfully displace domestic fiat currencies in emerging countries, not only central banks will lose control of monetary policy, but also governments will lose their seigniorage revenues.
How can these countries respond to this threat? Potentially, they could ban the use of Libra, making it illegal not only for the execution of transactions with Facebook’s new currency but also for its use as a store of value. This is what China did in 2017, when it de facto banned the use of bitcoin, out of fear it was used to funnel capital abroad. In a recent paper (“Regulation Spillovers across Cryptocurrency Markets“), we look exactly at this episode and show that China was quite successful and bitcoin trading volume, on Chinese exchanges, collapsed from 8.5 billions of U.S. dollars per day, or 90% of the global bitcoin daily trading volume, to less than 1 million of U.S. dollar per day (see Figure 1).
Can countries like Argentina, or Venezuela, successfully ban libra as China did with bitcoin? We think this is unlikely, even though in recent years many emerging countries have tightened the regulation on cryptocurrencies. First, China is a very large country with a government that uses the iron fist to achieve its goals. It is not clear if governments in emerging countries could be as effective. Second, even if Argentina and Venezuela successfully banned the domestic use of Libra, our paper shows that a ban in one country does not “destroy” the trading volume permanently, but more likely just shifts it to neighboring countries. Therefore, only an international coordinated response could really stop Libra. Initial official comments by institutions like the Bank of International Settlements and the Financial Stability Board seem to suggest that this international response could materialize. However, since Libra is backed by developed countries fiat currencies, its success, at the expense of emerging country currencies, could benefit stable currencies like the dollar and the euro and reduce the incentives that these countries have in blocking libra. After all, while many emerging countries have already introduced an absolute ban on crypto, some advanced economies have already made a move exactly in the opposite direction, recognizing bitcoin as legal tender (see Table 1).
Nicola Borri, Department of Economics and Finance, LUISS University, ROME
Kirill Shakhnov, Department of Economics, University of Surrey
References
Borri, Nicola and Kirill Shakhnov. 2019. Regulation Spillovers across Cryptocurrency Markets. Working Paper.
