Libra, Europe and the Race For Digital Currency Supremacy
Few events have had as a profound impact on the blockchain industry as the announcement of Facebook’s digital currency Libra. Libra has brought the idea of cryptocurrency and digital currency into the mainstream. Governments and banks are beginning to realize that crypto is not just a passing fad and can offer tangible benefits in making transactions faster and cheaper, and opening access to finance.
In Europe, Libra has prompted a wider discussion on Europe’s standing among the operators of global payments systems. There is a general sense at both the ECB (European Central Bank) and finance ministries of the domestic European powerhouses that Europe is lagging behind other global providers of payments platforms.
Former ECB board executive Benoît Cœuré has been a prominent advocate of such a position, outlining how more than two-thirds of non-cash payments are made using non-European card schemes. American multinationals Visa and Mastercard dominate the European card payment market, while Chinese companies such as Alipay are also expanding in Europe. The risk to EU states of relying solely on foreign payment providers is considerable: the monetary power of foreign state entities may not always be used in the best interests of Europe.
Such potential has led the European financial elite to warm to the idea of a Europe-wide digital currency, with ECB head Christine Lagarde recently revealing that the ECB is looking at producing a central bank issued digital currency to address the trend in declining use of cash. The Basel-based Bank for International Settlements (BIS), owned by 60 central banks, has also launched an initiative to create a central bank digital currency for use between banks and secured by Distributed Ledger Technology (DLT).
Europe is in a strong position to create such a centrally backed digital currency. Unlike attempts within relatively small countries, such as Sweden, to launch digital currencies, the size and scale of Europe together would ensure that the formation of a digital currency would be sustainable in the long term.
European regulators have also demonstrated a positive attitude and openness to digitally backed currencies. France has established itself as one of the leading hubs for fintech companies. The French regulator, the Autorité des Marchés Financiers (AMF), has been proactive in setting up a department dedicated to robustly regulating the fintech sector. The UK has also displayed a welcoming regulatory climate, launching the first fintech regulatory “sandbox” of its kind--an experimental safe space in which businesses can test services without immediately incurring all of the standard regulatory consequences of this activity. The success of the project has since led more than 13 EU member states to adopt similar experimental “sandboxes” or innovation hubs dedicated solely to fintech.
Post-Libra, the advantages of a central bank issued European digital currency also resonate more strongly with European domestic policy makers. French Minister for the Economy and Finance Bruno Le Maire is one such vocal champion, calling for the ECB to “accelerate its thinking on a public digital currency” in order to compete with Libra.
The reasons for doing so are clear: the use of cash is in decline, financial transactions now occur at a rapid rate between parties across the globe rather than solely in small localized communities. A centrally managed digital currency would facilitate a reduction in the current high transaction costs involved in the global financial system, as well as greatly increase the speed of such transactions. A digital currency would also provide greater access to finance for unbanked citizens, a figure the World Bank puts at 1.7 billion globally. A central bank digital currency would increase the efficiency of the settlement and clearing services that central banks offer to commercial banks, with significant potential savings for both service providers and consumers.
While the demand for a digital currency has become clear, less clear is what shape this currency will take. Considerable dialogue needs to take place between the various stakeholders as to what exact form this currency should take: should it carry interest; should it be anonymous; should it act as a complement, or a substitute to bank deposits? These are all key questions which policy makers will have to wrestle with. It is also worth pointing out the scalability problem associated with transaction speeds for many DLT based currencies. While Visa can process around 1700 transactions per second, Bitcoin only performs around 4.6 per second. Blockchain developers will have to solve the scalability problem before any global system of payments can be implemented.
Nonetheless, make no mistake, innovation in how we transfer and use currency is on the way. Citizens have a right to access central bank money. Given that technology has changed the way we use cash, it is only fair that we continue to be granted the right to access central bank money. Creating a central bank digital currency for Europe would be the perfect means of doing so.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.