CESC2020: Libra and its Discontents

I'm Barry eichengreen. I'm a professor of economics and political science at the University of California at Berkeley. Maybe I should start by explaining why I'm here. How and why I got here, I'm not a technologist or a blockchain Enthusiast. I'm actually an economic and monetary historian by profession. Much of my work has been on the classical or 19th century gold standard. You all will probably know that there is something of an affinity between Goldberg's

enthusiastic support of the gold standard and stablecoin blockchain bugs. Both have something of a Libertarian streak. I think both believe not entirely accurately that the gold standard operated like a private money with limited government involved. And they see an analogy between a dollar that was once pick two gold and a stable coin, that might be pegged to the dollar or to another major currency. So, the fact that I've worked on the gold standard, led me to be invited to

lunch actually to a series of lunches, at excellent. San Francisco restaurants with the funders and founders of prospective stablecoins. First thing I noticed was that I was the youngest person at the table. I was the oldest person at the table. Sorry about that by like 30 years. Looking at the program for this conference. I see that history repeats itself in an in that respect as well. I explained that I was skeptical about the stablecoin idea. I was skeptical that

private labels Volkwein a private label dollar would be a viable. My conclusion was that my lunch me companions knew all about blockchain but they didn't know very much about monetary economics, which is what I do. If you know, monetary economics, you'll be familiar, for example, with the literature on currency crises or on speculative attacks on picked exchange rates, including successful speculative attacks on gold standards on Gold Exchange standard systems. So I asked my lunch and companions are you familiar with the literature on speculative attacks on

on pegged exchange rates and they responded? What's that? So him and hence my skepticism then which I I retain now, I think this more accurate historical analogy between speculative attacks on currencies and gold standards in the past with stablecoin schemes, today leads you to the conclusion that stablecoin sorry. Either fragile, they're prone to attack and collapse if they're only partially backed or collateralized with actual dollar store or Dollar Bank balances

or their prohibitively expensive to scale up if they are in fact fully or over collateralized, so that brings me to Facebook's private label. Stablecoin known to That's all as Libra. I was skeptical about the viability of Libra. When the original proposal was floated more than a year ago and as I said, a few moments ago, I remain skeptical. Now there is a new Libra white paper 2.0, that was issued back in April of 2020 and it filled in many of the blanks in the original white paper. But I think blanks and ambiguities remain that again

lead me to the conclusion that this scheming is never going to get off the ground. So the Problem with Libra 1.0 was pushed back from Regulators. Financial Regulators around the world who worried about whether it would create Financial stability risks, whether it would undermine the effectiveness of national monetary policies. A few of those concerns have been addressed, others not. But even the ones that have been addressed the way that Libras Architects and fakirs have attempted to, to address those problems. I think raises as many questions

as it answers. So what does a white paper 2.0? Say number one, it replaces the original Libra, which was essentially Peg to a basket of Different National currencies with a set of separate stablecoins, one of which would be pegged 121 to the dollar one of which would be pegged 1212 the Euro one of which would be Peg 121 to the Yen and so forth and so on that does address, the issue of who would ever want to use this thing. Nobody actually wants to do transactions in a basket of currencies. If there were a demand for such a thing,

some clever Investment Bank, JP Morgan or someone like that would have constructed and Market at the basket, long long ago. But there could conceivably be in interest in in in using a stable coin that is widely used by other people and tagged one to one to the dollar among residents of the United States and other people who presently use us. Issued a dollars. So I think that's a small step forward in in, in terms of viability. We're also told that Libra will be fully backed. Its Reserve made up of cash, and short-term Securities

will be held by a network of well-capitalized, custodian Banks and there will be designated dealers who will commit to making markets with tight spreads, and other words, buying and selling Libra, for in our case, in the u.s. actual dollars at a price that barely deviates from 1 to 1 and they will interact. Both with retail customers like you and me and with the Libra Association which will burn and issue the Libra units. So I think that in principle solves the address anyway

that take up problem, other problems, not so much. Previously the white paper, let me let me put it this way. A problem with these single coin units is that they will circulate in the countries who questioned Libra dollars will circulate in the US, but they can also circulate in in other places as well. So, the danger of what monetary Economist refer to as currency substitution, I think it is very real. That people in Argentina will move out of pesos end and into Libre dollars. If The Regulators there, if the Central Bank of Argentina allows them to do so. So you can see where

this is headed face with the danger of loss of monetary control in ability to conduct monetary policy in a bill How to use the resources of the central bank to help Finance the government. When governments do in fact need finans, The Regulators there will try to prevent shifting into a Libra dollars. That's problem. Number one, problem. Number two, I think has to do with the the source and the structure of the backing for Libra male, Libra is supposed to be 100% plus backed,

who's going to going to pay to accumulate all the Dollar Bank, deposits that back. Libra people who Purchase Libre units are going to have to give the Libra Association. A real dollar in return for a dollars worth of Libra but this thing now is going to be more than fully backed more than 100% that somebody is going to have to put up. The residual whatever is over and above that 100% that may be financed by the fees that the Libra Association financing

for its transactions. But as you know, the higher the fees, the less they use. So the fees are going to be kept low and I think that will raise questions about the adequacy of the capital buffer and they're lots of technical details that Financial regular later, this worry about having to do with capital buffers, do they moving a procyclical or countercyclical way? Do they amplify or moderate the business cycle, the financial cycle, the Libra association. Their learning monetary

economics, as fast as they can, but they don't address these issues in their new white paper. I think, because They haven't really absorbed their importance yet. There is the problem that Libra doesn't have a forward market. So the idea at the moment I mentioned it before is there will be these entities called designated dealers, who will be responsible for intervening in the market buying and selling Libra? So that its price doesn't deviate from $1. The problem is that the designated dealers. Think of them as Narrow banks

will only have so many resources. So many actual dollars to use in those stabilizing Arbitrage transactions. If there was a forward Market where you could Say, if the if the price of a Libra US dollar rises above $1, the dealer would be able top sell Libra US Dollars on the stock market for $1 and fight back at the forward price tomorrow. And if the Ford price is exactly $1 as it should be. If this thing is stable and credible than this Arbitrage, this spot Market forward, Market are the cross, will push the price

back to $1 where it belongs. Moreover, if this forward Market existed, other people besides the designated dealers could engage in these profitable stabilizing transactions. So every currency that has successfully tagged or kept stable around some Target level, that's done through operations on the forward market and the Libros haven't figured this out yet finally, I think there is the problem that there is no Libra lender-of-last-resort. The Libra Association talks about smart contracts in Libra dollars and and and so forth. What that means is they

anticipate correctly. I think that an ecosystem of derivatives other types of Securities based on Libra will grow up around that actual token or currency unit. The problem with derivatives markets is that they can be a liquid, everybody can line up on one side of them and things can go wrong financially, and the way actual Currency markets deal with this actual financial markets deal with it is by having a central bank that acts as a security. Buyer of Last Resort in times when liquidity is lacking, as the FED did in the early stages

of the pandemic, when it bought everything that moved that was denominated in dollars. Libra needs a Central Bank in effect if it's going to if the the markets that grow up around, it are going to be stable and National governments are going to be queasy about the creation of a private Facebook owned and operated Central Bank. There is talk hidden in the Libra white paper about instead using Gates. Rather than having a lender of Last Resort, they're just going to prevent you from selling your leave or selling your Libre related, derivative Securities your smart

contract at those times when everybody lines up on one side of the market and who exactly Culebra or who is going to make those decisions that you're not going to be permitted to sell, what you own for actual dollars is not clear either. So there's some very big Uncertainties. I think that would have to be resolved in order for this creation to get off the ground and my conclusion remains. Some of those problems are insoluble. Libra is an interesting idea that will never see the light of day. So

what will see the light of day here? That brings me to the official alternative, which is simple bank. Digital currency a digital unit digital accounts, a digital wallet, a digital token. That would be issued by national central banks. Like the Federal Reserve System or the European Central Bank or the People's Bank of China. A first observation about this would be that the FED already has digital dollars. It already has digital accounts and does digital transactions with

the private sector, but it limits who can open those accounts and who can do those transactions to regulated commercial Banks. So, the cbdc debate is about whether the FED should provide those accounts to other entities weather, for example, it should provide retail accounts to others including two individuals like you and me. So I think the most likely scenario is one in which we all would be allowed to have an individual account with a Federal Reserve

Bank. This idea came up again in the early stages of the pandemic, you may recall The US Treasury had great difficulty in actually getting $1,200 checks to individuals. Not all of whom had a file with the Internal Revenue Service. Not all of whom had a bank account, so how would they figure out how to actually get a check to everybody else? And it took them many weeks in the midst of serious economic and financial distress for them to be able to solve that problem. If we all have an account

at a Federal Reserve Bank, they could have just credited all our accounts with the $1,200 deposit done. So I think this idea is going to come back. I think it's less likely that the FED in particular will move in the in, in the area, in the direction of doing transactions, in digital dollars with e-wallets issuing tokens and But like here to I'm skeptical about whether and how quickly the FED will move in this direction. So the Federal Reserve System, like almost every other Central Bank on the planet is studying the possibility

and what a lot of those central banks are concluding. If you read what they write is that it's possible that there might be modest benefits of moving in that direction of a central bank, digital currency greater convenience and transactions. For some people more financial inclusion or other people who find the fees And conditions attached to private bank accounts, too costly but those modest benefits are dominated by the uncertainties and risks. I think the

fundamental problem from the point of view of the Federal Reserve is that Federal Reserve digital dollar payment system where people were using digital dollars to clear all their payments through federal reserve banks would be a rich Target for hackers and four terrorists. What we have now in the United States, what most countries have is more decentralized, payments, and payment system where we clear our payments through thousands of different banks

using debit cards. They're using our credit cards through the credit card companies using the wrong. Variety of online platforms that you will be familiar with so hackers and terrorists can conceivably take one of those down but there are many others that are still up and running presumably. And that means that a hacker, can't take down the entire us payment system by going after an individual Target. So my conclusion is more likely than not. This this ain't going to happen in the United States. China is where it very much will happen. I think

the People's Bank of China, the Central Bank there is confident about its ability to maintain the security of its Central Bank, digital currency. It's already overseen, the two big online payment systems alley, pay and WeChat pay which now have to run. Their payments through the central bank which therefore has oversight over all those payments, the pboc is planning to roll out its own digital wallet or token maybe as soon as this year will it work? It's not

clear that if folks have the choice of transacting with Ali pay or transacting with the new People's Bank of China system. Now prefer the latter, maybe the pboc can regulate. Ali pay, if not, if this out of business, then maybe out of luck and caused people to shift toward the central bank's system. We will see another question is, whether this kind of thing will work internationally. So one of the advantages of the dollar is that everybody uses it in a wide variety of different countries for cross-border transactions. That's what the Chinese want to do. As

well, encourage cross-border, use using other countries of their currency, the Renminbi and they see the digital Renminbi as a device to that end. I saw a survey and on this observation, I will conclude of merchants in South Korea.