The European Central Bank could be inching toward creating a digital currency for the continent. Attitudes about cryptocurrencies appear to be shifting in Europe — which could have negative repercussions on Libra.
The eurozone’s central bank has been tentatively exploring the possibility of issuing a digital currency for a number of months. A draft proposal was developed by the bank after social media giant Facebook revealed its plans to create the Libra stablecoin. The draft text, as reported by Reuters last week, suggested “The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect.”
ECB-issued digital currency idea gathering steam
Traction appears to have grown at the end of last week as a number of models were proposed. The move comes despite the Financial Stability Board’s recent explicit objection to stablecoins. The board was established by the G20 after the 2008 global financial crisis to strengthen the world’s financial system.
In a mid-October letter addressed to G20 Finance Ministers and Central Bank Governors, the advisory body warned that stablecoins presented a threat to global financial stability “because they have the potential to become systematically important, including through the substitution of domestic currencies.”
The European Union has already replaced domestic currencies in 19 of the 28 member states of the union. The Euro is managed by the ECB and has brought a range of efficiencies to the continent. A move toward the creation of a digital currency could help Europe usher in more efficiencies in the financial system.
The central bank has been considering a centrally issued digital currency since Libra announced its plans, with board member Benoit Coeure calling the announcement a “wake up call”. Last Friday it was revealed those plans were beginning to accelerate, with a proposed digital currency possible as early as next year.
Draghi’s exit could sway Europe toward a digital currency
Mario Draghi vacated his seat as president of the ECB at the end of October. Christine Lagarde took over on Nov. 1. The former Chairman and Managing Director of the International Monetary Fund maintains a guarded acceptance of cryptocurrencies, writing in an IMF blog post that “it would not be wise to dismiss crypto-assets; we must welcome their potential but also recognize their risks.”
Lagarde, at least in her capacity as IMF chief, was more concerned about the problems crypto assets posed for law enforcement, which she considers a “potentially major new vehicle for money laundering and the financing of terrorism.” She also vowed to “fight fire with fire” by using cryptocurrency technology against them in order to “help us remove the “pollution” from the crypto-assets ecosystem.”
While the new ECB president was cautious in her approach to cryptocurrencies, she at least acknowledged them as financial instruments. Lagarde’s predecessor was more dismissive of cryptocurrencies. He did not regard them as a threat to the European economy and considered them risky assets deserving consumer protection scrutiny. He did not see them as legitimate currencies.
Libra poses a different challenge for regulators
But Libra presented European policymakers with a different threat from that of decentralized cryptocurrencies.. A relatively centralized asset with a built-in European user base representing around half of the population could substantially undermine the EU’s ability to use monetary policy as leverage over the economy.
Libra’s potential to scale virtually overnight lent it properties other cryptocurrency projects lack. Facebook could easily make Libra as seamless as the rest of its products. — while user-friendliness is generally considered the Achilles’ Heel of most other cryptocurrency networks.
As Coinbase’s design director Connie Yang argues, “Alongside all the brilliant protocol developers, investors, and entrepreneurs — we need more people thinking about guidance, education, and use cases — people who can make technical ideas accessible to all.”
Libra faces the strong possibility of a Europe-wide ban on its use. Given the social media site is blocked in China, almost two out of seven people in the world would be Libra-excluded. And it faces an uphill battle in the U.S. if Congress’ apprehensions materialize into legislative action.
At the Oct. 23 House of Representatives Committee on Financial Services hearing, Zuckerberg himself conceded “I actually don’t know if Libra is going to work.”
It was ultimately the threat of a cryptocurrency initiated by a powerful American corporation that appears to have sparked the ECB into action. Whether they proceed to introduce a digital currency for the Eurozone or wider European community remains to be seen. But Facebook’s decision to launch a cryptocurrency of its own has sparked the ECB into action to both prevent Libra going ahead and consider substituting it with a public equivalent.