Facebook’s Libra could ‘damage’ the yuan if China’s currency is not convertible, says central bank
- People’s Bank of China (PBOC) breaks silence on Facebook’s Libra, says that it will not be sustainable without the support of central banks
- A PBOC official said Libra could ‘spark depreciation in domestic currencies and worsen the financial situation of the poor’
Facebook’s push to create its own cryptocurrency, called Libra, must be put under the oversight of monetary authorities, according to a senior official from China’s central bank.
As a convertible cryptocurrency asset or a type of stablecoin, Libra can flow freely across borders, and it “will not be sustainable without the support and supervision of central banks”, Mu Changchun, deputy director of the People’s Bank of China (PBOC)’s payments department, wrote in comments provided to Bloomberg.
Digital currencies can be used for lending, could disrupt monetary policy, and may induce foreign exchange risks in economies with a volatile local currency, Mu said. In addition, Facebook has not made clear its commitment to anti-money-laundering and anti-terrorist financing responsibilities, as well as how it will protect the privacy of its users, Mu wrote.
Caixin published similar comments on Libra from Mu this weekend.
“In the longer term, the yuan will be damaged by Libra if it’s not convertible,” Mu told Bloomberg. Making the yuan freely exchangeable would deal with that risk, he said.
The central bank is organising market-oriented institutions to jointly research and develop a central bank digital currency, and the programme has been approved by the State Council, Wang Xin, director of the PBOC Research Bureau, told a seminar at Peking University on Monday.
“From the government’s perspective, we pay more attention to its influence on financial services, monetary policy and financial stability,” Wang said, according to a report in the China Daily.
The California-based tech giant’s announcement last month of its plans to issue a digital currency prompted global central banks including the European Central Bank and the Bank of England to voice concerns. Though Facebook itself is not generally accessible in China, the PBOC is also signalling that it is worried by issuing a public response.
Mu said the central bank’s research team tested Libra’s code and found it’s “still in an initial stage and the quality of the code isn’t stable.” He also said it’s questionable whether Libra would indeed use blockchain technology, because it cannot meet the high concurrent transaction requirements necessary for retail sales scenarios.
The PBOC has been working on developing its own digital legal tender, but has not announced a time table for issuing any such currency.
Here’s a detailed list of Mu’s views on Libra:
Foreign exchange risks
When Libra is used in developing economies where the local currency is volatile, the public will have an incentive to exchange large amounts of local currency into Libra, sparking depreciation in domestic currencies and worsening the financial situation of the poor.
The International Monetary Fund or other international organisations will have to monitor the issuance of Libra and oversee the exchange rate mechanism among the various currencies in Libra’s basket. Otherwise, countries will engage in competitive easing to exchange more Libra.
Monetary policy
When Libra is widely used in payments, transactions will be priced in Libra, and financial products, such as credit sales and consumer loans, could be granted in Libra too. Libra therefore enters the credit market, creates derivative deposits denominated in Libra and generates a money multiplier.
In that case, the reserves that back up Libra’s original equivalent purchase of fiat currencies will not be enough to secure the value of all the Libra created, and it will not be enough to keep the Libra stable. Central banks should be involved in the process to carefully evaluate and control the money multiplier and decide how many reserves are needed.
“Know your customer”
Libra expects its users and taking part institutions to observe existing “know your customer” rules and anti-money-laundering or anti-terrorist financing regulations, but it had offered little information on its own responsibilities on these issues.
Libra’s users overlap with those of Facebook or WhatsApp, and Facebook’s new subsidiary Calibra would possibly know the real identity of these users.
Blockchain, or not
Whether Libra will use authentic blockchain technology is questioned by many. Its announced goal of supporting 1,000 transactions per second cannot meet the high concurrent requirements in the retail payment market. The transaction peak of China’s NetsUnion Clearing Corp is 92,771 transactions per second.
Libra will highly likely adopt a mixed technical path by combing centralised distributed architecture and blockchain technology.
