Gu Yanxi: European finance ministers should not completely ban Libra

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European finance ministers believe that stable currencies like Libra cannot be allowed to circulate in the euro zone before the central bank has thought about it.

Original title: “Europe’s finance ministers should perhaps consider the strategy to deal with Libra from another angle”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry

On August 19, the finance ministers of the five European countries issued a joint statement. In this statement, they suggested that stablecoins should not be allowed to be issued in the Eurozone before relevant European laws, regulations and regulatory agencies are established. If a digital stablecoin needs to be issued in the euro area, it must be registered in the euro area and obtain regulatory approval. The Minister of Finance of France directly stated that European digital currencies can only be issued by European central banks, and this power should not be weakened or destroyed by any projects including the so-called Libra project. Although no specific stablecoin projects are mentioned in this joint statement, it is clear that these views are aimed at the Libra stablecoin.

European finance ministers are right to worry about the Libra stablecoin. If the Libra Association is allowed to issue Libra euro stablecoins in the euro area on a one-to-one basis with the euro, then Libra will definitely affect the circulation and use of the euro in the market and have an impact on financial institutions.

First of all, if various applications in the Libra ecosystem are welcomed by users, then users must exchange their euros into Libra euro stablecoins for use in various applications in the Libra ecosystem. One consequence of this is that the euro will definitely flow from commercial banks to the Libra ecosystem. Deposits in commercial banks will be greatly reduced, and their lending capacity will also be affected. The European Central Bank’s ability to influence economic activities through monetary policy will therefore also be affected.

Secondly, because the applications in the Libra ecosystem are available anywhere in the world, and the members of the Libra Association are also global, the flow of stablecoins in the Libra ecosystem is also global. And a digital asset exchange will surely appear in the Libra ecosystem soon, providing exchange services between different Libra stable coins and digital asset trading services. Therefore, in the Libra ecosystem, stablecoins will easily flow around the world. When a certain Libra stablecoin becomes more and more influential, it will attract other stablecoins to flow to it. Similarly, when the influence of a Libra stablecoin weakens, it will be exchanged for other stablecoins. The stablecoins in the Libra ecosystem compete on a very equal and efficient basis. For the European Central Bank, the Libra Euro stable currency is therefore likely to be a double-edged sword. Therefore, the rejection of Libra by the European finance ministers can be understood before they are sure.

The European Central Bank is also considering the issuance of CBDC. But this process will not be a fast process. The power of digital stablecoins circulating globally, represented by Libra in the market, is developing rapidly. Therefore, the European Central Bank certainly does not want stablecoins to circulate in its own jurisdiction before its CBDC is issued and circulated, which may have a possible negative impact on the euro. However, if stable currencies such as Libra develop at a relatively fast rate worldwide, and Europe has been insisting on prohibiting Libra from being issued in the euro area, then one of the most likely development results is the influence of the euro in global financial and economic activities. It is getting smaller and smaller, and there will be more and more transaction settlement activities in the form of Libra stablecoin or other digital currencies. And this situation will certainly not be what European finance ministers want to see.

The essence of Libra is the development of blockchain technology and various innovations based on it. The development trend of technology is irreversible. When the market discovers that a new technology can be used for more innovation, the trend will definitely continue. Among the various innovations brought about by blockchain technology, the market has discovered that the free flow of assets and currencies on a global scale can be realized based on the support of blockchain technology. Such a development trend was first spontaneously generated in the market, and now it has begun to be carried out in a compliance manner in some jurisdictions. For example, using digital tokens to represent real estate for cross-border movement. Digital stablecoins based on fiat currencies have also appeared and began to circulate. Libra is just a specific application of this development trend. Therefore, the strategy adopted by the EU finance ministers in this regard is actually to respond to changes in the development of blockchain technology, rather than just targeting a specific project.

I believe the EU finance ministers also have a clear understanding of the above. But the coping strategies they adopted do stand on the opposite side of this trend. Their basic view is that stablecoins like Libra cannot be allowed to circulate in the euro zone before our central bank has thought clearly. From the perspective of the European Central Bank, in order to maintain the stability of the European financial market, their basic position in this regard is not problematic. However, the response strategy adopted may not be the best. Since digital currency is still in a very early stage of development, it is impossible to make accurate predictions about its impact in all aspects. This is what worries European finance ministers. However, if there is no specific practice in the market, it is impossible to formulate corresponding and reasonable regulatory policies and response strategies. Therefore, for European finance ministers, they should still adjust their strategies to allow digital stablecoins like Libra to operate within a controllable range. In this way, we can have a more accurate understanding of the impact of digital stablecoins on the currency market, and also help them develop a Euro CBC that can better meet market needs.

In the US market, there are also plans to promote the development of USD CBDC. One of these views is to suggest that the U.S. Central Bank and the private sector adopt a cooperative approach. The Chairman of the Federal Reserve is not interested in this. He believes that the USD CBDC is a matter for the US Central Bank. But at least in terms of technology, the Fed is indeed working with the private sector to evaluate various possible technologies. In terms of currency circulation, the Federal Reserve actually cooperates with private commercial banks to issue U.S. dollars. So in the current monetary system, the Fed is actually already cooperating with private institutions. Since they are all private institutions, is there a fundamental difference between commercial banks and large technology companies for the Fed or the European Central Bank? Judging from the trends brought about by the development of technology applications, technology companies have advantages in realizing the monetary policy of the central bank in some respects than commercial banks. Therefore, European finance ministers should probably consider how to better cooperate with technology companies, rather than rejecting them as opposites.