Hoping Europeans will not be tempted by “treacherous promises of Facebook’s siren call” of Libra..

One of the hardest hitting speeches on Libra by Yves Mersch of the European Central Bank.

He starts quoting Madison:

In 1787, during the debates on adopting the US Constitution, James Madison stated that “[t]he circulation of confidence is better than the circulation of money”. It’s telling that Madison chose to use public trust in money as the yardstick for trust in public institutions – money and trust are as inextricably intertwined as money and the state. Money is an “indispensable social convention” that can only work if the public trusts in its stability and acceptability and, no less importantly, if the public has confidence in the resolve of its issuing authorities to stand behind it, in bad times as well as in good.

Madison’s 18th century remark on the link between money and trust has lost none of its relevance in the 21st century. The issue of trust in money has resurfaced in the public debate on privately issued, stateless currencies, such as bitcoin, and their promise to serve as reliable substitutes for public money. Today’s conference is neither the place nor the time for me to repeat my past statements on the shortcomings of cryptocurrencies[1] and why they do not fulfil the basic tests of what constitutes “money”.

Instead, I will today talk about Libra, Facebook’s newly announced private currency. It is scheduled for release in the first half of 2020 by the very same people who had to explain themselves in front of legislators in the United States and the European Union on the threats to our democracies resulting from their handling of personal data on their social media platform.

He says there are 3 qs:

There are three key questions here. First, how does Libra differ from other private currencies and from public money? Second, what legal and regulatory challenges does it pose? And third, in the light of its mandate, what position should a central bank like the ECB take towards Libra?

The remainder of my speech will be dedicated to these three questions, not with a view to conclusively answering them, but merely to raise awareness of some of the risks of Libra, to question its main premises and, in the process, to highlight the perils of entrusting the smooth processing of payments, the savings of citizens and the stability of the global monetary and financial systems to unaccountable private entities with a questionable track record in matters of trust.

He thrashes Libra on all premises barring the innovations in brings towards payments. But that is something which ECB and other central banks can do without Libra:

In the context of the smooth operation of payment systems, the ECB takes a close interest in market innovations that seek to replace the euro with alternative settlement currencies or create new and autonomous payment channels. Although some of Libra’s aims are legitimate, reductions in cross-border fund transfer costs and other efficiency gains can also be obtained through established instant payment solutions. The Eurosystem recently launched the TARGET Instant Payment Settlement service, or TIPS – a pan-European, 24/7 settlement service for instant payments. By operating in central bank money, and by being embedded in TARGET2, TIPS provides a high-performance payment solution that is safer and more economical than questionable, market-based retail payment innovations.

At the end, he says money and state sovereignty are linked to each other. He obviously ignores the history of free banking where stateless money did exist and ran successfully too in places like Canada. He calls Facebook’s promises as treacherous which is a very strong criticism:

In the field of money, history bears testament to two basic truths. The first is that, because money is a public good, money and state sovereignty are inexorably linked. So the notion of stateless money is an aberration with no solid foundation in human experience. The second truth is that money can only inspire trust and fulfil its key socioeconomic functions if it is backed by an independent but accountable public institution which itself enjoys public trust and is not faced with the inevitable conflicts of interest of private institutions.

Of the various forms that money has taken throughout history, those that have best fulfilled their purpose and proven the most credible have invariably benefited from strong institutional backing. This backing guarantees that they are reliably available, that their value is stable and that they are widely accepted. Only an independent central bank with a strong mandate can provide the institutional backing necessary to issue reliable forms of money and rigorously preserve public trust in them. So private currencies have little or no prospect of establishing themselves as viable alternatives to centrally issued money that is accepted as legal tender.

The stance of central banks towards modern forms of money is bound to evolve with time, and central bankers have embraced technological developments in the field of money and will continue to explore helpful new innovations. But the rise of cryptocurrencies and other forms of privately issued instruments that can only fulfil some, but not all, of the functions of money is unlikely to fundamentally upset the two truths I just described. If anything, it will serve as a useful reminder of central banks’ pivotal role as responsible stewards of public trust in money, and stress the need for vigilance towards phenomena capable of undermining public trust in the financial system.

I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favour of the beguiling but treacherous promises of Facebook’s siren call.

Hmm..Central bankers hitting hard at cryptos not really reflecting on their own track record of money management…

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One Response to “Hoping Europeans will not be tempted by “treacherous promises of Facebook’s siren call” of Libra..”

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