Differences between Euro and Libra: Good way to think about digital money..

Just a few days back, ECB member Yves Mersch criticised Libra vehemently asking Europeans to reject the treacherous sirens of Facebook’s Libra currency.

After a few days,. another ECB member Benoît Cœuré in another speech is more hopeful of benefits of Libra.

Price stability remains, and will remain, a precondition for a currency to gain widespread use, whether digital or not. For this reason, central banks worldwide have adopted price stability as their primary mandate. And this is why unstable crypto-assets, such as bitcoin, whose price in fiat currencies is highly volatile, will never be able to serve as a reliable means of payment. “Stablecoins”, if they meet their promise of stability, are the natural next step in the evolution of digital assets.

This was already understood nearly 50 years ago when Friedrich Hayek proposed abolishing the government monopoly on money issuance, arguing that competitive forces would exert disciplinary effects on issuers and incentivise them to provide stable money.[26] Ultimately, the currency with the lowest inflation rate would crowd out its competitors.

Next to stability, other factors are likely to play a growing role in the digital age. Convenience is a prime candidate.

Consider the euro area. Despite the creation of the single currency 20 years ago, cross-border e-commerce in the euro area has not taken off. Home bias remains strong. Only one-third of European e-shoppers make purchases from sellers in other EU countries.[27] And around 40% of European websites do not sell to consumers based in other member states, while almost 80% of online sales are domestic.[28]

Put differently, it is probably easier to connect a new currency to an existing network – the case of Libra – than to build a new network on an existing currency – the case of the euro. Few retailers have seen the introduction of the euro as an opportunity to build a pan-European network around it. With or without the euro, the single market for services remains incomplete.

Global “stablecoin” initiatives could work in reverse. They could turn the nature of payments on its head. WhatsApp, for example, is a messaging service. Adding a payment leg that enables direct transfers of money between registered users will not change the nature of its business. But it will provide a platform to turn a means of payment into a global currency. This is the exact opposite of what theoretical models of global currency use would predict. According to these models, payments lead and other uses follow.

Hmm. This bit is interesting. As per Cœuré, there were already existing currencies in Europe and Euro was a new network on these existing currencies. Libra on the other hand is a new currency on an existing network as it derives its values from a basket of existing currencies. Same for whatsapp as well which could use its existing network to create a new currency.

He then discusses privacy:

A second, and related, new driver of international currency use in the digital age relates to privacy.

Historically, privacy was not an issue. Anonymity is one of the salient features of paper money.[29] Private digital currencies that run through a distributed ledger have arguably restored anonymity in the virtual world, making them prone to being used to finance illegal activities, such as tax evasion or terrorism.[30]

To pass the test of faith, therefore, any “stablecoin” initiative will have to conform to international anti-money laundering and know-your-customer regulations.[31]

But assuming they do comply with the applicable regulations, “stablecoins” could differentiate themselves according to how much personal data they collect and process. Some could use or sell customer data, whereas others may give priority to protecting the privacy of their customers.

It is hard to tell just how much the privacy dimension will affect international currency use. But the effects could also work in reverse. There are significant differences across countries in terms of how much consumers value the privacy of their data. In Europe, individuals’ control over their personal data has been protected by an EU regulation – the General Data Protection Regulation, or GDPR – since May 2018.[32] Any private initiative operating in the EU will have to comply with this regulation.

Interesting to have such different viewpoints within ECB. This is how it should be…

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