Libra’s shockwave to central bankers: Germany edition

Interview of Jens Weidmann of Bundesbank.

Mr Weidmann, Facebook sent shockwaves through the financial community with its plans for Libra, the group’s own digital currency.
You’re right to call them “shock waves”. But I would hesitate to dub Libra a currency. Facebook is looking to roll out a new digital payment medium pegged to a basket made up of multiple currencies like the euro and the US dollar. This exposes users to exchange rate risk, however. We’ve got a stable currency – the euro – with a proven track record over the past decades.

So there’s no potential for Libra?
I see greater potential in countries with weak official currencies and underdeveloped payment infrastructures, such as a number of emerging market economies.

Why, then, has Facebook’s announcement made such waves?
Payments is an area where network effects and scale can be decisive. Facebook has more than two billion possible users. This clout would give Libra the potential to become a dominant market player from the outset.

Do you think the European Central Bank needs to push back with a digital currency of its own?
I’m not a fan of always calling on the government to intervene. In a market economy, firms should be the first to come up with the right products and services to satisfy customer needs, Competition is what spurs market players into action. For example, the prospect of new rivals arriving on the scene was one reason for the banking industry’s campaign to offer an improved pan-European payment system.

Christine Lagarde, the new ECB President, says that central banks need to be ahead of the curve, not behind it.
First and foremost, it is a question of understanding the pros and cons of central bank digital currency. Then, it can be decided whether central bank digital currency is needed and the risks can be kept in check.

How is Germany reacting to all this?

And yet for all that, the Bundesbank itself is also experimenting with a digital currency.
That concerns payment transactions between the Bundesbank and credit institutions. What we are trialling here is a blockchain-driven solution to complement our existing centralised account-based solution.

And is that working well?
In our specific context with a small number of trusted counterparties, our initial finding is that blockchain is no more efficient than centralised settlement. It does, however, allow automatic functions to be integrated for smart contracts. For example, the transfer of a security would simultaneously trigger a payment.

With reluctance so widespread in Europe, isn’t there a danger of being left behind? China has already responded to Libra by announcing plans to create a central bank digital currency of its own.
China might be quicker off the mark, but then again it has a different political system. It’s a country where the state has abundant powers which would not be to the liking of many of us. My view is that a social market economy in a liberal society will ultim..

The last words are missing..Perhaps it is “will ultimately prevail/win”..

 

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