Stablecoins and Soft Power

The Libra Association has rebranded as the Diem Association and plans to launch its first digital currency, a USD dollar “stablecoin", early this year so it’s time to think again about the implications of stablecoins. But first of all… here’s wishing you Happy Holidays and all the best for 2021 from all at 15Mb Ltd!

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

You'll remember Libra, the global currency proposed by Facebook. It met with some pretty negative reactions from central banks, regulators and many other stakeholders. Visa, MasterCard and PayPal dropped out of the initial group of Libra Network members and things went a bit quiet. Then the Libra Association produced a revised version of their White Paper, adding "stablecoins" in national currencies to the original plan for a single Libra currency based on a basket of currencies and making an interesting offer from the consortium to the world's central banks. It says that the consortium hopes that "as central banks develop central bank digital currencies (CBDCs), these CBDCs could be directly integrated with the Libra network, removing the need for Libra Networks to manage the associated Reserves". There's no need to waste resources of your own on CBDC, Diem is telling central bankers. If a couple of billion people around the world are going to store digital currency in Facebook, Instagram and WhatsApp wallets, then why build an alternative? Use us. You set the policies on inclusion and so on, we’ll do the heavy lifting. [bctt tweet="You can be the NASA of money, Diem is telling the Fed, and we'll be the Space-X." username=""] The Bank of England’s December 2020 Financial Stability Report devotes a section to stablecoins and says the bank is considering the potential effects on financial stability if stablecoins were to be adopted widely. It notes that if stablecoins were backed with central bank money in one form or another it would be "economically similar" to a CBDC. A member of the European Central Bank (ECB) board, Fabio Panetta, referred to this issue of at a recent Bundesbank-convened event about the future of payments noting that allowing something like Diem would be "tantamount to outsourcing the provision of central bank money". But why is that such a bad idea? After all, as Simon Lelieveldt pointed out to me, while we might assume that the ECB would be the issuer of an electronic euro it is not currently in their mandate. The truth is that stablecoins are coming. Whether provided by private companies or as a public good, the DC/EP cat is out of the bag, the USDC genie is out of the bottle, the Libra horse has bolted and the question for the world’s central banks is not whether there should be digital currencies or not but what is the best way to deliver them. In which context, outsourcing is a viable option. Recall the Mondex experiment of the 1990s: it was the Bank of England that controlled the issuing of the digital currency, but the Mondex system itself and the Mondex cards issued to consumers were provided by commercial banks. Personally, I can see the attraction of using such an outsourced stablecoin such as Diem. The ability for me to send money to a cousin in Australia by sending a few Facebucks directly from my Facebook Novi wallet to her Instagram Novi wallet would be useful and convenient. The ability for me to buy shareware from a Swedish software developer and pay instantly by transferring Facebucks by WhatsApp would stimulate trade and the economy. Joking aside, with a good user interface, a good customer experience and a good API to satisfy regulators, Novi and Diem together could indeed provide a viable global alternative to SWIFT.

Dollars and Dominance

Perhaps more importantly, though, US dollar stablecoins — whether provided by central banks themselves as in China, by banks or mobile operators, or by other organisations such as the Diem Assocation — would also reinforce the global dominance of the US dollar ahead of digital competitors (including everyone’s favourite unstablecoin, Bitcoin) in the post-pandemic world where online transactions are the new normal. The German Minister of Finance calls Diem “a wolf in sheep’s clothing”. If you look at it though, what Diem propose to do is basically that same as is already allowed under European electronic money regulation. Provided that Diem segregate the customer deposits and hold them in the form of bank deposits and other appropriate asset classes, then issuing a digital dollar (or euro or or pound) is no big deal. What the Minister and others are presumably concerned about is the loss of monetary sovereignty if European citizens opt to shift their cash holdings from euros to dollars whether intermediated by Diem, Circle or anyone else. If you want to understand some of the bigger picture around currencies, competition and what the eminent historian and Hoover Institution senior fellow Niall Ferguson refers to as "Cold War 2", then you should take the time to listen to this conversation between Ferguson and CoinDesk's Michael Casey. As the author of one of the best books on the history of finance, The Ascent of Money, Ferguson has a very wide and well-informed perspective on the issues and I have quoted him more than once in my book on the topic. In this conversation, Ferguson observes that one of the lessons of history is that with globalisation comes a tendency for a particular currency to become the dominant currency, the Prime Currency, for transactions for trade. In the 19th century it was the British Pound, in the 20th century it became the US Dollar, and in the 21st century it will be… well, who knows but as globalisation moves into a period of obvious crisis it is being talked about as it wasn't before. Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, recently wrote in the Financial Times that only five currencies had been top dog in post-medieval times: those of Portugal, Spain, the Netherlands, France and our United Kingdom. Those reigns lasted 94 years on average, by which measure the Dollar is overdue for overthrow.

Public or Private? Local or Global?

Many people think that the only thing keeping the Dollar in place is the lack of a successor. Ferguson points toward China as the place where the new world may be forged, saying that "if I'm right and that trend continues and they become more dominant in not just domestic consumer payments in China but increasingly in payments around the world" then we may start to see a shift in the "tectonic plates of the international monetary system" and I couldn't agree more. Ferguson also refers to former Bank of England governor Mark Carney's call for a synthetic hegemonic currency (SHC), which he rates as more plausible than Diem as the future of the international financial system. It would be a victory for John Maynard Keynes from beyond the grave. Keynes, as you will recall, was in favour of an SHC (the "bancor") from the very beginning of the current international monetary regime and (correctly) reasoned at the time of Bretton Woods that the lack of such an international reserve currency would deliver control to the United States (at the expense of the United Kingdom). In Ed Conway’s excellent book on Bretton Woods “The Summit” he talks about how the dollar becoming top dog gave America what the recently-deceased former French President Valery Giscard d’Estaing called the "exorbitant privilege" of borrowing in its own currency. But finance is not the only reason why the coming currency Cold War is of vital importance to the US (and to the West as whole) and control over currency is important. Currency competition is about politics, because the use of the dollar to settle global transactions gives the US unparalleled lever of "soft power". As Ferguson puts it, "I think we probably mostly underestimate how extraordinarily effective this lever has been, it's actually been a much more effective weapon of US foreign policy than the boots on the ground of the U.S. Army and Marine Corps". Hence a digital dollar (whether a NASA Digital Dollar or a Space-X Facebuck) should be an important policy discussion in the United States right now. Should a future US administration with a global perspective accept the compromise of an SHC as a means to retain some control or can they launch a digital dollar into global orbit first? [An edited version of this piece first appeared on Forbes, 14th December 2020.]