HENRY CHAN
Super currency, backed by assets, currency pools, corporations, crypto V2.0 with muscle The announcement on June 18 by Facebook to launch a blockchain digital currency, Libra, in 2020 has opened the Pandora’s box on the current digital currency challenges to different national currencies.
In contrast to the hands-off attitude on Bitcoin and other cryptocurrencies, the response of the US government and regulators was swift.By early July, the US Congress has asked Facebook to pause development on the Libra cryptocurrency until it has more time to investigate the ramifications of the company’s initiative.And in July, there was a growing chorus of US and European officials voicing resistance to the tech giant operating its own digital money, with the Trump administration emphatically raising national security concerns on Libra.
In the quarterly update filed with the Securities and Exchange Commission at the end of July, Facebook acknowledged that “market acceptance of such currency is subject to significant uncertainty,” and the Libra cryptocurrency may not happen after all.Given the fierce regulatory pushback, at least three of the original 28 members of the Libra project were to force to consider withdrawing from their participation, according to a report from the Financial Times on August 23.In response to the public pressure, Facebook stepped up the lobbying in Washington, and there is no sign that the company has stopped the digital currency development.
The Libra
Libra is a digital currency proposed by Facebook.The project, money and transactions are to be managed and cryptographically entrusted to the 28 member Libra associations led by Facebook.Each member will inject an initial $10 million, and Facebook will keep the leadership role in developing and managing the technology behind the digital currency.
Libra keeps a stable coin digital currency structure, and it is 100-percent backed by assets, such as a pool of cash, traditional money deposits and very short-term government securities denominated by the currencies in the designated reserve basket.German weekly magazine Der Spiegel, reported on September 20 that in a letter responding to a question from German legislator Fabio De Masi, Facebook said the US dollar would make up 50 percent of the currency reserve basket; Euro, 18 percent; Yen, 14 percent; the British pound, 11 percent; and the Singapore dollar, 7 percent.
The Libra association will create new Libra currency units based on demand.
Libra currency units can be redeemed fully for their constituent currencies.In contrast to other cryptocurrencies that are decentralized and do not have a final entry of ownership, Libra will rely on trust in the Libra Association as “a de facto central bank.” The structure of Libra allows it to minimize some of the price volatility, money laundering, tax evasion and terrorist financing challenges besetting many existing digital currencies.
The head of the Libra project at Facebook, David Marcus, aptly described Libra as a “reserve-backed digital currency.”
The challenge to PH peso
If Libra will overcome the challenges posed by the US and Europe and launch in 2020, it will pose significant challenges to many Southeast Asian currencies sometime in the future, foremost of which is the risk of good money to drive out bad money — the so-called Thiers’ Law in economics.The Indonesia rupiah, Philippine peso , Viet dong, and Thai baht are likely to be the most affected, given their history of depreciation and huge existing Facebook user base.
Libra’s currency board arrangement with 100-percent reserve backing means that it can become one of the most stable non-reserved currencies in the world.Taking into example the two most stable non-reserved Asian currencies, the Singapore dollar and Hong Kong dollar, their domestic liquidity or M3 to foreign exchange reserve ratio runs at over 45 percent.
For non-reserve currency, the relationship between foreign exchange reserves and currency stability is straightforward and historically tested in all instances.With 100-percent reserve backing behind Libra, the digital creation of Facebook can make it one of the most stable currencies, and it can draw away users from the perceived weaker currencies in the Southeast Asian region.
The existing user base of Facebook around the world and in Southeast Asia will facilitate the circulation of Libra if ever it is allowed to enter the market.
As of June 2019, there are 2.4 billion monthly active users of Facebook, with an estimated 1.7 billion who do not enjoy affordable payment service.An estimated 1.6 billion people on average log onto Facebook daily.Some 30 percent of Facebook users are aged 25 to 34, and they are technically savvy with money to dip into Libra.
Besides, Facebook estimated that 2.7 billion people use Facebook, WhatsApp, Instagram or Messenger each month and on average, more than 2.1 billion people use at least one of the Facebook family of services every day.The potential market of Libra is mind-boggling under the market reach of Facebook.
Southeast Asia countries are active Facebook users, and the service has a penetration rate of more than 70 percent among internet users in major Association of Southeast Asian Nation economies (higher than the 62 percent in the US).Indonesia, Philippines, Vietnam and Thailand have 130 million, 70 million, 59 million and 50 million active Facebook users at the end of second-quarter 2018, respectively, and are counted among the top 10 user-countries in the world.
The user base of Facebook and the currency board arrangement mean that many savers in Southeast Asia might opt for the digital currency as the preferred means to store value because of their past depreciation experience.They will also opt to use Libra in some transactions because the transaction cost in the digital currency is expected to be much lower than that of the national currency.
Moving away from national currency will pose a serious challenge to the economic regulating power of the monetary and fiscal authority of each country.
A wake-up call
Singapore is the only Southeast Asian country known to be closely watching the developments in digital currency.
The potential disruption raised by Libra can serve as a wake-up call for decision-makers around the region to look at the relationship between technology and monetary policy — they are more closely linked now and relations are more complicated than ever.
The improvement of telecommunication infrastructure in Southeast Asia following the adoption of 5G means an accelerating intrusion of digital technology into financial services in the next few years.How the central banks of each country will handle the challenges and the use of the nascent financial technology, in order to improve the operations of their financial system and to avoid any potential disruption to the system merit a step-up effort to study the emerging issues.A smooth transition to the new technology platform in running the financial system will test the capabilities of all governments in the region.
Dr.
Henry Chan is an internationally recognized development economist based in Singapore.He is also a senior visiting research fellow at the Cambodia Institute for Cooperation and Peace and adjunct research fellow at the Integrated Development Studies Institute (IDSI).His primary research interest includes global economic development, Asean-China relations and the Fourth Industrial Revolution.
New Worlds by think-tank IDSI works with a global network of institutions studying innovations and events to propose integrated, implementable frameworks.It is non-profit, not politically aligned, emphasizing rigor and practicality ([email protected]).OTHER Op-Ed Columns.
