Bumpy road ahead for Libra’s global currency goal as supervision called for

By Liu Ge Source:Global Times Published: 2019/7/3 22:18:40

Illustration: Luo Xuan/GT

Facebook's announcement regarding its global cryptocurrency Libra, to be launched in 2020, has recently sent shockwaves through the world. Regulators in the US and European countries have already said that there would be plenty of scrutiny over the new cryptocurrency.

As a social media platform with a vast user base, WeChat has appeared to be so successful in the payment field that even Facebook founder Mark Zuckerberg seems envious of its business model. The majority of WeChat's 1 billion monthly active users are based in China, with the Chinese yuan the only currency in the WeChat payment feature. After receiving government backing, WeChat payment developed through quick promotion and, together with Alipay, has made China the frontrunner in the global electronic payment field.

Facebook's situation in the US is entirely different. There, the credit card market is highly mature, making it difficult to popularize mobile electronic payment. Globally speaking, Facebook has 2.3 billion users in more than 100 countries and regions, of whom many are from countries outside Europe and the US. In addition to the US dollar and the euro, each of these countries has its own sovereign currency and foreign exchange control policies. Such complications will only make it more difficult for Facebook to introduce mobile electronic payment comparable with WeChat.

Issuing its own cryptocurrency has become an almost inevitable choice for Facebook; it is necessary to achieve free online payments, bypassing the national borders and foreign exchange controls of various countries. This could explain why Facebook is so determined to launch its own cryptocurrency, raising red flags for regulatory authorities in various countries.

When a free flow of information and a free flow of money could not be achieved simultaneously, Zuckerberg attempted to push forward with decentralization by issuing a virtual currency. For any currency in circulation, the stable valuation of the currency can be said to be a basic requirement. Crytocurrencies like Bitcoin, however, are priced differently every day or even every hour, which is more like a speculative target than an equivalent transaction with another currency. Libra differs from established cryptocurrencies in one important way: Libra's value will be pegged to a basket of major currencies to maintain valuation stability. Although it is still unclear what the equivalent of each currency will be, such a form reminds us of the model of the Special Drawing Rights (SDR) by the IMF and various other money funds.

Fundamentally speaking, Libra is still a special token used in a specific online community or business circle. Since it is a token, it is too idealistic to talk about the possibility of Libra replacing fiat currencies.

As a relatively stable cryptocurrency, Libra is not an entirely new thing. Before that, Gemini had already issued the Gemini dollar (GUSD). JP Morgan had also issued the JPM Coin, also a cryptocurrency using blockchain technology, which made quite a splash at the time of its release. Thus far, none of these virtual currencies have led to any big changes in the global payment network.

Regardless of how revolutionary virtual currency is said to be, its success still hinges on its application. For now, the US dollar-denominated system is still unable to meet the needs of blockchain-powered applications. Will Libra, which fiat currencies must be converted to during payment, be more capable of meeting these needs?

Regardless of whether or not virtual currency can replace the current currency system, as long as it is launched as a currency, it has a substitute relationship with fiat currencies and regulatory scrutiny will be an inevitable obstacle. According to Dante Disparte, head of policy and communications for the Libra Association, one of the aims of the cryptocurrency is to provide online business and financial services to the more than 1 billion people that remain unbanked at the lowest cost. This will undoubtedly increase the difficulty for regulatory oversight, meaning that the cryptocurrency is bound to attract more stringent supervision by financial regulatory agencies in various countries once it is launched.

At least under the current circumstances, a "global currency" that is not subject to regulation by various governments is unlikely to be popularized around the world. Looking into the future, assuming that virtual currency is indeed a major trend in the future, then the premise for a globally-recognized "global currency" must be an established supervision system for global payment and liquidation.

The author is a commentator for the CCTV finance channel. bizopinion@globaltimes.com.cn


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