May 26, 2020
In Octobre 2019, the G7 group of richest countries said “stablecoins” should not be allowed to launch until the profound international risks they pose are addressed. Because of these drawbacks by governments and regulators, David Marcus (CEO of the Facebook-born Calibra Association) then offered a new twist to the Libra project, by suggesting that its final goal is to make the current payments system more agile.
Even if the original plan to achieve such goal was to use its own stablecoin backed by a portfolio of ‘stable’ currencies, Marcus said the initiative is open to other considerations by governments and regulators, like launching a multitude of stablecoins that represent national currencies in a tokenized digital form: a “dollar stablecoin”, a “euro stablecoin” etc. This way, Marcus was trying to shy away the governments’ and regulators’ fears of a highly fluctuating — pretty much like when the exchange rate of the IMF’s Special Drawing Rights with the USD fluctuated by up to 20% in 2015 — and uncontrollable digital currency.
However, the real issue was the lack of control over these stablecoins. So, shortly after, at the beginning of 2020, the Libra Association announced that it had abandoned its key proposal to create an un-regulated, decentralised digital coin backed by a basket of fiat currencies. Instead, the digital coins that Facebook would now seemingly launch would each be pegged one-to-one to a different physical currency. This way, it would be each central bank that would control its own stablecoin.
The initiative had an interesting backer: the previous Greek Minister of Finance Yanis Varoufakis, who proposed that the IMF takes over Libra as a digital token to “reduce global trade imbalances and rebalance financial flows” and “help the IMF fulfill its original purpose” by turning the IMF into “a global sovereign wealth fund” for transnational currency exchanges using a blockchain-operated digital coin that fluctuates freely with each national currency.
Despite those pivots and backings, Libra failed to gather the support of the incumbent governments and regulators, dominated by the U.S. and its global payment system.
Because relinquishing control of stablecoins to central banks was still not enough to bring enthusiasm to the minds of the regulators, and the company diminished its initially ambitious initiative by suggesting the creation of one ‘composite’ digital coin to be used in transactions: a Facebook version of PayPal based on Whatsapp, a plan that was behind of Facebook's minority investment on Reliance Jio in India.
In parallel, we happened to know earlier in 2020 that China’s Central Bank has been testing its own digital currency, the DCEP (Digital Currency/Electronic Payment), with four national banks on top of payments and e-commerce giants Ant Financial and Tencent. The digital currency would be paired 1:1 to the official Renminbi. Contrary to Facebook’s Libra, the new DCEP will be centrally governed and controlled by China’s authorities. DCEP is a centralized, sovereign issued currency (it is the Central bank of China that has the ability to create or destroy DCEP). It is not possible to mine DCEP or stake on the DCEP network. Meaning: the DCEP is not for speculation.
While Calibra would have to convince each western country central bank and regulator to use its transactional coin, the Chinese government is already paying its civil servants their transport subsidy via the new currency. And has mandated that all merchants who accept digital payments (such as Apple Pay, AliPay and WeChat) pay must also accept DCEP, or face a potential loss of their business license. Mobile payments such as Alipay or WeChat Pay have more than 1.7 billion customers across China. Currently, the two companies handle more payments monthly than Paypal did in the whole of 2017: USD 451 billion. The governor of the People’s Bank of China allegedly said that China is seeking to have a sovereign digital currency in time for the Winter Olympics in 2022.
Such control and endorsement gives DCEP access to a potential market composed by 1.39 billion Chinese citizens, plus 1.95 billion in its Belt and Road Initiative: 796.4 million in southeast Asia, 455.8 million in South Asia, 438.45 million in west Asia and north Africa, 117.78 million in central and eastern Europe, 72.51 million in Central Asia, and 71.7 million in other six states of the CIS. That's 3.35 billion people in total. According to statistics from the World Bank, 1.7 billion adults around the world use cash because they don’t have bank accounts. However, two-thirds of this population own a mobile phone, which can be used to make monetary transactions. The idea is that with DCEP being used by mobile wallets, populations along the Belt and Road can be connected, bypassing existing financial infrastructures completely and giving an opportunity for the unbanked to pay for online purchases and build their savings ... in Renminbi.
With DCEP, the China International Economic Exchange Center can better monitor digital currency transactions, supposedly allowing it to be a powerful tool against illicit payments, money laundering and frauds. This may be so but, through a generalised enforcement in international trade within the Belt and Road Initiative, it would also allow China to bypass the international SWIFT worldwide interbank financial network transactional system (in 2018, around half all high-value cross-border payments worldwide used the SWIFT network), internationalising the renminbi. Although SWIFT is headquartered in Europe (in Brussels, specifically), the U.S. has repeatedly had access to financial transactions even between EU countries. SWIFT was even used as part of the U.S. sanctions against Iran in 2012. DCEP would allow China — and its allies — to bypass possible sanctions by the U.S..
DCEP benefits of a regulatory endorsement that would not only put China in the forefront of digital payments, it would also position the Renmimbi as a global currency, and would challenge the U.S.'s and the E.U.'s capacity to enforce international sanctions. Certainly as the dollar is losing international weight over other currencies, including the Renmimbi, in a global environment where the U.S. is currently leading the charge in de-globalization. Indeed, (a) the broad renminbi index constructed by the BIS (Bank of International Settlements) is up 53% from its December 2004 lows in real effective terms, (b) the U.S. share of reserves are well in excess of its share in world GDP and trade, and (c) the dollar’s share of official foreign-exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the BIS (Bank for International Settlements).
By diminishing Facebook's Libra, and in a time of weakness for the USD, the United States might have lost an opportunity to maintain its global influence, that China is already ready to seize. More than that, the case mirrors the struggle between values. Because, as Stephen Roach — former chairman of Morgan Stanley Asia — put it, a currency "encapsulates a broad constellation of a nation’s value proposition — economic, financial, social, and political — as viewed against comparable characterizations of other nations."
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