Tuesday, 25 June 2019

Governments must not allow private, profit-seeking parties such as Facebook Inc.to put the entire global financial system at risk


Wikipedia, 22 June 2019:

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems……

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. 

Concerns abound that altcoins may become tools for anonymous web criminals.
Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money.

The Guardian, 22 June 2019:

Facebook is developing Libra from a base in Switzerland, in partnership with 27 other corporations – including Mastercard, Paypal, Uber and Vodafone – collectively known as the Libra Association.

Financial Review, 21 June 2019:

Facebook has just unveiled its latest bid for world domination: Libra, a cryptocurrency designed to function as private money anywhere on the planet. In preparing the venture, Facebook CEO Mark Zuckerberg has been in negotiations with central banks, regulators, and 27 partner companies, each of which will contribute at least $US10 million. For fear of raising safety concerns, Facebook has avoided working directly with any commercial banks.

Zuckerberg seems to understand that technological innovation alone will not ensure Libra’s success. He also needs a commitment from governments to enforce the web of contractual relations underpinning the currency, and to endorse the use of their own currencies as collateral. Should Libra ever face a run, central banks would be obliged to provide liquidity.

The question is whether governments understand the risks to financial stability that such a system would entail. The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide.

Unlike states, private parties must operate within their means, and cannot unilaterally impose financial obligations on others as needed. That means they cannot rescue themselves; they must be bailed out by states, or be permitted to fail. Moreover, even when it comes to states, currency pegs offer only an illusion of safety. Plenty of countries have had to break such pegs, always while insisting that “this time is different”.

What sets Facebook apart from other issuers of “private money” is its size, global reach, and willingness to “move fast and break things.” It is easy to imagine a scenario in which rescuing Libra could require more liquidity than any one state could provide. Recall Ireland after the 2008 financial crisis. When the government announced that it would assume the private banking sector’s liabilities, the country plunged into a sovereign debt crisis. Next to a behemoth like Facebook, many nation-states could end up looking a lot like Ireland.

Facebook is barreling ahead as if Libra was just another private enterprise. But like many other financial intermediaries before it, the company is promising something that it cannot possibly deliver on its own: the protection of the currency’s value. 

Libra, we are told, will be pegged to a basket of currencies (fiat money issued by governments), and convertible on demand and at any cost. But this guarantee rests on an illusion, because neither Facebook nor any other private party involved will have access to unlimited stores of the pegged currencies…..

Read the full article here.

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