"Facebook will become a major government creditor" Interview published in Frankfurter Allgemeine Sonntagszeitung

23.06.2019 | Joachim Wuermeling

Interview conducted by Georg Meck.

Mr Wuermeling, is a private corporation such as Facebook allowed to simply invent a currency?

There is no ban on using private money, private digital money included, as a private medium of exchange. However, crypto tokens such as Libra are not currencies in the traditional sense, and we need to draw a clear line between the two. As a general rule, we at the Bundesbank are both market-neutral and technology-neutral, and that alone is reason enough to welcome innovation ...

... but?

We need to prevent a return to the Wild West within the monetary system. The fact that we have independent central banks providing sound and stable money is quite the accomplishment. This system enjoys a high level of confidence, and we need to preserve that. Consequently, we need to pay particularly close attention to the risks. For example, we cannot allow such platforms to become a new marketplace for money laundering or terrorist financing. Some want to simply ban Libra outright.

Including the Bundesbank?

Technological progress is a positive thing. Banning it would also be a tall order. Projects such as this are not tied to any one physical location, so they cannot be governed so easily by national law. If we were to ban crypto tokens in Germany, Germans could still buy them in London, for instance. That is why we also need global rules, and as a matter of urgency. The time factor is the biggest challenge, as precedents are quickly established in the digital world.

Facebook intends to get started next year already.

All the better, then, that France has already taken the initiative as current holder of the G7 presidency so that the finance ministers and central banks of the major industrialised nations can take up the issue. We need a global response to Facebook’s plans. When you take your car for a roadworthiness test, you do not have the tyres tested in India, the brakes in Brussels and the emissions in Bolivia. Just like a car, we need to take a holistic approach to examining Facebook's initiative and get to grips with it at the global level if we are to avoid potential risks.

What risks do you perceive? Will Libra become a gambling currency like Bitcoin?

Probably not. Facebook has drawn on the lessons learned by Bitcoin, which, given its massive fluctuations, is not exactly suited for use as a means of payment or store of value. There is nothing more to Bitcoin than the expectation that more people will buy Bitcoin later. By contrast, Facebook plans to back Libra with a basket of currencies and short-term government bonds. Nevertheless, users could be exposed to other risks – exchange rate risk or counterparty credit risk, say.

What does that mean for the markets?

Facebook could hoard vast quantities of government bonds and become one of the biggest government creditors. I would be alarmed if governments made themselves dependent on a single corporation in this way. It would take only 100 million of Facebook’s 2.7 billion users to give Libra more customers than the entire German banking market. Facebook could become the world’s biggest asset manager, thus making it systemically important. In view of this, we at the Bundesbank will carefully analyse whether Libra could have an impact on financial stability.

Would the central banks lose control over monetary policy?

If Facebook were to succeed in making Libra a leading payment method, this could cause government-issued currencies to decline in importance. As a result, implications for both the banks and monetary policy cannot be ruled out.

How do you intend to prevent that?

Facebook will not be able to launch its platform – and nor would it want to – against the wishes of governments and central banks. The company needs to be willing to cooperate – only by doing so will Libra win credibility and thus become more stable. One thing is clear to me as a supervisor: Libra needs to be as safe as a Pfandbrief.

How much potential would you say Facebook has? How quickly will Libra gain acceptance?

At this point in time, no one can say. So far, the project has been raising more questions than answers. Nevertheless, we at the Bundesbank need to consider the possibility that the situation could evolve very quickly. We are therefore keeping a close eye on developments. In China, digital providers such as WeChat Pay have all but replaced cash as a means of payment – and they managed that in five years!

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