Weidmann calls for a hard line on Libra Interview published in “Handelsblatt”
03.01.2020 | Jens Weidmann DE
Interview conducted by Jan Mallien and Frank Wiebe.
Mr Weidmann, Facebook sent shockwaves through the financial community with its plans for Libra, the group’s own digital currency.
You’re right to call them “shock waves”. But I would hesitate to dub Libra a currency. Facebook is looking to roll out a new digital payment medium pegged to a basket made up of multiple currencies like the euro and the US dollar. This exposes users to exchange rate risk, however. We’ve got a stable currency – the euro – with a proven track record over the past decades.
So there’s no potential for Libra?
I see greater potential in countries with weak official currencies and underdeveloped payment infrastructures, such as a number of emerging market economies.
Why, then, has Facebook’s announcement made such waves?
Payments is an area where network effects and scale can be decisive. Facebook has more than two billion possible users. This clout would give Libra the potential to become a dominant market player from the outset.
Do you think the European Central Bank needs to push back with a digital currency of its own?
I’m not a fan of always calling on the government to intervene. In a market economy, firms should be the first to come up with the right products and services to satisfy customer needs, Competition is what spurs market players into action. For example, the prospect of new rivals arriving on the scene was one reason for the banking industry’s campaign to offer an improved pan-European payment system.
Christine Lagarde, the new ECB President, says that central banks need to be ahead of the curve, not behind it.
First and foremost, it is a question of understanding the pros and cons of central bank digital currency. Then, it can be decided whether central bank digital currency is needed and the risks can be kept in check.
Yet there’s a risk that Libra will carve out a private monopoly in the market for digital currencies. Surely it’s legitimate, then, to push back against this by creating a public monopoly.
In a market economy, the primary concern should be the rigorous and consistent application of regulations and competition law so that fair competition is possible.
But is it even realistic to call for Libra to be strictly regulated? After all, a digital currency can be stored in electronic purses, or e-wallets, anywhere in the world.
We are talking about a scenario, remember, where Libra is rolled out as a means of payment specifically in the euro area or elsewhere. Naturally, then, the providers need to comply with that particular jurisdiction’s supervisory requirements as well as the rules that are designed to prevent money laundering or terrorist financing. To stop an unsupervised space from emerging, the G7 and G20 are also addressing this topic.
And just how exactly do governments need to proceed if they want to avoid a monopoly?
Those kinds of online firms with huge platforms are a difficult topic for competition authorities. And the masses of data they hoard can give them an edge over smaller rivals. That is why the Federal Government is working on updating competition law. Another step would be to help the general public to decide for themselves how their data are used.
How would that work in practice?
There are some interesting ideas out there. In India, for example, people will be allowed to claim ownership of their own financial data: businesses that want to use those data need to gain permission. I see a great deal of merit in the idea of giving people ownership of their own data. Germany’s “Commission of Experts on Competition Law 4.0” also recommends giving greater thought to this proposal.
What would that mean for government?
In the digital age, it is very important to be able to clearly identify your counterparty using their electronic identity. It would be good for that to work across Europe. This can be offered by the private sector. But realistically, government would also play a role here.
Wouldn’t that raise fears of a surveillance state?
Digital technology can make surveillance easier. That’s something we need to bear in mind. The more important data and data processing become, the more important the rules protecting those data become as well. By the same token, more and more innovative and useful services use data as a raw material. This is a potential source of tension that will need to be balanced out.
You have suggested that banks ought to take a stand against Facebook. But how?
The main issues are speed and simplicity – for instance, being able to pay by fingerprint on your smartphone. But low costs and security, of course, matter as well.
Is that enough?
The banking industry is working on building up a common pan-European range of services such as convenient real-time payments, not just in Germany but internationally as well. Much like cash payments, real-time transactions transfer money in an instant. In this way, the recipient sees that the money has been credited to them straight away and not a few days later. This eliminates the risk of delivering goods when the payer’s account lacks the funds needed to pay for them.
Sweden has been making plans for an e-krona for some time now. One reason for this is the steady drop in the use of cash there.
We are nowhere near that stage yet in the euro area. Roughly three out of four payments at the point of sale in Germany are still made in cash, and it’s just under half in terms of total value.
But those percentages are dropping. And if cash vanishes, the last chance for people to hold actual central bank money in their hands will disappear, too.
The percentages are only dropping very slowly. And even if cash did vanish, people would still have their deposits with banks which they can use for payments. But what’s clear is that we will continue to provide cash for as long the general public want us to.
If a financial crisis erupts, surely many customers would be glad to have a direct claim on the central bank, like they do with cash, rather than a bank account.
Central bank digital currency can shift the foundations of the financial system and leave it less secure. Depending on how a central bank digital currency is designed, customers might well transfer large volumes of bank deposits into central bank digital currency, thus depriving banks of a key source of funding. There might also be a greater risk of a bank run if a critical situation emerged.
And yet for all that, the Bundesbank itself is also experimenting with a digital currency.
That concerns payment transactions between the Bundesbank and credit institutions. What we are trialling here is a blockchain-driven solution to complement our existing centralised account-based solution.
And is that working well?
In our specific context with a small number of trusted counterparties, our initial finding is that blockchain is no more efficient than centralised settlement. It does, however, allow automatic functions to be integrated for smart contracts. For example, the transfer of a security would simultaneously trigger a payment.
With reluctance so widespread in Europe, isn’t there a danger of being left behind? China has already responded to Libra by announcing plans to create a central bank digital currency of its own.
China might be quicker off the mark, but then again it has a different political system. It’s a country where the state has abundant powers which would not be to the liking of many of us. My view is that a social market economy in a liberal society will ultim
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