G7 and G20 Considering Going After Stablecoins, Should They?

The proposed launch of Libra appears to be leading to some confusion among politicians and regulators with the prime example being Trump mixing Libra with bitcoin even though the two have nothing to do with each other.

Now a draft report by the G7 taskforce, which coordinates rules for the G20 economies, says global stablecoins with the potential to scale rapidly pose a risk to the financial system.

“The G7 believe that no stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed,” the draft report says before adding:

“Addressing such risks is not necessarily a guarantee of regulatory approval for a stablecoin arrangement.” 

In other words, they’re thinking of implicitly or explicitly potentially banning completely stablecoins like Libra, with Germany’s finance minister stating last month:

“We must protect consumers and state sovereignty. A core element of state sovereignty is the issuing of a currency, we will not leave this task to private companies.”

The almost unanimous agreement of politicians on both sides of the Atlantic and their almost immediate response to Facebooks’ Libra plans have both narrowed the debate to Facebook bad and have now expanded it to “global stablecoins” as well as “alternative currency.”

That it is Facebook has a lot to do with it because they already have much power, are generally disliked, the design gives them too much control, with all of it combining to make it fully political.

That it is Facebook also means they lack public support, making the politicians’ job very easy, but there’s a considerable danger that specific circumstances are generalized into things like alternative currencies, there’s a danger that politicians might use this opportunity to enact unwise laws.

Making this Facebook matter a lot less black and white when it comes to actual laws and when it comes to such terms as “alternative or parallel currency.”

The politicians specifically point out to Central Banks’ plans to issue their own crypto like digital currency.

Whether they are aware of the debate that has been going on since at least 2016 on these central bank crypt currencies (CBCC), is not clear.

Such debate was subject to a referendum in Switzerland. They voted against giving the central bank effectively total control over money as while the system currently is centralized, it does still have a slightly decentralized private market element to it in commercial banks.

So the conclusion of that debate was that CBCCs would not be a great idea unless the economy is to be under even greater control by the government.

Such CBCC, moreover, would have perhaps even greater ramifications than Libra for the financial system, especially if you like free markets.

So Libra can in some ways be seen as the opposite of CBCCs, but with a crucial difference. Stablecoins do not create money. CBCC does create money out of nothing when they buy government bonds, for example, or when they loan to commercial banks or when they pay interest on reserves by the commercial banks.

Stablecoins instead only change the appearances of such CBCC money from say paper to digital.

They do not therefore compete with central banks, but they can provide a limited alternative to commercial banks and can be a direct competitor to payment processors like MasterCard.

With commercial banks they compete in a very limited way because something like Libra would not create money from nothing by issuing a loan like commercial banks do.

Libra would moreover be reliant on banks for the cash deposits that back the stablecoin, but otherwise they can also be a challenger to banks in some functions like holding and moving value.

Politicians are seemingly moving towards basically saying there can be no competition to banks. That may not be quite what they mean or intend, but there is a risk the dislike of Facebook leads to unintended consequences when it comes to hard instruments, like acts of parliament or congress.

It is perhaps wiser to cool down a bit on this matter, to have greater consideration of the many potential issues and benefits, and not rush into statements or hard instruments whether at the IMF annual meeting of finance ministers this week or anywhere else.

Because the banking system does need market based reform and competition as they are too big, too systematic, too concentrated, and too dangerous in the current form to the point sometime they bankrupt our nations.

Something like Facebook is also too big in a different way and has its own specific considerations, but disliking it and prohibiting it can be two very different things.

Not that we’re saying Libra specifically shouldn’t be prohibited, but that there are significant aspects that need to be considered first before taking action, and that far more needs to be considered before using general terms like stablecoins.

In the case of Facebook specifically there can also be innovative elements or experiments, with the tech giant probably unlikely to execute them well, but could pave the way for others.

Here specifically there are also risks of potentially crowding out competition especially if Facebook merges with Coinbase, but if action is to be taken a far more nuanced analysis is needed first, a far more colorful debate, and a more systemic look of both the current approach and potential new innovative approaches with such overview preferably taken by some independent body, rather than central bank controlled taskforces which are fully biased and perhaps blindly biased.

As a reminder for example, there was no such backlash when Kin or Telegram proposed something like Libra, although there they planned to use crypto-tokens.

So if this is specifically about Facebook, then it should be specifically about Facebook, not something where self-interested bankers use some bogy man to enforce total control over money and to prevent the much needed market based innovation and competition.

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