The benefits of a global digital currency — Antonio Fatás, Beatrice Weder di Mauro

Economists have reacted negatively to the prospect of Facebook's Libra cryptocurrency. This column, part of the VoxEU debate on the future of digital money, outlines how if we focus exclusively on the efficiencies a currency like Libra brings to payment, there are arguments in its favour. A global digital currency provided by central banks may be preferable, but a private version would offer many of the same benefits....

The Libra operates on a fixed exchange rate with reference to floating national currencies.

In response to the high volatility of Bitcoin and other cryptocurrencies, developers have created 'stable coins', currencies whose value is tied to a traditional currency. Libra belongs in this category. Economists are familiar with fixed exchange rates, so this is not new. The stability of Libra is guaranteed by a redemption mechanism supported by assets that back the value of the currency in circulation. This mechanism, used by other stable coins, is equivalent to a currency board.

Libra is global, so it is pegged to a basket of currencies. There are precedents in this for fixed exchange rates, although it is not common for currency boards.3 Of course, fixing the value of Libra to a basket of currencies implies that its value will fluctuate relative to any single currency.

Owing to efficiencies and to preempt rivals, something like this is almost certain to happen and central banks are already discussing it. To say that this a "disruptive technology" would be an understatement. But the alternative is attempting to criminalize use of digital currencies in order to preserve the current system, and that is impractical. What remains to be determined is what it is going to look like and who is going to be in control.

I don't see Facebook owing it. That would just add to the present issues around monopoly and anti-trust. Eventually, the digital world is going to be publicly controlled. How that is going to transpire will involve major issues in the future.

ConclusionTaking the Libra proposition at face value, we made the best economic case we could by focusing on it as a means of payment, domestically and internationally. We wanted to understand whether the potential benefits of a means of payment could compensate for the risks of holding a volatile asset. Our estimates suggest that the overall risk of holding a global currency may not be large for plausible exchange rate volatility and risk aversion. On the other hand, the potential gain in lowering transaction costs in retail cross-border payments and even local payments are large.

While a global currency may be desirable, this currency does not have to be Libra. There are many other concerns not discussed here, such as privacy, data control, operational risk, regulatory consequences, or dominance. In his speech at the 2019 Jackson Hole conference (Carney 2019), Carney discussed the benefits of a global currency that would be provided by a network of central banks, which he called a Synthetic Hegemonic Currency. But, without a coordinated effort by policymakers and regulators to create this currency, a private solution such as Libra might end up partially fulfilling this need.

VOX.EU
The benefits of a global digital currency

Antonio Fatás, Beatrice Weder di Mauro

See also at VOX.EU

Libra: The known unknowns and unknown unknowns

Barry Eichengreen

The rise of digital currency
Tobias Adrian, Tommaso Mancini-Griffoli

The Future of Digital Money
Stephen Cecchetti, Antonio Fatás