As a commercial project, Facebook’s digital currency proposal is flailing, having lost partners and failed to charm regulators. But at the IMF’s annual meeting in Washington last week it was clear that Libra has already notched up one success: it has spooked central bankers.
When he announced Libra in June, Mark Zuckerberg let slip to policymakers that they are already behind in a race they did not even know they were running.
They have now got the message: if they do not have a hard think about whether to make their own digital monies, someone else will.
Two years ago Stefan Ingves, governor of Sweden’s central bank, started looking into an e-krona to be created and run by the Riksbank. At the time his colleagues in other countries were bemused, but over the summer, said Mr Ingves, “we ended up in a lot of conversations about Libra, because Libra showed up, at least from a central bank perspective, kind of out of the blue”.
Lael Brainard, a governor at the Federal Reserve who has run a working group on digital payments since 2016, told the Financial Times last week that “Libra heightened the urgency and sharpened the focus of senior policymakers on this work.”
Four months after the Libra proposal first hit the headlines, the topic gripped the halls in Washington, both onstage and in closed sessions of the Financial Stability Board. Central bankers do not move this quickly unless they are rushing to put out a fire.
Libra alarms central bankers for two complementary reasons. The first is scale.
Ms Brainard pointed out that, given the 2.7bn users on Facebook’s combined platforms, the company could roll out a payments system to one in every three humans.
Central bankers’ other concern is that Libra presents an affront to monetary sovereignty.
“[Libra] was a shock to central banks,” said Simon Potter, a fellow at the Peterson Institute who used to run the markets desk at the New York Fed. “I think Facebook hadn’t thought through carefully how important control of currency is for governments and central banks.”
Successful digital payment apps such as Swish in Sweden and Alipay in China move deposits among existing commercial banks, using existing currencies backed ultimately by existing central banks. But Libra is its own money, a distinct currency backed by a reserve of bank deposits and sovereign debt from different countries. Whatever group runs Libra would be its own private central bank.
For larger banks that run systemically important currencies such as the dollar and the euro, Libra could interfere with their ability to provide liquidity when markets are under pressure.
Countries that run only local currencies face an additional problem: in some places households and businesses hold foreign hard currency as a physical store of value; replacing that with a privately run digital currency such as Libra could quickly shift control of the economy from the central bank to a company.
Tobias Adrian, another New York Fed veteran who now runs the IMF’s monetary and capital markets department, offered the hypothetical of a dollar-backed digital coin in a Caribbean country.
“It could be that this is taking over the majority of transactions,” he said. “At that point the central bank is losing control of monetary policy.”
Some central banks are stepping up their efforts to create publicly run digital currencies, as a way to allow technology firms to innovate without giving up state control. The Fed has no plans to do so, however, Ms Brainard made clear.
Most central bankers are trained to argue about macroeconomics, Mr Ingves said, but Libra has provoked a fight over monetary theory — the question of what money is.
“This is dealing with the plumbing,” he said. “And most people don’t deal with the plumbing.”
Until now, that has left the field to Facebook and its private sector competitors.
“The public sector has always had a say when it comes to money, so it’s hard to imagine that you create entirely private monies,” said Mr Ingves. “If history gives us any guidance, those types of arrangements tend to collapse sooner or later. That’s why we have central banks.”