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the Libra system from interfering with the rights of countries to control their monetary policy, she argues.
A nation’s monetary policy consists of actions such as setting interest rates in order to control inflation and influence the amount of currency in circulation—a major element of the money supply.
At the House Financial Services Committee hearing, both Democrat Maloney and Republican Andy Barr of Kentucky said they were concerned about Libra’s potential to interfere with central banks and monetary policy.
Maloney said the Libra Association’s reserve fund could end up “managing too much money,’’ posing a systemic risk to US financial stability by pulling an outsized amount of cash out of banks.
With depleted reserves, banks would need to reduce lending, The Economist predicted. If every bank customer in the West shifted a tenth of their savings deposits to Libra accounts, the Libra reserve could reach a value of more than $2 trillion, the publication estimated.
That potentially vast amount of money would be invested in a portfolio of assets, making the Libra Association an influential new investor in the financial markets. The reserve fund’s currency holdings would be lodged in custodial accounts at banks, but Libra’s managers could also invest in securities such as short-term government bonds.
Biancotti said the Libra Association’s investment bets could boost demand for financial assets such as bonds. “This could have repercussions for prices [of bonds],’’ she said. For that reason, the Libra project might be wise to phase in the process of selling the currency, to avoid swelling the fund and investing it over a short period of time, she said.
Members of Congress, as well as US and international regulatory agencies, are trying to figure out whether the Libra project can be controlled by their current framework of regulations. It’s not yet clear how the Libra Association would be classified—whether as a bank, a purveyor of securities such as exchange-traded funds, or some new kind of entity.
Marcus maintained that Libra is a payment tool, and will never grow large enough to supplant another currency.
The Libra Association will accept government-backed currency as payment for units of Libra, but it won’t pay interest to the buyers, such as consumers and businesses that want to use Libra for transactions.
If the assets in Libra’s reserve fund rise in value, the profit would be used to pay the operating expenses to maintain the currency. Beyond that, some of the profit would be distributed to Facebook and any other organizations that funded the Libra project. Marcus said part of the profits will be used for a pool of incentives to spur merchants and consumers to use Libra.
Facebook’s Calibra wallet is the first for-profit business created on top of the Libra currency, though the plan calls for many independent developers, from any country in the world, to build other wallets and financial services based on Libra. Calibra would compete in the digital payments field by offering users and merchants quick transactions at fees that could be substantially lower than the current average for credit card purchases and international money transfers, Marcus testified.
Facebook would profit from the Libra system because it would help establish ecommerce on the company’s social media platforms, including its WhatsApp and Messenger apps, Marcus said. That activity would lead to more revenue from advertising. Users could choose to use competing digital wallets through their Calibra accounts, but Calibra will be the only wallet embedded in WhatsApp and Messenger, Marcus revealed under questioning by Sen. Mark Warner (D-VA) at a Senate committee hearing Wednesday.
Marcus also claimed a benevolent mission for the Libra ecosystem—it would serve the poor and people in developing nations who lack access to banking services or can’t afford the fees. With a $40 smartphone and a basic data plan, he said, workers could tap into the global economy, or send money to family members in their home countries instantly while avoiding money transfer charges of 7 percent or more.
The success of the global Libra system would depend on a network of for-profit businesses and currency exchanges in many countries, where monetary policies vary widely. Marcus said US-based Calibra would not be able to operate in some developing countries that impose currency controls. Certain countries bar the use of foreign currencies, regulate exchange rates, or forbid the export of the national currency, for example, as a means of stabilizing the local economy.
Biancotti said the Libra project could pose a danger to developing countries, which often have high inflation rates that lead to a devaluation of the local currency. Citizens of these countries might sell assets to buy Libra to avoid the erosion of their wealth or to participate in the global economy, she said. This could cause the local currency to devalue against the dollar, the yen, or other government-backed currencies. Some residents—such as those without Internet access—could be stuck with the national currency, dividing commercial activity between two forms of money. The nation’s central bank would be unable to fully mitigate the disruptive effects through its monetary policy, she said.
“They can only reach those using the national currency,’’ Biancotti said. “It’s an extreme case, but it could happen.’’
The United States uses its control of the national currency (dollars), its jurisdiction over banks, and its monetary policy not only to regulate the economy, but also to prevent crimes like … Next Page »