cryptocurrency revolution: How Europe could take the lead in the ‘money of the future’ – The Brussels Times

The cryptocurrency revolution: How Europe could take the lead in the 'money of the future'

The slow progress of authorities in Europe and elsewhere to regulate it and the struggle to fully understand and legislate without killing it, significantly changed in the summer 2019.

Libras earthquake

That June, Facebook announced that it would launch in 2020 a stablecoin, a digital currency backed by the best performing independent currencies, to offer cheap and fast means of payment to users.

The announcement provoked an immediate backlash from governments and central bankers. Users were also uneasy with the social networks intentions to build an alternative global system for instant payments, in light of its poor record respecting their private data.

Facebooks Mark Zuckerberg testifies before the US House Committee on Financial Services in Washington, October, 2019. National authorities fear that their cryptocurrency project, Libra could destabilise the global economy, given the substantial reach by the social media giant.

The irruption of the social network pushed cryptocurrencies to the top of the priority lists for regulators across the world, concerned not only about their price instability and dodgy users, but also the implications for the global economy as a whole.

The reason is that Libra is a stablecoin, a type of cryptocurrency backed by a reserve asset, in this case a basket of sovereign currencies.

By being tied to national currencies, Libra wants to address the high volatility of cryptocurrencies. But national authorities fear that it could destabilise the global economy, especially when you can reach potentially 2.7 billion users around the world.

We will not accept that Libra is transformed into a sovereign currency that can endanger financial stability, French finance minister, Bruno Le Maire, told us in an interview in July 2019, on the eve of the G7 finance ministers meeting, where France sent a strong warning to Facebook.

Dante Disparte, deputy chair of the Libra project, said in December last year that we have always said that the project would seek to be regulated.

But he asked for the same risks, same rules principle that regulators defend in Europe.

Dont push Fintech innovations of any size offshore from the European market because, in the long run, it is going to be bad for the economic competitiveness of the region, he stressed.

The concerns erupted across the world, and the withdrawal of some initial partners from the Libra project, including Visa and Mastercard, led the Libra Association this spring to lower its ambitions, by offering primarily stablecoins backed by only one sovereign currency, becoming in practice digital versions of national money.

By scaling down their plans, Facebook intends to convince financial supervisors of their reasonableness in order to win their approval when it is finally launched in the EU. But it wont be easy.

While US authorities apply existing rules on cryptocurrencies, the Commission drafted new legislation (announced for autumn 2020) to rein in these digital assets.

The rules will come after more than two years of slow but steady progress to regulate cryptocurrencies, a Commission official told The Brussels Times magazine. Libra was a wake-up call to take seriously these developments.

The EU executive was wary from the outset of the risks of over-regulating because of Libra, as Europe could strangle the innovation brought by smaller Fintech firms.

As a result, the Commission designed a set of rules that will be proportionate to the level of risks. Less risky cryptocurrencies will face lighter legislation, while for global cryptocurrencies such as Libra, rules would be stronger, given that they are likely to raise challenges in terms of financial stability and monetary policy, warned Dombrovskis before the summer break.

The new European framework will substitute the national rules that are starting to emerge in a few member states, including France, Germany and Malta. Once the cryptocurrencies win regulatory approval at EU level (by following a series of requirements, depending on their risks), they would obtain a EU-wide passport to operate in the bloc.

Our central banks account

Libra also became a wake-up call for central bankers. A recent survey among 66 central banks by the Bank for International Settlements showed that more than 80% are working on central bank digital currencies, including the ECB.

Yves Mersch, member of the executive board of the ECB said last May that Frankfurt wants to be ready to embrace financial technological innovation, which has the potential to transform payments and money faster.

Although most of the money issued by central banks is in fact already digital, it is accessible only for banks. Their new digital currencies could make their balance sheets accessible to citizens, a true game-changer. In other words, we could have a deposit account in our central bank.

This scenario would have major consequences for the banking industry, as savers would prefer to have their money in the safe hands of the ECB or the Federal Reserve, given the long history of banking crises.

For that reason, central bankers are thinking twice about how to design their digital currencies without provoking a financial earthquake.

The journey wont be either short or easy, as every step forward in the crypto-world has brought new challenges. While stablecoins addressed the volatility of Bitcoin and the first cryptocurrencies, Libra still does not meet the standards of commercial bank money.

Meanwhile, central bank solutions still raise profound questions about the shape of the financial system and the implications for monetary and financial stability, and their own role in the system, Andrew Bailey, the governor of the Bank of England, said on 3 September.

Like every new technology, cryptocurrencies must overcome numerous obstacles and address many outstanding risks. But the sense of direction is clear. The future of money is already here.

By Jorge Valero

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cryptocurrency revolution: How Europe could take the lead in the 'money of the future' - The Brussels Times