Libra threat has central banks eyeing faster payments

A former colleague once described the payments departments of central banks as the sort of place staff were sent when they had done something really bad. Facebook probably didn’t foresee when it was dreaming up Libra that it would change all that. But Alphaville suspects a renewed interest in the ways in which money -- public and private -- changes hands will be one of the most important unintended consequences of the tech giant’s power grab.

One of the big takeaways from this year’s International Monetary Fund and World Bank annual meetings was that, as ill-designed as it was and as ill-fated as it now seems, Libra has global economic officialdom terrified. And that has led to central bankers thinking of ways that they can pull their socks up.

We will ignore for a moment the appeal of digital currencies in developing economies, where they can aid financial inclusion. And the case of Sweden, which looks the most likely contender to become a fully cashless economy. We want to focus here on those to whom Libra’s threat primarily lies in its challenge to a payments technology that has long looked behind the times. As Martin Wolf writes here (our emphasis):

Hyun Song Shin of the Bank for International Settlements made a distinction between the “architecture” of the monetary system and the “technology” that enables it...

...Cryptocurrencies offer new units of account, stores of value and means of payment. Thus, they also offer a new architecture for creation and use of money. But it is a lousy architecture. As [The US Federal Reserve’s Lael] Brainard put it in her speech: “Early iterations of cryptocurrencies have exhibited extreme volatility, limited throughput capacity, unpredictable transaction costs, limited or no governance, and limited transparency.” They are an anarchistic fantasy...

...The new payment systems are, however, both real and large. According to Ms Brainard, “in China, consumers and businesses participate in two mobile networks, Alipay and WeChat Pay, which by some accounts handled more than $37tn in mobile payments last year”. At the very least, these systems transfer retail payments to new players. But, as an important paper by Markus Brunnermeier and Harold James (both of Princeton) and Jean-Pierre Landau (of Sciences Po), argues, digital payment systems also potentially create rival ecosystems, with payments linked to data networks, with banking and asset management as subordinate functions.

We think there are two big flaws with the way in which the payments technology works right now. The first is largely a public-sector issue and global problem. The second, in many places, can be better dealt with by private lenders.

We want to focus on the first one here, as we think this is the area where Libra has really shown the central banks up. But first we want to quickly mention the second.

In some places, such as Germany, France, Spain and the UK, payment systems have kept pace with technology and lenders can wire money through the central bank within seconds.

The problem here is more one of perception. There is no obvious advantage that the likes of Alipay and WeChat Pay can provide; there is already a cheap and efficient public incumbent. Yet, while we think people in the UK generally are aware you can make more or less instant payments, in other parts of Europe -- outside the realm of central bank nerdery -- not so much.

In Germany, for instance, we don’t think there is much awareness at all. The banks here should be doing far more to tell customers that the service is available and creating their own technology to enable people to better use it. And it is something of a mystery why they are not. 

Now to the second one.

As our regular readers know, there is a lot of fluff talked about digital money, but one of the most thoughtful remarks we have come across is this podcast from Benoît Cœuré of the European Central Bank’s executive board, who led the G7 nations’ report on cryptocurrencies (emphasis ours): 

We are talking of technologies which spread across borders, we are talking in many cases of technologies being provided by companies which are already global… And we are talking of technologies where the main business case is about cross border payments. It is by essence a global issue…

...The responses to cryptocurrencies and to stable coins are not necessarily about issuing our own digital currencies. We might end up doing it, but another response on our side is about improving existing payment systems so that the needs evidenced by the whole discussion in the first place, the demand for cheaper payments and faster payments, can be met by traditional payment systems. The whole discussion is a useful wake-up call for the central banking community and it makes us understand that we have got to be faster and we have got to step up upgrading our payment systems...

...The main gap, or next frontier in terms of central banking activities would be to find efficient ways to connect our fast payment systems so that they can be used by citizens to transfer remittances to send money back home, to send money across borders, so that cryptocurrencies would be less needed in the first place.

Money makes the world go round, but the way in which it goes right now is not nearly fast or cheap enough. Fixing that is Libra’s siren call. 

And -- while Facebook’s currency looks destined for failure -- if the public sector does not rise to the challenge, then someone else will.