U.S. payments system could use an ally like Libra

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Facebook's digital currency plan has been widely criticized on Capitol Hill but critics are missing a bigger issue — the social media giant must be given the freedom to innovate or China will soon dominate the global payment system.

Facebook CEO Mark Zuckerberg warned of this during his recent testimony before the House Finance Committee.

“A digital payments system is going to be important in the future. If America doesn’t lead on this, others will,” he said in the written testimony. “Foreign companies or countries may act without the same regulatory oversight or commitment to transparency that we have.”

Rep. Patrick McHenry, R.-N.C., the committee’s ranking member, started the hearing by telling Zuckerberg “you are here today to answer for the digital age” regardless of whether it’s “fair.” (McHenry later questioned whether it will be American innovation or that of others that will control the digital age of payment systems.)

Yet, during this time, the Office of Comptroller of the Currency suffered a setback in its own attempts to allow innovation in the digital age. The OCC’s offer of a special-purpose banking charter for fintechs was ruled illegal by a New York judge, citing the agency for acting beyond its legal mandate.

The idea of special banking charters has long been opposed by both state regulators and the financial services industry, effectively dampening competition and innovation.

The House committee hearing was supposed to be about how Libra, under development by Facebook and its partners, would work in the global payments system. However, lawmakers instead questioned Facebook’s past missteps, whether it’s sharing data inappropriately, and its current policies on political ads and housing redlining.

Policymakers also emphasized that the U.S. dollar is the standard unit of international finance and provides a source of power to the nation’s economy. Further, they noted that if the U.S. lost its currency dominance, economic sanctions would become irrelevant.

Zuckerberg made clear that Libra would not derail the U.S. currency as the dominant global currency. But many lawmakers remained skeptical.

During the hearing, there lacked discussion on how the system would work, given that the currency unit in Libra would be backed one-for-one with a basket of currencies dominated by U.S. dollars and a reserve.

The biggest issue not addressed, however, was China. The Brookings Institution reported that China is on its way to developing a payments system that disintermediates its banking sector.

China is nearing completion of a central bank payments network and cryptocurrency anchored by the yuan. Unlike many central banks and private sector companies that are studying the capabilities, China is doing it.

The country has the economies of scale of nearly 1.4 billion potential depositors. A cryptocurrency issued by China’s central bank can easily flow between its banks for lending purposes to retail and commercial customers, as well as directly to and from the central bank for customers’ deposit record keeping.

One of the intriguing questions posed by Libra and other cryptocurrencies is whether a privately issued currency can serve as money in commercial transactions. This would be a money proxy, a stablecoin which is not issued by the government or its central bank.

Like China, Facebook is setting out to establish economies of scale. But unlike China that can dictate use to its 1.4 billion citizens, Facebook aims to provide efficiency and timeliness of payments through its existing global client base of nearly 2.4 billion monthly active users. Many of these users are without such services entirely.

Facebook is moving cautiously, given the amount of scrutiny it faces from past mistakes, and its credibility gap with both customers and regulators.

A basket of currencies is still to be determined. The Libra reserve fund is intended to support stability of the currency’s price but its actual mechanism is pending as well.

Our U.S. regulators and government officials are right to question Zuckerberg as Facebook’s single majority owner to direct, build and run a global payments system. After all, Facebook is a dominant for-profit big tech company that leverages its customer profiles for selling ads. It has no experience either as a financial entity or a payments processor.

But it’s far better to oversee a U.S.-owned company with 2.4 billion customers as it innovates a new currency and payments system, than deal with one controlled by China, an adversary run by a single person with dictatorial powers over one billion people.

The U.S. has to be assured that any future payments system utilizes a currency that continues the nation’s economic advantages. At the same time, U.S. regulators must free up U.S. companies to innovate and move through the digital age as expeditiously as possible, lest such efforts turn to China.

This would threaten the nation’s currency dominance and the effective control of the international payments mechanism that currently allows the U.S. to project economic power.

This article originally appeared in American Banker.
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Cryptocurrencies Bitcoin Fintech Fintech regulations Libra Faster payments Payments Facebook