Governments race to beat Facebook's cryptocurrency, libra, at its own game: Don Pittis

Facebook's scheme to create its own money in the form of the libra digital coin has set off a global race to beat the social media colossus at its own game, and Canada may be an important player.

Since the initial mild reaction from U.S. Federal Reserve chair Jerome Powell the day after the libra project was announced in June, the world's governments and central banks have realized what some suggested at the time, that with its global reach and technological savvy, Facebook was blazing a path to dominate money.

Canada has been one of the leaders in researching how to create and manage a digital coin backed by a national central bank. But the arrival of the libra idea, with its persuasive scheme to launch what was essentially a credible new global currency, kicked off a flurry of fresh activity that could transform the way we think of money.

Not only are the world's governments gathering at bodies such as the International Monetary Fund, the Bank for International Settlements and the G7 group of large industrial economies to work on the idea, but there are signs that individual governments, notably China, are racing to be the first to create a functional, tradable government-backed digital coin.

Will people give up cash?

And while the final results are difficult to predict, it is not clear that ordinary citizens, who have grown used to money in its current form, will be happy with the outcome.

"It's interesting how exciting these developments can be," enthused Bank of Canada senior deputy governor Carolyn Wilkins at last week's monetary policy news conference.

Introduced by her boss, bank governor Stephen Poloz, as "one of the world's foremost experts" on the subject, Wilkins has attended global conferences, armed with several years of groundbreaking Canadian research.

As Wilkins explained, what central banks hope to create is not a digital coin like bitcoin and its many imitators. With that currency rising and falling as inexperienced investors tried to make a killing, critics, including me, pointed out years ago that the volatility of such cryptocurrencies made pricing goods in bitcoin impractical.

Far more interesting and functional, according to people like Wilkins, is a kind of digital money called a "stablecoin," which is how the libra is conceived. Rather than shooting up in value and plunging like bitcoins, a stablecoin is managed to maintain a relatively constant value.

"There's a whole class of crypto assets called stablecoins," said Wilkins last week. "What's exciting about it is the fact that these kinds of innovations can address what I think are important issues in global payment systems, particularly the cost of cross-border payments."

Wilkins suggested a stablecoin could be used, for example, for people from the Philippines trying to send money home from elsewhere in the world. And in developing countries without a stable banking system it might be used domestically as a reliable unit of exchange.

Innovation plus risk 

That innovation is exactly what the libra project has proposed, offering a service to millions of the world's "unbanked" so that they too can buy and sell and save up the value of their labour in a place they know won't be wiped out by inflation or government mismanagement.

But the more the world's central banks and the governments they represent thought about the libra, the less they liked it.

To oversimplify, the two main objections to having a private company with such monetary clout were the wrenching of monetary power out of the hands of central banks and the worry that eventually, without the backstop of a government, a private sector currency would collapse, creating global chaos.

"We know that innovations never come without risk," said Wilkins.

There are benefits to such a stablecoin system, but there are dangers: "The costs that we all know that are related to money laundering and terrorist financing, but also, with respect to safeguarding the value of that stablecoin properly, as well as potentially getting in the way of monetary sovereignty of different countries," she said.

By current thinking, that sovereignty is important. With people using something like libra, the currencies of smaller countries such as those in the Caribbean, or notoriously unstable currencies such as those of Rwanda or Argentina would be completely upstaged, as people use libra as a better alternative.

Loss of control

"I think Facebook hadn't thought through carefully how important control of currencies is for governments and central banks," said longtime U.S. central banker Simon Potter in an online video interview by the Financial Times.

Globally, digitization of national currencies is already underway. Sweden is well on the road to phasing out conventional cash. Canadians have been world leaders in paying with alternatives like chip cards. China, with its powerful centrally controlled state, is ideally placed to push through a digital stablecoin that will also help it keep track of the money flows of everyone who uses it.

Watch the International Institute of Finance discuss the future of money:

As reported by CBC Radio's The Current, access to information requests by the tech news site The Logic show that the Bank of Canada has looked into the possibility of following Sweden and gradually eliminating those polymer bills, but such a plan would require a decision of the federal government to proceed.

Unlike China, a Canadian government might be unwilling to take such a radical step when such obvious moves as replacing low-denomination bills by coins and eliminating the penny attracted such popular wrath.

But the difficulty for governments is that commercial stablecoins such as libra are not the only competition. If one country creates a functioning state-backed digital stablecoin, it may be difficult to stop the citizens of other countries from using it.

For Wilkins, no doubt, working out a solution is part of what makes it all so exciting.

But whatever the final outcome, it does seem that our concept of money is changing. Just last month, Bank of Canada deputy governor Timothy Lane participated in a discussion at the International Institute of Finance titled The Future of Money. The fact is, as cash disappears, digital stablecoins may become an essential alternative for certain purposes.

Lane pointed out that as merchants, banks and consumers increasingly stop using bank notes for transactions, we may reach a tipping point where those notes effectively disappear from circulation so that even people who want to use bills don't have the option.

"In the immortal words of Joni Mitchell," quipped Lane, "'You don't know what you've got till it's gone.'"

Follow Don on Twitter @don_pittis