One idea as to how officials might keep CEO Mark Zuckerberg’s dreams grounded in reality is to get under the hood of what goes into the digital currency in the first place. Given Libra wants to back every digital cent with a mix of real-world reserve currencies, that might be the best place to start. Bank of England boss Mark Carney hinted at this in his Mansion House speech on Thursday, proposing that tech firms and other non-banks be allowed to hold funds directly at the central bank.
You can see why this idea would appeal. If central banks start to hold deposits for the likes of Facebook and other Libra backers, officials will get a first-hand view of the assets held in reserve (though they’ll have to coordinate for a complete picture). And for the tech companies, having the central bank’s blessing is the ultimate seal of approval and trust — something Zuckerberg could benefit from. It would all require a fair bit of readjustment in terms of what a central bank does and how it does it, but it makes sense.
While this will all seem like a specific issue of financial plumbing off the back of a crypto project, there’s a much bigger point here about finance and tech in general — and not all of it comforting for bankers.
Carney’s push for new tech companies to be embedded more deeply in the financial system will raise competitive pressure on incumbent banks. The regulatory barriers to entry in finance are already high — think of the billions spent on compliance — and it’s a reason why Silicon Valley hasn’t yet posed an extinction threat for banks. But officials want more firms to clear those barriers, “leveling the playing field between old and new,” Carney says.
Hence, he also talked up the central bank’s payments system overhaul, with a view to plugging in tech firms. Libra could just be a face that launches a thousand ships of new payments ideas – the crypto bit might never take off, but other ideas will.
Banks have done a decent job of fending off fintech over the past decade: 35 percent of British consumers have had the same account for at least two decades, according to UBS. But that’s partly because their opponents have been pretty under-powered: No amount of glitzy tech conferences featuring entrepreneurs kitted out in lederhosen can disguise that. Start-ups have been forced down a risky path to grow fast in a market that’s highly regulated and concentrated.
Facebook, as well as Apple Inc., Amazon.com Inc. and Alphabet Inc. are different. They have size: Apple is in “a billion pockets,” as Oprah Winfrey put it. They have money: Alphabet’s revenue in a single quarter could cover the market cap of Deutsche Bank several times over. And they have data: Amazon has our credit card details, and indeed its own card. With their main businesses drawing tough criticism over monopoly concerns, more diversification — even into a very regulated sector — is investor-friendly.
Libra specifically may well be a pipe dream that may never be implemented in its current form. But Facebook’s size means that central banks already have to take it seriously — or they face being unprepared to ensure financial stability. Bankers themselves aren’t powerless to respond to the tech threat, and they have the financial firepower to develop services and products. But as after dinner speeches go, this was a sobering one.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.
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