Condivergence: Money and cyber-money

This article first appeared in Forum, The Edge Malaysia Weekly, on December 2, 2019 - December 08, 2019.
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Everyone is obsessed with money. The latest buzz is all about Libra, the digital currency that Facebook announced in a White Paper that it would launch sometime next year. Facebook is, of course, the largest internet network with over two billion users, 20 times larger than the largest bank in the world with 100 million customers. The audacity of Libra is that Facebook promises to provide a “reliable digital currency and infrastructure that together can deliver on the promise of the internet of money”.

Unlike the cybercurrency bitcoin, which is backed by nothing, Libra comprises three elements: a secure, scalable and reliable blockchain infrastructure; backed by reserve assets to give it intrinsic value; and governed by an independent Libra Association tasked with evolving the ecosystem.

Since Facebook has a market cap of US$560 billion and the Libra Association includes heavyweights such as Uber, Vodaphone, Visa, ebay and Spotify, this is the most credible challenge to central bank or official fiat money ever launched.

The Libra business case is straight-forward. There are 1.7 billion adults globally who do not have access to bank accounts. Moving money around, especially cross-border, is costly. If you change money at any exchange kiosk at the airport, it could cost you as much as 10% for a less-used currency.

Remitting the money through banks can cost on top of that remittance charges of 3% to 5%. The reason for this is that the banking system is designed for wholesale payments and less for retail.

So, with a customer base of over two billion and by scale and speed, Facebook can cut costs, increase convenience and add the scope of services for the customer. This is big tech (large technical platforms) moving head-on into traditional banking territory.

Small wonder that France and Germany immediately announced that they would regulate Libra. The general consensus is that if Libra acts like a bank, looks like a bank and offers products like a bank, it would be regulated as a bank, meaning that all the anti-money laundering, Basel 3 rules, consumer protection, data privacy and so on would apply.

What bitcoin and Libra have provoked among economists and policymakers is the tough question: what is money?

There is a long history of money moving from actual tokens such as cowrie shells and metallic coins to paper issued by banks and then to digital records of obligations that can be used as a means of payment, standard of value and store of value.

Money, therefore, evolves, most recently into crypto assets, but they are derivatives of an underlying asset. However, when blockchain cryptocurrencies came into being, it became clear that these were not backed by anything. Their value would be determined by the supply and demand for such crypto assets, such as bitcoin.

Central bankers quickly figured out that there was a difference between crypto assets that have unstable value (and are not backed by any tangible asset) and those that are relatively stable, which they designated stablecoin (BIS 2019). The issues dividing different forms of money are whether they are trusted, legal and backed by tangible assets.

The reason why money became regulated and subject to state control is due to the failure of trust in currency issued by private entities that can be expanded without limit. Bank money failed because the depositors lost trust in the banks and bank runs caused severe liquidity crises that accelerated the failure of these institutions, causing huge losses to depositors and disrupting the economy. Furthermore, if banks could expand money indefinitely, there would be inflation that is also harmful to society.

Hence, with the arrival of central banks, money became a state monopoly that could be issued by the central bank or regulated by the state. In exchange, the public is protected with implicit or explicit deposit insurance and monetary and financial regulatory policies.

When central banks embarked on quantitative easing through the massive expansion of their balance sheets and this did not create inflation, technology experts decided that if central banks could create money with no marginal cost, so could the private sector. So, with the advent of blockchain technology, they created bitcoin and equivalent crypto tokens that could be used as payments that can avoid taxation and regulation, as well as a means of speculation, rather

than stores of value. As long as such activities are not public scams or do not reach systemic scale, the advanced countries did not bother to regulate their operations. However, central banks in emerging markets, such as China and South Korea, quickly banned them.

Libra, on the other hand, is the first serious appearance of big tech that challenges the banking system in terms of scale, speed and scope. Essentially, Libra and its like can disintermediate the banking system and raise huge issues of competitive fairness, systemic stability (too big to fail?), data privacy, taxation, national security and the like.

Frankly speaking, most central bankers and financial regulators look at big tech from the perspective of sector specialists (namely finance). They fail to see that the business models of banks are completely different from that of big tech. By definition, a single sector specialist cannot have the same scale as big tech platforms, which span multiple sectors. In other words, Amazon is today

providing a whole range of services, from the sale of books, music and consumer products and services to cloud computing (infrastructure and related services) as well as logistics. Alibaba has moved from that into Alipay, but prefers to use domestic currency and banks to complement its expansion.

In other words, unlike banks, big tech companies do not have to rely on payment services and intermediation profits (asset

management, credit and so on) to make money. By providing the full range of services (scope), including payments, they can compete better on speed (better technology and convenience), customer focus, data management and scale (global reach). Short-term profits are not of concern as once they reach near monopoly control of customers, they can monetise the ecosystem through charging higher fees, such as moving from commission on per-piece acquisition or advertising to monthly subscriptions with the ability to read, listen or watch anything that is published.

If they wish to still be in charge of money, central bankers would have to get out of their silos and think big tech and ecosystems.

Digital money means that money can be anything the public accepts as money. Different forms of money can evolve, disappear or continue to exist, like viruses. There will be big winners, such as the US dollar, but it does not mean that there could not be new

challengers through different means, such as central bank digital currencies.

Watch this space.


Tan Sri Andrew Sheng writes about global issues from an Asian perspective

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