Libra: A Dramatic Call to Regulatory Action
— August 28, 2019
By Kim Schoenholtz and Stephen Cecchetti
Libra’s stated objectives include improving the efficiency of payments, reducing costs, speeding transfers, and expanding financial access. While these are laudable goals, it is important to achieve them without facilitating criminal exploitation of the payments system or hampering the ability of authorities to monitor and mitigate systemic risk. In addition, any broad-based financial innovation should facilitate the stabilization of consumption.
On all of these criteria, we see Libra as doing more harm than good. Libra looks to be Facebook’s third entry into the payments world, the first two—Credits and Messenger—were wound down or scaled back (BBC News 2012, Lunden 2019). The third time appears to be anything but a charm: Libra could facilitate various criminal uses of finance as well as become a significant source of systemic risk. For those who use it in advanced economies, Libra will likely add uncertainty to the purchasing power of savings, raising the volatility of household consumption. For the countries whose currencies are not a part of the Libra portfolio, its use will diminish seignorage and encourage capital outflows while accelerating capital flight in periods of stress.
Read the full VoxEU article.
Kim Schoenholtz is the Henry Kaufman Professor of the History of Financial Institutions and Markets in the Economics Department and Director of the Center for Global Economy and Business.