Anxiety about Libra, Facebook’s proposed digital currency, continues to grow among policymakers worldwide. A recent report commissioned by the G-7 warns that stablecoins—digital currencies backed by assets with a stable value—that are adopted on a global scale could pose a challenge not only to monetary policy but also to the international monetary system itself. For developing countries, Libra could bring significant benefits as well as risks: It could provide financial inclusion and cheaper international transfers for hundreds of millions of people but, at the same time, could weaken developing countries’ currencies and amplify financial panics. If Libra does eventually achieve its aspirations of global adoption, it would not be surprising for emerging markets and developing countries to
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Anxiety about Libra, Facebook’s proposed digital currency, continues to grow among policymakers worldwide. A recent report commissioned by the G-7 warns that stablecoins—digital currencies backed by assets with a stable value—that are adopted on a global scale could pose a challenge not only to monetary policy but also to the international monetary system itself.
For developing countries, Libra could bring significant benefits as well as risks: It could provide financial inclusion and cheaper international transfers for hundreds of millions of people but, at the same time, could weaken developing countries’ currencies and amplify financial panics. If Libra does eventually achieve its aspirations of global adoption, it would not be surprising for emerging markets and developing countries to be a central part of the story. In contrast, Facebook’s digital currency would be less of a game changer in industrialized economies, as discussed in a previous blog post.
Libra is relevant for the developing world because it would offer features that are similar to those provided by the financial systems in industrialized nations and would lower barriers to financial integration with the rest of the world. Policymakers should consider the associated benefits and downsides carefully and actively participate in the debate on global stablecoins.
Facebook’s digital currency could help developing countries overcome at least three big challenges:
- Financial inclusion: Many households and firms in emerging markets and developing countries are unable to access basic financial intermediation (e.g., banking) services. Only 58 percent of adults in lower-middle-income countries had an account at a bank or similar financial institution in 2017, compared with 95 percent in high-income nations. For low-income countries, the rate drops to 35 percent. In recent years, the arrival of digital financial technologies through smartphones has helped bridge this gap (over 395 million people in Sub-Saharan Africa and 288 million in South Asia had a mobile money account in 2018). Facebook’s digital currency could accelerate this process.
- Cheaper, easier international transfers: By providing its users with rapid and inexpensive means of transferring money abroad, Libra could become especially appealing to migrant workers who live in advanced economies and periodically send remittances back to their families overseas. Libra’s head of policy and communications has already identified lowering the cost of remittances (which averages 7 percent of the amount transmitted, according to the World Bank) as a global priority.
- Protection from unstable currencies: Easy access to Libra would be an attractive alternative for people living in countries with a volatile domestic currency, such as Turkey, Pakistan, and Argentina. Unlike in most advanced economies, where there are few barriers to buying foreign currencies, people in developing nations hoping to store their savings in a currency other than their own often face a number of hurdles. Households with no bank accounts, for example, might be forced to rely on informal vendors who charge a high premium for their services. In more extreme cases, countries with capital controls may go so far as to bar the population from buying foreign currencies altogether. Such governments would likely ban the use of Libra. Although preventing the population from adopting an app-based payments system is not simple (as exemplified by Uber’s success in Colombia and Brazil in spite of hostility from regulators), it is certainly feasible. PayPal, for instance, was forced to suspend its operations in Turkey in 2016.
Against this background, it is easy to see how a reliable digital currency would be in high demand in the developing world. Of course, money is useful only when a large enough number of people are willing to accept it, and Facebook has a distinct advantage thanks to its large network of existing users. Already it reaches 270 million people in India, 130 million in Indonesia, and 120 million in Brazil.
But Libra won’t have it easy. Many of the world’s unbanked also lack reliable access to the internet. And personal identification systems in low-income countries are often unreliable and unlikely to meet the identification standards decided by the Libra Association, thus hampering its ability to implement Know Your Customer and Anti-Money Laundering safeguards.
But suppose that Libra overcame these challenges and achieved large-scale adoption. What would be the macroeconomic consequences for developing countries?
- Higher interest rates: Demand for Libra would translate into demand for the financial assets that back it—in all likelihood, government securities from advanced economies. This would exert some downward pressure on interest rates in economies like the United States, Japan, or the euro area but would push rates higher in the developing world, as residents shift their savings toward foreign assets. The net effect on global rates is unclear, although they might decrease if Libra promoted higher aggregate saving in poorer nations.
- Exchange rate depreciation: As residents in the developing world adjust their portfolios and choose to hold more Libra and less domestic currency, depreciation would follow. It is not necessarily bad but might heighten financial stress in countries where dollar-denominated debt is high, either in the public or private sector.
- More fluid foreign exchange markets, for better or worse: Adopting a digital currency that can be purchased within seconds on any smartphone would remove many of the frictions in foreign exchange markets of developing nations, such as banking requirements, government regulations, and even geographic distances. If money can flow into and out of these countries more easily, they would inevitably become better integrated with global financial markets and more sensitive to their business cycles. As a result, however, Libra could unintentionally increase exchange rate volatility. In the event of a panic—like what happened during the Asian financial crisis of 1997 or the Mexican peso crisis of 1994—the availability of an easily convertible Libra could worsen a potential run on the domestic currency.
The team behind Facebook’s digital currency says the plan is to complement countries’ currencies rather than replacing them. Christian Catalini, lead economist for the project, has stated that it would be unlikely for Libra to replace domestic currencies in daily transactions; instead, its competitive advantage is in international transfers and other operations with high financial or regulatory costs. Domestic currencies, he argues, have better properties for commonplace commerce.
This is a valid argument, but the question of currency substitution is not black and white: There is a continuum of possibilities between zero Libra adoption and full replacement of local money, with many grey areas where the economic implications could be unfavorable for developing countries. Policymakers should therefore ask for sensible rules and sound supervision in exchange for allowing Libra to operate in their countries.