How Beijing will react to Facebook’s cryptocurrency Libra

Facebook’s plan to launch a cryptocurrency could usher in a new type of “currency competition” and force China to rethink how it deals with the realities of the digital world, analysts said.

Image credit: Facebook

In the past, Beijing has cracked down on cryptocurrencies like Bitcoin, viewing them as a threat to financial stability, and has tried, with little success, to develop a “sovereign” digital currency of its own.

Facebook’s Libra, which is expected to be launched next year, raises a tough question for Beijing as it may have greater implications for global currencies, payments, and financial systems than traditional currencies.

That is because it will be pegged to a basket of convertible currencies – so it could serve as a stable online currency – while its payments will be endorsed by Visa and Mastercard, meaning it can be used for a range of online services. Also, Facebook has more than 2 billion users.

Its aim to make payments easier could undermine Beijing’s efforts to curb capital outflows as well, while its potential to become a global currency could bring uncertainty to China’s use of the yuan as an economic and policy tool, analysts said.

Wei-Tek Tsai, chief scientist at Chinese blockchain firm Tiande Technologies, said the planned launch of Libra heralded a new type of currency competition and will be the first one related to digital currency.

That is because as a stablecoin – a cryptocurrency that holds a stable value – Libra will not be working against fiat currencies but as a supplement to promote their use.

“In the past, the usual practice was devaluing the fiat currency to stimulate exports. When countries begin to competitively depreciate their domestic currencies, global currency wars and exchange rate wars break out. This is old-style currency competition,” Tsai said.

“In the new currency competition, they can also use stablecoins to enter other markets, and control trading information. The characteristics of the new competition are: fast circulation, 24/7 and no Swift [financial messaging for cross-border payments].”

Facebook has not disclosed the composition of the currency basket that supports Libra, but said it has been “diversified by selecting multiple governments, rather than just one” to reduce the likelihood of excessive fluctuations.

Jerome Powell, chairman of the US Federal Reserve, said last week that Facebook had been in contact during the development of Libra and he had high expectations for it on “safety and soundness.”

“Libra will support the dollar, as a supplement to the fiat dollar,” Tsai said. “Some people may think it’s just a US company launching a stablecoin, not a fiat currency, and this company cannot operate in China, so Libra is not important. Is it? Now that the government and central banks from the US and Europe are all in on this, even though they may disagree on their positions. It has become a national-level public debate. How could it not be significant?”

China’s central bank did not respond publicly to Facebook’s white paper announcing its plans to launch Libra last week.