Facebook’s Libra and more ECB stimulus

On 18 June 2019 Facebook unveiled Libra, its digital currency project, which immediately raised alarm among regulators and central banks. That same day, Mario Draghi, president of the European Central Bank, announced that the institution was ready to provide more stimulus. Two pieces of news of a different nature, but speaking of the same subject: the future of money and who controls it. The two announcements, so close together, showed that money and payments are a field in which private innovation and public authority coexist.

The coincidence was not accidental in terms of how it was read. On one side, a large technology company proposed creating a means of payment with global ambitions. On the other, the central bank of the euro area reminded everyone that it remained the one that sets monetary conditions. For business owners and families, both facts raise practical questions: how people will pay in future and what to expect from interest rates in the coming months.

A currency with global ambitions

It is different when a major technology company proposes its own digital currency than when a small project does. Libra could potentially reach an enormous user base, which is why regulators and central banks quickly asked about its control, its supervision and its effect on the financial system. Digital currencies and new means of payment promise speed and low cost, but they also raise questions about who is responsible if something goes wrong.

Money is a piece of collective trust, and states and central banks have mechanisms to protect that trust: rules on who can issue, how funds are guaranteed and how abuse is prevented. A project that aims to operate outside those rules, or to reinterpret them, necessarily raises questions before it even begins to function.

The ECB, ready to act

Central bank stimulus means measures to ease financing and support activity, such as cutting rates or buying debt. Their effect is to make credit cheaper and encourage investment and spending, although they have costs and side effects, and are usually applied when there is concern that the economy is losing momentum.

By saying it was ready to do more, the ECB indicated that the euro-area economy still needed support and that low rates could last longer. For those with variable-rate debts it is good news, and for those who live off the return on their savings it is a reminder that deposits would keep yielding little. That combination of low rates and new forms of payment sketches an environment in which financial decisions deserve frequent review.

What to bear in mind

New projects in money and payments can change quickly, and their regulation is still to be defined. The terms announced today may be modified, and regulators may impose limits or requirements that alter the expected operation. That is why it pays to look at these projects with curiosity, but without haste.

Before using or accepting a new means of payment, a business owner should find out well about its terms, its supervision and its legal and tax fit. Accepting payment in an instrument that tomorrow could be limited or regulated differently carries collection and accounting risks, which should be weighed with the adviser before taking the step. While regulation remains unclear, the prudent course is to keep established means of payment as the base and to try new ones, if at all, with small, reversible amounts.

Financial innovation moves fast; prudence moves at its own pace.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.