(Yicai Global) Jan. 15 -- US social media giant Facebook's new digital asset Libra is set to revolutionize cross-border remittances and mobile payments, but it is essential to find a balance between market efficiency and risk management, according to the chief China economist at the Hong Kong Exchanges and Clearing.
It is entirely new for a commercial entity to issue a currency, Ba Shusong said at the Yicai-sponsored symposium Fintech and Digital Currency: Financial Innovation in the Greater Bay Area, which was held as part of the Asian Financial Forum in Hong Kong yesterday.
When Facebook announced its own cryptocurrency Libra last June, it offered unparalleled conveniences for its 2.7 billion global users, but at the same time its freedoms pose enormous challenges for regulators.
Only by promoting the reform of regulations concerning new technologies and financial innovation can we find a way to resolve the difficulties of regulating Libra, Ba added.
Impact on Existing Financial System
Many countries are concerned that Libra's issuance and global circulation will affect their sovereignty. As the US dollar accounts for half of Libra's reserve assets, if it is successful, it will strengthen the dollar's global standing.
However, the way Libra will work is contrary to the monetary policy of many small economies. "In existing monetary policy, Libra's asset reserve is actually equivalent to the role of the final buyer and the central bank's last borrower," Ba said.
Libra's strong advantages in cross-border transactions will challenge the international payment businesses of traditional commercial banks, financial institutions and intermediary businesses.
As Libra grows, it might branch into lending. If so, it will start to create credit. This will change the business model of existing financial institutions and impact on the core intermediary position of commercial banks.
Libra might also replace some currencies. This would limit the right of some governments to issue currency and affect the corresponding coinage revenue. It could cause some countries to be increasingly reliant on fiscal policies and lead to a rise in debt levels, he said.
Need for New Global Rules
There is no doubt that the emergence of the super-sovereign currency represented by Libra will pose a challenge to regulators.
Libra's goal is be inclusive and open. But its inclusiveness and the anonymity of its transactions can be misused as an international money laundering tool to circumvent capital controls. "Fintech innovation tools improve efficiency, but also increase the information asymmetry between the regulator and the regulated party," Ba said.
Libra's cross-border payments cost over 90 percent less than traditional bank transfers. "But as an influential financial business, entering different markets requires applying for the corresponding permits," said Ba. To achieve legal currency exchanges with different countries and to expand its financial services, Libra must get licenses from them along with the corresponding transaction support. A unified global cryptocurrency regulatory body is required to supervise such applications.
Libra is undoubtedly an important innovation. Once launched, it will be an overarching architecture with huge influence, business scale and coverage. Regulators must maintain the credibility of their financial laws and regulations. They need to maintain stability while remaining open to such an innovation. They need to promote the reform of regulations concerning new technologies and financial innovation, so as to resolve the challenges of Libra regulation.
Editor: Kim Taylor