Public vs private stablecoins: a battle over money’s most attractive digital form

19 May 2022

Georgette Fernandez Laris - Doctoral Researcher, Department of Economics, the University of Sheffield

Wary of unruly private global digital currency mavericks that monetise on people’s privacy, several central banks are developing their own digital legal tenders – but we should question how and by whom our money is controlled.

The alchemy of a private token

Yesterday’s Facebook (current Meta) announced in 2019 an ambitious plan to launch their version of a global private digital currency: Libra, renamed Diem in Dec 2020. Unlike the speculative asset-based properties of cryptocurrencies (making them as valuable as people believe they are), Libra/Diem would be pegged, thus making it a stablecoin—i.e. an asset-backed digital private token—like Tether. As such, it would be underpinned by some of the claim-like properties of fiatmoney causing it to derive value from users’ trust. 

Unlike pure stablecoins—usually pegged to a single currency—Libra/Diem’s initial design was to be backed by a Reserve composed by a basket of high-quality, liquid financial assets (including bank deposits and liquid securities) denominated in multiple low volatility currencies.

Imitation crypto currency coins
Photo by Art Rachen on Unsplash

Demystifying the political economy of Diem

Libra/Diem was set to run on blockchain technology—albeit not the typical we know from the cryptocurrency world pioneered by Bitcoin’s architect Satoshi Nakamoto. Such was a permissionless world of ‘blocks of transactions’ relying on decentralised consensus to verify transactions, add them to the blockchain, and create new tokens. By contrast, Libra/Diem would operate on a permissioned Block(chain), consisting of a single data structure, whereby only members of the Diem Association—involving companies from payment-technologies, telecommunications, e-commerce, venture capital, and non-profit market sectors—would validate transactions, manage, and control the ledger.  

Diem’s highly centralised nature was more evident from its Reserve structure. The initial portfolio composition of Diem’s Reserve would have exposed users to unwarranted exchange rate and liquidity risks because its convertibility into any given national fiat currency would have been subjected to ample parity fluctuations, moving according to the weighted value of the national currencies underlying its Reserve bucket. 

Keeping the token’s value within Diem Association’s desired (undisclosed) bounds would have made the Association a de facto central bank finetuning the operations of a quasi-currency-board between public fiat money and a digital private token. Meta recruited former chief public servants versed in financial regulation as political appointees to orchestrate concessions to earn regulators’ approval. One such compromise had Diem reduce its scope to be singly backed by the U.S. dollar in order to appease regulators (including those in Europe).

Nonetheless, in the U.S. “the government hesitated to condone a project like Diem until it had its own comprehensive regulatory framework for stable coins in place” and reminiscent of 1930’s Glass–Steagall Act it limited stablecoin issuers’ affiliation with commercial entities “to address concerns about systemic risk and concentration of economic power”.  Unable to subdue regulators, Meta sold Diem to a little-known California bank on January 2022.

Digital Cavaliers: shedding light on abstruse meta-designs

Tech giants power beats from proprietary access to data on customer transactions and their network effects, which they monetise. The latter has incentivised central banks (CBs) worldwide to develop possible counteroffers—central bank digital currencies (CBDCs)—which, among other things, seek to revert to consumers the bargaining power they loose from inadvertently renouncing their privacy to payment platforms and big-Techs.   

CB’s new proposal—retail CBDCs—would allow everyone to make electronic payments directly in central bank money, diminishing the need for intermediation. Their technical designs vary but most attempt to ensure similar objectives: accessibility and reach at least equivalent to that of private digital currencies, preserving the effectiveness of monetary policy, safeguarding financial systems’ stability, ensuring data privacy and maintaining the integrity of payment systems. To foster competition, CBDCs could be designed as public-private partnerships stemming from two-tiered systems of collaboration between central banks and the private sector.

New pawn structures?

Libra/Diem founders claimed it was about increasing people’s monetary freedom. Yet, evolutionary psychologists and behavioural economists have documented the link between ‘easier’ and less material (digital) payment methods and reduced financial decision-making since less physical forms of payment decrease the transparency and saliency of purchases, inducing impulsive spending and lessened control over ones budget.

The waters are now calm and regulatory Titans seem to have defeated a private, global digital currency Leviathan. It is not implausible, however, to foresee Diem-like iterations in the future.  

Central banks have used private digital currencies' regulatory impasse—exemplified by Diem's stalemate—to create their own digital alternatives. Pilot versions of a Digital Chinese Yuan (DCNY) were rolled out as early as October 2020. While initially criticised as another tool for government surveillance, the People’s Bank of China (PBOC) contends it was created to protect China’s monetary sovereignty from the threat posed by new private digital moneys. 

In Spring of 2021, Bank of England established public engagement groups to gather strategic input on potential designs for a Central Bank Digital Currency (CBDC). Similarly, the European Central Bank (ECB) decided to launch its digital euro project in July 2021. Others have followed suit (most are a work-in-progress). The impact of CBDC’s on consumer welfare will depend on countries’ current payment systems, digital money literacy campaigns and on users’ preferences. As potential users, we must inform ourselves on the technologies and processes underlying them and on how they override human cognitive decision-making systems. 

The exercise must go beyond listing their benefits and cons to understanding how each of those is achieved. We must consider on which hierarchy of principles and under whose control do we want our money to be based. For starters, we could ask how willing are we to entrust our transactional digital footprint—itself revealing parts of our identity and psychology—to schemes that make it a tradable luxury rather than a right only we control.

This blog is the seventh and final in the series ‘The political economy of everyday life’ by SPERI’s Doctoral Researcher Network.

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