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Libra, the yuan and the dollar: A complex digital currency war

As China ponders 'financial belt and road,' US stays cool to Facebook e-money

TOKYO -- A proposal by U.S. social networking leader Facebook to create a virtual currency called Libra is making waves. Such a currency could become the third node in a three-way struggle with the yuan and the dollar for supremacy in the 21st century.

On July 11, U.S. President Donald Trump weighed in on the debate over Libra in a series of tweets, saying: "Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity." He followed up with: "If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations," and, "It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!"

A Japanese financial official, who was at the time discussing a response to Libra with counterparts ahead of the G-7 finance ministers and central bank governors meeting in France later in July, applauded the tweets. The focus of the G-7 meeting was on how to warn Facebook to delay Libra, which it planned to launch in the early 2020s.

"As far as Libra is concerned, the president got to the point, and that was exactly what global regulators were trying to say," the official said.

David Marcus, who oversees Facebook's Calibra digital wallet, was called before Congress, where he assured lawmakers that the company would comply with global regulations. "Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals," Marcus said.

U.S. regulators moved quickly, seeing Libra as a potential threat to dollar-based international currency system and big Wall Street banks. The Federal Reserve on Aug. 5 announced plans for a new, round-the-clock, real-time payment and settlement service, called FedNow Service, to support faster payments. As of now, only large banks can use the immediate settlement system, but the new service will be available to all banks in the U.S. The service is to go online in 2023 or 2024.

The announcement came despite strong resistance to the new service from the big banks. The Fed's new system aims to deal with a potential move by Facebook into the remittance business, according to a financial official.

Chinese authorities are even more nervous about a virtual currency backed by Facebook. At a meeting of scholars and financial officials in early August, an executive with the People's Bank of China, the central bank, said work on a digital yuan is nearly complete. He also mentioned Libra, stressing that China is speeding up the development of its own digital currency.

China has been studying a digital yuan since 2014, and the central bank's Digital Currency Research Institute has filed numerous patent applications. According to the central bank executive, the digital yuan is to be traded in a two-tier system, one between the central bank and banks, and another between banks and corporations or individuals.

The central bank plans to issue the digital currency through seven organizations, including Alibaba Group Holding's Alipay mobile payment service, Tencent Holdings' WeChat Pay and banks.

China tightened controls on bitcoin and other digital currencies in 2017 to prevent people from circumventing the country's capital controls. Libra, which promises a stable value and easy overseas remittances, poses a serious threat to China's currency ambitions.

With the U.S. trying to cut China out of global supply chains, a digital yuan could enhance Beijing's economic clout. It could be also used for trade with Asia and Africa, creating a financial version of its Belt and Road Initiative.

So now Libra finds itself in the crosshairs of both U.S. and Chinese regulators. But it is unclear whether Libra really is a threat to the U.S.

The U.S. government has a complicated relationship with tech giants such as Facebook. Washington is eager to prevent them from using international tax havens to shelter their income, but it does not want to see American companies singled out for punishment.

A good example of the Trump administration's economic nationalism was the president's threat to impose higher tariffs on French wine if the European Union implements a digital tax proposed by France. That prompted French President Emmanuel Macron to offer a compromise.

Washington is wary of Libra because it could threaten the dollar's supremacy and the Fed's seigniorage. But the digital currency may survive, if Washington finds it a useful tool to keep China in check. 

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