ifo Researcher Thum: Libra Could Bring More Financial Autonomy to Emerging Markets

Libra, the planned Facebook cryptocurrency, could help citizens in emerging and developing countries to achieve greater financial autonomy. “In many developing and emerging countries, the central bank is used as an extended arm of the government, which leads to inflation, currency depreciation, and real devaluation of savings. The Libra could enable citizens to escape this kind of financial repression,” writes Marcel Thum, Director of the ifo Institute’s Dresden Branch, in an article for ifo Schnelldienst that he co-authored with Stefan Eichler, Professor of International Monetary Economics at TU Dresden.

They write: “In most emerging and developing countries, it’s the poorest people who have no access to the financial system. They have to pay horrendous amounts of interest on loans or high fees for international bank transfers.”

Thum and Eichler warn, however, that “Even though the Libra Association underscores the cryptocurrency’s advantages for humankind, the participating companies’ involvement in the cause is not purely altruistic, of course. When the system is up and running, they stand to benefit from seigniorage. After all, the Libra Association will buy interest-bearing government securities or bank deposits to offset issuance of the non-interest-bearing Libra.” Given that all transactions will be stored, user data will also be a valuable asset to the Libra Association. “This will enable them to analyze payment and goods flows as well as customers’ payment behavior.” Creation of a digital marketplace like Amazon, where all transactions made by Libra users could be traced, offers further business potential for the Libra Association.

Thum and Eichler add that a sovereign monetary system has been established worldwide in which a (more or less) state-controlled and yet independent central bank issues money and the financial system is state-regulated. However, it is in democratic systems with independent central banks that the advantages of this setup can really shine through. The Libra may create challenges for this sovereign monetary system, which is why governments, central banks, and regulators view it with skepticism. If use of the Libra became widespread, use of official local currencies might gradually decline. The impact of domestic monetary policy would diminish, while inflation would be even harder to control and would be prone to greater volatility.