In a new report published by Brookings yesterday, the Honorable Timothy G. Massad, Senior Fellow at The John F. Kennedy School of Government at Harvard University, Former Chairman of the Commodity Futures Trading Commission, and Former Assistant Secretary, Treasury for Financial Stability, discusses changes to Facebook’s Libra. In what Massad describes as ‘Libra 2.0’, he evaluates the potential impact of Libra on both payments and financial inclusion. Massad then describes the way Chinese mobile payments have achieved both inclusion and satisfied regulatory requirements, and cautions that a U.S. central bank digital currency should be studied by the Federal Reserve but with caution, as it may disintermediate commercial banks.
Overall, the paper is sufficiently complex to manage the complicated topics at hand and at the same time, commands a simplicity and common sense to take the reader on a journey of how payments systems could still provide access to help the unbanked. Massad offers his conclusions up front: he considers ‘Libra 2.0’ as amended by the version of its white paper as one that the United States should consider embracing. Whether through Congress, the Financial Stability Oversight Board (FSOC), or through the work of regulators to stitch together a framework, Massad believes Libra 2.0 has revised its structure as such that it should be given the opportunity to help the unbanked.
As first impressions are everything, Massad walks the reader through how Facebook itself drew renewed criticism against the Big Tech social media giant and prejudiced many lawmakers from giving Libra the time of day. Massad notes how Facebook’s Libra has changed its approach from a ‘global currency’ to matching one-to-one with sovereign currencies. The second change is enhanced compliance procedures to address concerns that the network could be used for money laundering and financing illicit activity, and the third is how the reserves will be protected for the sovereign currencies that Libra coins are issued against. Finally, Massad notes how Libra decided to jettison the idea of moving from a permissioned blockchain to a permissionless blockchain enviornment similar to Bitcoin or Ethereum, which he sees as a move in the right direction for Libra to meet its regulatory responsibilities on an ongoing basis. While fans of cryptocurrencies may find this a disappointing turn of events, it is helpful to view Libra now as more of a ‘PayPal
Massad shares the concerns about use of data and privacy by a company such as Facebook, and the power of large digital platforms generally, and that we need to address those issues anyway, whether or not Libra goes forward. According to Massad, the goal of helping the unbanked and improving access is an important one, and we should let Libra try to make a difference.
Massad then notes how digital currencies for his definition include everything that is tokenized, whether private money or central bank money. He argues that due to the fractional reserve banking system in the U.S., most of what commercial banks offer and create for its customers is essentially private money anyway. He then notes that for China, the advances in mobile payments demonstrated how to create a new payment rail and provide financial inclusion without creating a digital currency. While the Bank of International Settlements notes that central banks are looking to implement its own public digital currency which cover 25% of the world’s population. Massad points out that China by itself covers 20% of the population and is arguably farthest along in the development of its digital currency, which is why he takes us on a journey into China to best understand how the unbanked were provided options.
Finally, Massad comments on both the retail CBDC suggestion in Congress as well as the idea of FedAccounts, including the notion of using the Post Office system as part of the Federal Reserve to help offer direct banking services. Massad pushes back on the idea of the Post Office, noting the original reason the Post Office was used to support national banking arose prior to either the existence of the Federal Reserve or the FDIC. Indeed, Massad’s ultimate conclusion is the suggestion to offer everyone an account at the Federal Reserve – but one with a ceiling and with a limited number of transactions. Massad imagines these FedAccounts would be ‘starter’ accounts as a way to give access to the unbanked an entry into the banking system, and at some point the person would ‘graduate’ to commercial banking.
With this conclusion, Massad carefully threads the needle in his concern for a retail CBDC possibly dis-intermediating commercial banks as well. Massad refers to the Bank of England’s consultation on central bank digital currencies and notes the careful examination that central bank engaged in to ensure it understood the potential consequences of retail CBDC. While he does not mention the ‘Digital Dollar Project’ and his peer, the other Former Chairman of the CFTC Giancarlo, and his work toward a tokenized retail CBDC and its importance for the U.S., Massad believes a retail CBDC may cause as many problems as FedAccounts or the U.S. Post Office. His paper does suggest carefully evaluating and not rushing the Digital Dollar, something Giancarlo has been very clear about during Covid-19. Both also share agreements that were there already a retail CBDC in place in the U.S., the delivery of critical stimulus payments to those who did not have a bank account or direct deposit would not have highlighted what Massad calls the ‘Cash-Digital divide’ in the way Covid-19 did for the U.S.
Massad’s paper overall provides a constructive way of looking at how Libra’s 2.0 construction should be afforded at least the opportunity for Libra to see if they will live up to their promises in helping the unbanked. While Massad discusses capital and other regulatory requirements that Libra may need to meet, the one suggestion to his model that I would add, as I did serve for some time after the FDIC as a contractor on the Making Home Affordable Program – Compliance, is the idea of not only consumer protections, but similar in a manner to the CRA exams for community banks, perhaps assigning a metric such as the number of ‘unbanked’ who achieve access to the payments system in the U.S. as part of Libra’s goals on the compliance side along with necessary capital and reserve requirements, might be the carrot to waive as insurance that David Marcus and Dante Disparte will keep their focus on the unbanked here in America.
The paper is available through the Brookings Institution.