Germany's stand against stablecoins may filter across Europe
What has recently been considered a foregone conclusion in Germany has finally happened: the country's cabinet has officially taken a hard-line stand against stablecoins and any other cryptocurrency projects that seek to unseat fiat as a default currency. The move is seen largely as one intended to prevent Facebook's Libra from being developed in Europe. However, Libra will not be the only affected project.
Germany's reaction to digital currencies is not surprising. Berlin has made it clear for quite some time that cryptocurrencies have no place in Germany. And given Germany's membership in the EU, it is quite likely that Berlin's policies will filter throughout the bloc. Will they reach far enough to affect European countries not part of the EU? How about the rest of the world?
A question of national sovereignty
Governments that tend to be hostile toward cryptocurrency cite lots of different reasons for that hostility. According to German Finance Minister Olaf Scholz, one of Berlin's primary motivations is national sovereignty. Scholz says that he and his fellow government leaders "must protect consumers and state sovereignty."
He went on to explain that "a core element of state sovereignty is the issuing of a currency," and that Germany's government will not sit idly by and allow stablecoins to replace fiat. The irony of Scholz's statements is rich indeed. If stablecoins really do represent a threat to national sovereignty, why does the euro system not pose the same threat? Why did Germany dispose of the deutschmark in favor of the euro?
All irony aside, Germany's concern is very real, albeit misplaced. Let us say a stablecoin did eventually get strong enough to completely replace the euro. Where would the German government be in terms of its ability to control economics and monetary policy? They would be left out in the cold.
In the real world, the ability to control economics is where government derives most of its power. Governments can stimulate or deflate economics in order to exercise control over citizens. It happens all the time. This is exactly what German leaders do not want to lose. Why? Because citizens suddenly have less need of government if their governments do not have control over economics.
The on-ramp question
As to why Berlin's concerns are misplaced, think no further than the cryptocurrency on-ramp - or the lack thereof. Most people who create cryptocurrency projects, be they traditional crypto or stablecoins, do not give their coins away for free. And the small number that do quickly realize that giving coins away means these have no value.
New coins are either sold as investments or distributed to miners as a reward for doing the work they do. The average person who wants to get his/her hands on cryptocurrency has to buy it with fiat. Why? Because only fiat is considered legal tender in all but two world countries.
Lacking status as legal tender means there is no inherent value in a cryptocurrency. By contrast, fiat's status as legal tender gives it inherent value. Even if that value suffers from hyperinflation (think Venezuela) people can still use it to pay their bills.
All Berlin has to do to prevent Libra or Bitcoin from supplanting the euro is to not recognize it as legal tender. Commercial banks, retail banks, and corporations are not about to do business with a cryptocurrency that doesn't have a fiat on-ramp. For the record, where there is an on-ramp there is also an off-ramp.
The stablecoin defense
Stablecoin creators defend themselves against accusations of threatening national sovereignty by pointing out that their coins are backed by other tangible assets. In fact, this is what makes a stablecoin different from a traditional cryptocurrency. A stablecoin's value is tied to something else.
In Libra's case, Facebook just released a list of assets that will be used to back the coin. Facebook has settled on a basket of global currencies rather than government securities. Libra will be backed 50% by the U.S. dollar. The remaining amount will be backed by the euro, British pound, Japanese yen, and Singapore dollar.
Let us step back and analyze this a bit further. The five currencies set to provide backing for Libra are all fiat currencies through which dozens of nations maintain some semblance of sovereignty. If Germany's concerns were ever to come to fruition, the euro would cease to have any value. But then that would negatively affect Libra's value as well.
Indeed, the collapse of any of the five backing currencies would render Libra worthless. It simply doesn't make sense for Facebook and the Libra Association to attempt to undermine fiat as a replacement currency. Whether you love Libra or hate it, you cannot deny the fact that it is not a replacement currency. It is like Bitcoin in that it will act as an alternative payment system.
Never on European soil
Any arguments in favor of Libra may fall on deaf ears in the coming months. Germany has vowed in its most recent policy to fight any and all attempts to develop Libra on European soil. Do not underestimate this vow. If it were not for Germany, the EU would probably not exist today. Germany's influence in the bloc's affairs is stronger than most other member nations. What they say generally has some clout.
Germany doesn't stand alone, either. France has also made it clear that it isn't all that thrilled about Libra or any other stablecoin, for that matter. Throw in Spain, Switzerland and Italy, and Facebook wouldn't have a shot of getting a foot on the ground in Europe.
Not having access to Europe would not be a death knell by any means, but it would put Facebook behind the eight ball in competing with Bitcoin. The thing Facebook has been working to its advantage is its widespread use in Asia and Indonesia. Those two regions might end up being Libra's biggest strongholds.
All Facebook needs to do to guarantee Libra's viability is find a way to dominate alternative payments in regions where other options are currently limited. Not only is Indonesia at the top of the list, but Facebook enjoys a very high adoption rate in that part of the world. Millions of Indonesian users are very familiar with all of Facebook's properties.
U.S. opposition unclear
Elsewhere, Facebook has other countries to contend with. The U.S. is at the top that list. Given that Facebook is an American company, the first hurdle is getting past the U.S. Securities and Exchange Commission (SEC). Facebook really cannot do anything, anywhere, until the SEC gives its approval.
It would appear at first glance that the SEC has nothing to object over. But it is not that simple. The SEC operates at the behest of the U.S. Congress, and many members of Congress have already raised concerns about Libra. Within days of the release of the Libra and Calibra white papers, lawmakers began scheduling hearings in hopes of learning more.
At least a handful of U.S. legislators have recommended putting Libra on hold until Congress gets a better handle on what it is and how it works. Others have shown open disdain for the project, citing Facebook's track record of not protecting privacy and selling access.
At the end of the day, it is unclear how Facebook will fare in its own home country. It's not beyond the realm of possibility for the company to set up an overseas subsidiary in order to launch Libra without SEC approval. Yet that might also damage the credibility of the stablecoin before it is ever released.
A European stablecoin
Getting back to Europe, a secondary reason Germany opposes Libra and other stablecoins rests in the European Central Bank's (ECB) commitment to developing its own stablecoin for Europe. That's right, the ECB is working on a digital currency project they hope to have ready in the short term.
Rumor has it that the ECB is working overtime to get their stablecoin to market quickly enough to preempt Libra. Whether or not they succeed is anyone's guess. However, the mere fact that they are working on their own stablecoin speaks volumes.
First, it says that the ECB recognizes the need for digital currency. They might also suspect the world is quickly coming to a place where paper bills and minted coins become obsolete. They want to be on the forefront of that revolution should it ever come to fruition.
More importantly, the ECB's work suggests that Berlin's real opposition to stablecoins doesn't rest in national sovereignty. We have already pointed out how Germany surrendered its national sovereignty when it got rid of the deutschmark. No, what this appears to be about is competition. Berlin and its allies do not want anything to compete with the ECB's stablecoin.
Berlin should not be faulted for this. Nor should France or any of the other EU member nations. They understand the power of competition in the marketplace. They do not want anything to compete with the European stablecoin.
The only problem is that government doesn't really want to open things up to competition so as to allow the best competitor to win. Instead, they use legislation to make sure they have no competition. Thus, Berlin's hard line stand against stablecoins is likely to spread across Europe.