Digital Dollars

This case explores private and public proposals for digital forms of money that bypass the commercial banking system. A private proposal comes from Facebook's Libra. A public proposal comes from central bank digital currency (CBDC). The case begins with Mark Zuckerberg's vision for Libra and the ensuing pushback from policymakers. One of the main concerns—financial stability—is revisited during a tour of the arguments for and against a CBDC. The introduction of the first official CBDC by the Central Bank of the Bahamas is then discussed. The case closes with Zuckerberg pondering the economics of Libra in a bid to bring policymakers on board. The case is intended to follow a class on the economics of cryptocurrency (e.g., as presented in "The Economics of Cryptocurrency" [UVA-GEM-0190]). Prior exposure to the causes of and responses to the 2008 financial crisis is also strongly recommended to permit a substantive discussion of financial stability risks.<br><br>Excerpt<br><br>UVA-GEM-0197<br><br>Aug. 23, 2021<br><br>Digital Dollars<br><br>It was a new year and a new problem for Mark Zuckerberg. In June 2019, Facebook made headlines with a plan to launch a new cryptocurrency called Libra. The plan proposed to solve one of the biggest knocks against existing cryptocurrencies—extreme volatility vis-à-vis traditional fiats—by backing Libra with a basket of stable assets. The assets would be held in a fund governed by the Libra Association, a not-for-profit membership organization whose initial lineup boasted a star-studded cast of payments and technology firms. In October 2019, however, the likes of PayPal, Visa, MasterCard, and eBay dropped out amid intense backlash from lawmakers. French and German ministers had vowed to block Libra in the name of financial stability while US senators were threatening increased regulatory scrutiny of those involved. The remaining members of the Libra Association scaled back their plans for Libra in April 2020 and rebranded as the Diem Association in December 2020, going so far as to limit Facebook's involvement to distance the project from recent violations of user privacy by the social media giant. Yet lawmakers remained highly dissatisfied. All the while, central banks had become increasingly interested in exploring a new form of money: central bank digital currency (CBDC). CBDC had the potential to render Libra obsolete, and word on the street was that the central banks were interested precisely because it could do so.<br><br>Facing an uphill battle that was steepening by the day, Zuckerberg and the Diem Association were at a crossroads. Could they make a serious economic case for Libra that would convince lawmakers to give it a shot, or was it time to cut losses and move on to another project?<br><br>Libra 1.0<br><br>. . .<br>