The Impact of Libra and Alipay on Monetary Policy

Digital payment systems such as Libra and Alipay may eventually weaken traditional tools of monetary policy. In doing a good job, central banks can prevent this from happening though, according to a high-ranking Swiss central banker.

The Swiss National Bank (SNB) is currently engaged in a fight against an appreciation of the Swiss franc and – presumably – is spending huge amounts of money on the purchase of euros and dollars. A fight against all odds it seems – and with the emergence of Alipay or eventually even Libra, the risk is that traditional means of monetary policy lose their effectiveness.

Once such a purely digital means of payment takes on the role of a trading currency across national borders, central banks are faced with a set of whole new questions.

It is clear that it would become more difficult to implement the monetary policy if a major part of payments in Switzerland is conducted in another currency than the franc, said Thomas Moser, member of the enlarged governing board of the SNB.

Moser is convinced that central banks can meet the challenges by simply doing a good job, and thereby prevent people from opting for alternative means of payment. But, at the moment, the bank estimates that the introduction of digital central bank money for consumers would entail hardly an advantage, but major risks.

The emergence of such means of payment is closely linked to the Blockchain, which is the focus of the second wave of digitization and decentralization. The Blockchain-enabled things beyond our imagination, Moser said. «Today as then, expectations were exaggerated. But in the long run, the consequences are underestimated.»

Central banks and governments are keen to provide a legal framework for such new projects and to make them conform to the current regulation in a bid to enable the financial market to exploit the new opportunities arising.