Regulators in EU, UK, and U.S. have expressed concerns about the intention of Facebook to launch the digital currency Libra, which is scheduled for release in the first half of 2020. Libra is a blockchain-based payment system and digital currency that will be governed by an association of up to 100 financial and non-financial members, including Calibra, the digital wallet service of Facebook. This announcement by Facebook has sparked a debate about the regulatory and financial stability implications of a digital currency such as Libra. Key concerns regarding Libra include the trustworthiness of the issuer, cyber security, money laundering risks, data privacy issues, legal characterization of Libra, and the regulatory uncertainties associated with the centralization of a currency by a private entity.
Stance of US regulators
At a hearing entitled, “Examining Regulatory Frameworks for Digital Currencies and Blockchain,” the U.S. Senator Mike Crapo, who is also the Chair of the U.S. Senate Committee on Banking, Housing and Urban Affairs, expressed concerns about the trustworthiness of Facebook. Additionally, the U.S. Treasury Secretary Mnuchin highlighted serious concerns regarding the growing misuse of digital currencies by money launderers, terrorist financiers, and other bad players. He said, “As Facebook’s and other’s digital currency efforts move forward, I am particularly interested in better understanding how these technologies may impact individuals’ ability to exercise control over their data, including the right to receive information about and access their data, correct inaccuracies, and delete their data.
The Libra project of Facebook has generated renewed interest in digital currencies and blockchain, generally, including how they interact with U.S. and international regulatory frameworks, the potential benefits and challenges they pose, and concerns around issues such as anti-money laundering and counter-terrorism efforts, data privacy, consumer protections, commerce and monetary policy. During the hearing, he looked forward to learning more about the following issues:
- The encryption and networking features behind blockchain technology and how that technology enables digital currency transactions
- Ways that the market for digital currencies has grown and evolved over the last decade
- Different types of digital currencies in the marketplace, including their key differences with proposed digital currency of Facebook
- How other countries are approaching the regulation of digital currencies and blockchain technology and what can be learned from their successes and failures
- Potential gaps in existing regulatory frameworks and whether distributive ledger technology can help to facilitate meaningful privacy for individuals’ data
- Approaches Congress should consider in developing a comprehensive regulatory regime for digital currencies, including ensuring individuals have real control over their data
Stance of UK regulator
During a speech, the BoE Governor Mark Carney described Libra as a new payments infrastructure based on an international stablecoin fully backed by reserve assets in a basket of currencies, including the US dollar, the euro, and sterling. He highlighted that "Libra must address" a "host of fundamental issues," ranging from privacy and financial stability risks to money laundering/terrorist financing and operational resilience. BoE and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch. As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency, would be best provided by the public sector, perhaps through a network of central bank digital currencies.
Stance of EU regulators
The Vice-President Dombrovskis, on behalf of EC, mentioned that EC is monitoring the developments of the Libra project from an EU regulatory perspective and assessing its risks, particularly with regard to financial stability, monetary policy, data privacy, money laundering, consumer protection, competition, and cyber security. Despite the limited information available about the nature of Libra, EC is conducting a preliminary assessment in cooperation with ESMA and EBA, of the legal nature of Libra and the authorization(s) it subsequently may have to seek under EU law, to ensure the protection of EU citizens. EC is also working with international partners to ensure a globally coordinated approach to manage any risks posed by this new project.
Recently, Mr Yves Mersch of ECB also expressed concerns and outlined challenges associated with Libra, while speaking at the ESCB Legal Conference in Frankfurt. In addition to indirectly expressing concerns about the trustworthiness of the issuer of Libra, he discussed how Libra differs from other private currencies and public money, what legal and regulatory challenges it poses, and what position should a central bank like ECB take toward Libra. He called the ecosystem of Libra not only "complex" but also "carrel-like," as Libra coins will be issued by the Libra Association that comprises a group of global players in the fields of payments, technology, e-commerce, and telecommunications. The Libra Association will control the Libra blockchain and "collect the digital money equivalent of seigniorage income" on Libra." The Libra Association Council will take decisions on the Libra network's governance and on the Libra Reserve, which will consist of a basket of bank deposits and short-term government securities backing Libra coins. Libra-based payment services will be managed by a fully owned subsidiary of Facebook, called Calibra. Finally, Libra coins will be exclusively distributed through a network of authorized resellers, centralizing control over public access to Libra. Libra will actually be highly centralized, with Facebook and its partners acting as quasi-sovereign issuers of currency. However, when it comes to money, centralization is only a virtue in the right institutional environment, which is that of a sovereign entity and a central issuance authority (rather than a private entity).
Despite its audacious global currency aspirations, Libra lacks a global lender of last resort. He questioned who will stand behind it in a liquidity crisis situation. Libra is also devoid of the equivalent of a deposit guarantee scheme to protect its holders' interests during a crisis. Moreover, the limited liability of the Libra Association members raises serious questions about their resolve to satisfy the claims of Libra holders with their full faith and credit, as central banks do with public money. Finally, the fact that Libra is backed by a basket of sovereign currency-denominated assets appears to defeat the very purpose of its issuance as a private currency. Next, he discussed three key legal and regulatory challenges associated with Libra:
- The first challenge concerns the fundamental legal nature of Libra and whether to treat Libra as e-money, a financial instrument, or a virtual currency. If Libra were to be treated as a transferable security or a different type of financial instrument, both the Libra Association and any other entities engaged in providing investment services through Libra coins would fall within the remit of the Markets in Financial Instruments Directive (MiFID II). Alternatively, if Libra were to qualify as a virtual currency then, under the Fourth Anti-Money Laundering Directive, both Calibra and its authorized resellers would become subject to the anti-money laundering and counter-terrorism financing obligations of the Directive and to its registration requirement. Given the different regulatory implications of Libra's legal characterization, regulatory intervention is essential, to either confirm Libra's classification under one of the existing legal and regulatory frameworks, or to create a dedicated regime adjusted to its specificities.
- The second challenge is to ensure that the relevant EU and member atate regulatory and supervisory authorities can assert jurisdiction over Libra and its network. However, this can be difficult to do when the entities behind Libra are located outside the EU.
- The third challenge is the need for cross-border cooperation and coordination. The global nature of Libra would call for a global regulatory and supervisory response to avoid regulatory arbitrage, ensure consistency of outcomes, and guarantee the efficiency of public policy responses to Libra. There are welcome signs that the global community is already working together to mitigate risks associated with Libra. Both the G7 and the Committee on Payments and Market Infrastructures have evaluated Libra, with an emphasis on its potential use in money laundering and terrorist financing. Further work is expected by the G20, FSB, and other fora with a stake in the stability of the global monetary and financial system.
Finally, Mr. Mersch summarized the general stance of ECB toward financial innovations such as Libra. He emphasized that ECB takes a close interest in market innovations that could directly or indirectly affect the control of Eurosystem over the euro or shift some of its monetary policy to third parties. Depending on level of acceptance of Libra and on the referencing of the euro in its reserve basket, it could reduce the control of ECB over the euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the international role of the single currency, for instance, by reducing demand for it.
- Yves Mersch of ECB on Libra
- EC Vice President Dombrovskis (PDF)
- Speech of Mark Carney from BoE
- US Senate Hearing on Digital Currencies and Blockchain
Keywords: International, Americas, Europe, EU, Blockchain, Digital Currency, Libra, International Cooperation, Calibra, Fintech, BoE, ECB, EC
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