After the United States Federal Reserve asked some of the nation’s largest banks about Libra, the banks expressed their negative stance towards the project, outlining the risks of potential decline in demand-deposit accounts and bank payment volumes, Bloomberg reports Sept. 30.
Facebook’s crypto project Libra will potentially create a “shadow banking” system, according to the banks at the Federal Advisory Council (FAC).
U.S. banks fear Libra will reduce payment volumes
Libra and similar stablecoin projects, where a digital coin is pegged to an underlying value consisting of one or more fiat currencies, also pose a possible challenge to the bank business model built on privacy, the banks reportedly said during a quarterly meeting of the FAC earlier in September.
Noting that around 52% of the U.S. population, or 170 million people, were considered active Facebook users in 2018, the banks suggested that Facebook is potentially creating a digital monetary ecosystem outside of sanctioned financial markets, or a “shadow banking” system.
The banks argued:
“As consumers adopt Libra, more deposits could migrate onto the platform, effectively reducing liquidity, and that disintermediation may further expand into loan and investment services.”
Banks want to keep managing local economies
Additionally, the banks warned that Facebook’s Libra could impact the national monetary policy, citing the “potential to reduce the ability of states to monitor, manage and influence local economies.”
The FAC, which includes twelve representatives of the U.S. banking industry, consults with and advises the Fed Board on economic and financial issues within the Board’s jurisdiction.
On Sept. 26, Bloomberg reported on Facebook planning to get its chief operating officer Sheryl Sandberg in front of the House Financial Services Committee in October to testify on Libra and its plans to launch the stablecoin in 2020.
European Commission Exec Questions Facebook’s Libra Stablecoin
Executive Vice President-Designate of the European Commission, Margrethe Vestager, has questioned the motives behind Facebook’s forthcoming Libra stablecoin.
In an interview with the Financial Services Union of Denmark, a fragment of which was published on Oct. 1, Vestager addressed the possible impact from Libra’s launch – such as competition due to Facebook’s multimillion user base and distortion of competition in the payment services market. Vestager argued:
«It’s a pretty new thing that we are starting to question something that does not exist yet. But it is so far in the future that we cannot tell if this is going to be a problem. And the problem may be that you get a completely closed ecosystem that has nothing to do with the rest of the economy.»
A lot of questions
Vestager said that the commission is asking a lot of questions about the impetus behind Libra and the extent to which Facebook also becomes a sales platform, adding:
«What does it mean that you have your own currency that works within this space – and which can only be used within this space? So what about the values that get caught there? Those who sell with the Libra as a means of payment then get a special advantage over those who come and want to pay in all sorts of other ways?»
While the competition concerns are not the major aspect to worry about, according to Vestager, the issue may be the financial stability.
Libra continues to be cause for serious concern
A number of governmental bodies and financial industry players have expressed concerns about Facebook’s own cryptocurrency. Most recently, the banks at the Federal Advisory Council stipulated that Libra and similar stablecoin projects, where a digital coin is pegged to an underlying value consisting of one or more fiat currencies, pose a possible challenge to banking business models built on privacy.
In late September, Marcus Treacher, Ripple’s senior vice president of customer success, argued that the major flaw in Libra is that it is a closed system – akin to a “walled garden.”
As previously reported, Facebook is planning to get its chief operating officer Sheryl Sandberg in front of the House Financial Services Committee in October to testify on Libra and its plans to launch the stablecoin in 2020.