On Sept. 16, Libra representatives met with the Committee on Payments and Market Infrastructure (CPMI), a part of the Bank for International Settlements (BIS) – an umbrella group for 60 central banks and monetary authorities – to discuss the regulatory hurdles around stablecoins developed by large financial institutions and tech companies.
Public authorities across the globe continue to press the developers of Libra, Facebook’s proposed stablecoin-like digital asset.
Members of blockchain-powered digital cash system firm Fnality International and JPM Coin – another stablecoin-like project, hosted by one of the largest private banks in the United States, JPMorgan Chase – were also present.
On the same day, David Marcus – CEO of Calibra, a Facebook-owned subsidiary tasked with creating a digital wallet for Libra – took to Twitter to disprove the assumption that Libra is a threat to the global financial system. It was not the first time Marcus came to Libra’s defence, as the Facebook-led cryptocurrency project has been unsettling regulators worldwide since the moment it was officially unveiled.
The BIS meeting: European regulators seem highly skeptical
The meeting in Basel was assembled by a working group on stablecoins that had been set up by the G7 (a group representing the leading industrial nations) in response to Libra’s announcement. At the time, numerous regulators around the world raised the alarm concerning the possibility of Facebook – a large, private company featured in high-profile privacy-related scandals – having control over people’s financial data and sovereign currencies.
Similar sentiments were shared by some authorities both prior to and following Monday’s session, which marked the first time Libra representatives sat with global regulators after the U.S. Senate hearings in July. Benoit Coeure, a Eurpoean Central Bank (ECB) executive who chaired the event, warned that regulators are cautious of ambitious cryptocurrency developments akin to Libra. “As a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system,” Coeure said. “They give rise to a number of serious risks related to public policy priorities.”
Another ECB board member, Francois Villeroy de Galhau, confirmed on Tuesday that stablecoins like Libra will face major regulatory scrutiny. “‘Stable coins’ are quite different from speculative assets like Bitcoins,” Villeroy told Reuters. “However, regulators will have to keep a very close eye at the global level, and believe me, we will do it.”
Additionally, the ECB representative stressed that Facebook will have to obtain a banking license in all countries in which it operates. Otherwise, these activities would be “illegal,” he explained.
So far, the Libra Association – a not-for-profit membership organization established to govern the Libra network, comprised of mostly U.S.-registered private companies like Uber, PayPal and eBay – has expressed interest in obtaining a payment system license under the Financial Market Supervisory Authority (FINMA) of Switzerland, where it is headquartered. The organization has also reportedly applied for a BitLicense, a business license required for cryptocurrency actors in the state of New York.
However, Agustín Carstens, the general manager of the BIS, appeared more diplomatic. Specifically, he pointed out the importance of global regulatory coordination to understand the details of the project, adding, “When such initiatives cross national borders, it’s important for regulators to coordinate and come to a common understanding.”
BIS declined to provide further comment to Cointelegraph.
Meanwhile, certain countries are taking action ahead of the G-7 working group. Last week, German parliamentarian Thomas Heilmann warned that his government would block any market-relevant private stablecoin – potentially targeting Libra, JPM Coin and even the recently unveiled Wells Fargo Digital Cash. On Sept. 17, that stance was reteriated by German Vice Chancellor and Finance Minister Olaf Scholz, who argued:
“We cannot accept a parallel currency. […] You have to reject that clearly.”
Moreover, French Finance Minister Bruno Le Maire said that Europe should consider creating its own “public digital currency” that could challenge Facebook’s Libra. That statement echoes the approach employed by the Chinese government, which ostensibly sped up the development of its central bank digital currency (CBDC) after the Libra announcement aired.
Libra’s response: Central banks’ sovereignty will remain intact
Marcus was quick to address some of regulators’ concerns on Sept. 16, while the meeting was still ongoing, Marcus posted a Twitter thread to address the recent talk “about how Libra could threaten the sovereignty of Nations when it comes to money.”
The Calibra CEO stressed that Libra does not intend to form a new currency but instead build a “better payment network and system running on top of existing currencies” to deliver meaningful value to users.
Libra will be backed one-to-one by a basket of so-called “strong” currencies, meaning that for any unit of Libra to exist, there must be the equivalent value in its reserve, Marcus added. Hence, there is no new money being created, which would “strictly remain the province of sovereign Nations,” the executive argued.
The Calibra CEO continued. “We will continue to engage with Central Banks, Regulators, and lawmakers to ensure we address their concerns through Libra’s design and operations.” Marcus had previously reassured the U.S. Congress that Facebook would not launch Libra before it address all regulatory concerns.
Although the Calibra CEO’s point about money creation could be deemed valid, there are ways other than issuing unbacked tokens that a project such as Libra could undermine central banks’ sovereignty, “at least to some degree,” according to Stuart Young, an analyst at cryptocurrency consulting firm Smith + Crown. He elaborated on this to Cointelegraph:
“Libra Association has the ability to choose which fiat currencies combine to back Libra, including their respective weights in the basket. If Libra were to become a widely-adopted medium of exchange, it would be highly relevant to a particular fiat currency (and associated central bank) if it were included in the basket, and to what degree. Being included in the basket could affect the currency’s broader position in global finance, and this decision could be made by the Libra Association without necessarily consulting with the central bank.”
According to recent media reports, Facebook told U.S. senators that the backing reserves for Libra would comprise several national currencies, including the U.S. dollar, euro, Japanese yen, British pound and Singapore dollar. However, the social media giant did not clarify whether the Chinese yuan will make the cut.
Previously, Sen. Mark Warner asked Facebook to exclude the Chinese currency from the Libra basket based on concerns that China is attempting to add stability to its currency, which is supposedly manipulated by the government. In response, Facebook stressed that the Libra Association would ultimately make such a determination:
“Any decision whether to add a new currency to the Libra Reserve would be made based on all the facts and circumstances at the time, including any direct or indirect regulatory restrictions,”
How much of a threat Libra is to central banks depends on what one sees their role to be, Konstantinos Stylianou, assistant professor of competition law and regulation at the University of Leeds, told Cointelegraph. In his view, the Facebook-backed stablecoin won’t undermine the sovereignty of central banks and challenge the national currencies. He believes, “What governments fear Libra will succeed in is becoming the first truly viable alternative to national currencies as money.” Going on, Leeds said:
“Central banks are also entrusted with ensuring financial stability and economic growth, but these objectives are not exclusive to central banks. In that sense, Facebook will make central banks’ life harder, but it doesn’t really threaten any of their prerogatives.”
The looming threat of a ban
Germany and France, having explicitly disputed the idea of Libra operating in their countries, reignited some of the ultimate questions surrounding the stablecoin’s launch: Can it be banned? Can the BIS veto its development, for instance?
Experts confirm that these are real possibilities. Stylianou told Cointelegraph that it is possible as, “Not all countries will agree on the type of services Libra provides and Libra will have to comply with different rules in different jurisdictions.” However, neither Libra nor governments currently seem to have an upper hand in this complex dispute, as Stylianou explained:
“Can it be banned? Yes, if it is deemed to be a risk to maintaining price stability or the smooth operation of payment systems, but this is a high threshold to prove. Governments have as difficult a task in justifying banning Libra, as Libra has in justifying why it should be allowed.”
According to Young, Libra can be restricted by regulators in a variety of ways, including full-fledged bans, as recently proven by France and Germany. The analyst stressed that unlike Bitcoin (BTC) and some other cryptocurrencies, the stablecoin is particularly vulnerable:
“While governments can restrict the activity of certain businesses that use Bitcoin, such as the money transmission laws that exchanges and payment processors must comply with, they have a limited ability to restrict the underlying Bitcoin network. With Libra, governments and regulators could take a wide variety of measures to restrict and/or outright ban Libra through their legal authority over the Association members.”
Libra Association to continue communicating with regulators
In any case, Libra meeting with central banks is beneficial for the token’s upcoming launch, which is scheduled for sometime in 2020. “Given the widespread criticisms and likely ability for governments to restrict the use of Libra, the Association needs to work with such regulatory bodies to address open issues,” Young told Cointelegraph. “Close communication could not hurt Libra’s prospects.”
“Being an unprecedented experiment, its [Libra’s] future hangs partly on the black letter of the law, and partly on how much those in power will like it,” Stylianou added. “Libra is now rightly playing politics with them.” Indeed, the Libra Association confirmed its intentions in a comment to Cointelegraph:
“The Libra Association participated in constructive dialogue with policymakers during the G-7 conference. We recognize that blockchain is an emerging technology, and that policymakers must carefully consider how its applications fit into their financial system policies. Our goal is a stable, secure, low-cost payment system that can expand access and improve financial services for billions of people. We are committed to ongoing engagement with central banks and financial regulators as we work toward that goal.”