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Fed governor warns of 'core' regulatory challenges facing Libra

Fed governor warns of 'core' regulatory challenges facing Libra

Facebook's Libra project will need to address core legal and regulatory challenges before it can facilitate a single payment, US Federal Reserve governor Lael Brainard has warned.

Last week, in the face of fierce pushback from politicians and regulators, PayPal, eBay, Stripe, Visa, Mastercard, Mercado Pago and Booking Holdings decided to duck out of the Facebook-led Libra cryptocurrency association.

In a speech on Wednesday, Brainard said it "should be no surprise" that the project is facing such a high level of scrutiny because it "combines an active-user network representing more than a third of the global population with the issuance of a private digital currency opaquely tied to a basket of sovereign currencies".

Among the issues Libra needs to address, says the governor, are compliance with KYC rules; demonstration of consumer protections; and efforts to define the financial activities that the various players in the Libra ecosystem are conducting in order for jurisdictions to assess whether existing regulatory and enforcement mechanisms are adequate.

More broadly, Brainard told her audience that global stablecoin projects such as Libra could challenge bank business models. "If consumers and businesses reduce their deposits at commercial banks in favor of stablecoins held in digital wallets, this could shrink banks' sources of stable funding, as well as their visibility into transactions data, and thereby hinder banks' ability to provide credit to businesses and households," she suggested.

Stablecoins could also have implications for central banks and monetary policy: "If a large share of domestic households and businesses come to rely on a global stablecoin not only as a means of payment but also as a store of value, this could shrink demand for physical cash and affect the size of the central bank's balance sheet."

On central bank digital currencies, Brainard struck a cautious note, arguing that there are "compelling advantages" to the current system and that a switch would raise "profound legal, policy and operational questions" around issues such aqs privacy.

Despite the setbacks, Facebook is pushing ahead with the project, holding a meeting earlier this week with the 21 remaining members of the Libra Association and electing a Board of Directors, and appointing members of the Libra Association executive team. David Marcus, who is leading the Libra effort, pointed out that 1500 other firms had expressed an interest in joining the initiative.

"It was energizing to see reps from many different industries, and interests come together with one mission at heart, improve access and lower costs to digital money and financial services for everyone," he posted on Twitter. "Change of this magnitude is hard. You know you’re on to something when so much pressure builds up."

Comments: (1)

Carlos Santaella
Carlos Santaella - FIDE PBC Europe - Madrid 17 October, 2019, 21:14Be the first to give this comment the thumbs up 0 likes

It's clear to me that the massive political volatility that the US dollar inflicts on world trade's GDPs (specially nowadays), creating extensive currency swings and losses to heavily export trading dependent countries - like India and Germany- is asking/demanding for the introduction of a counter balance tool to the hegemonic political forces of the US dollar. Hence, I can see more chances for central bankers to launch their own digital-currencies down the road, pegged to FIAT notes, maybe even utilizing RTP channels and or DLT newly developed pipes. Nevertheless, it is pristine clear what Governor Brainard's is saying about the side-effects of massively launching a stablecoin currencies -as LIBRA- without the proper vetting of the entities controlling and regulating our global, heavily inter-connected, financial system. Also it is now more clearly for me why financial non-banking global behemoths, like VISA, MasterCard and PayPal initially supported this extremely "bold" concept from Facebook. If Governor Brainard’s statements are true (and I agreed completely with her assessments), then, it seems than these large payment players were betting to benefit from the potential diminishing role of private and central bankers because of LIBRA expansion, and where its backers where going to harvest the benefits of replacing these millennial institutions with their own digital portfolios.

Something else was baffling me from the very beginning of LIBRA, why only American base companies where backing this global initiative? Where were the Europeans and or Asians?