Since Facebook announced Libra last month, it has generally been met with disdain from the crypto community, who have highlighted that it isn’t a true cryptocurrency and carries few of the benefits. But it has caught the attention of lawmakers and regulators, who are worried about the wider implications of the proposed coin – reflected in last week’s congressional hearings and G7 banking discussions on the subject.
US Congresswoman Maxine Waters is trying to get a ban on any big tech companies from getting involved in crypto. US Treasury Secretary Steven Mnuchin called it a ‘national security issue’ – a view shared by the French Finance Minister Bruno Le Maire. During last week’s House of Representatives’ hearing on the coin, Congressman Brad Sherman said Libra could ‘do more to endanger America’ than September 11th – while it’s a particularly tasteless comparison, it does serve to demonstrate the strength of feeling in the anti-Libra camp.
It’s early days for the new cryptocurrency and at this stage, no one – including Facebook – knows how it’s going to be governed in practice, or what safeguards will be in place.
It’s not just Facebook snobbery
Facebook doesn’t have the best track record, as demonstrated through the Cambridge Analytica scandal and alleged breaches of privacy laws in Canada and Ireland. And when it comes to offering financial products, the trust just isn’t there. Dubbed the Zuck buck, the Libra coin is to be governed by an independent association of 28 big players from the tech and payments sectors, including VISA, Mastercard, PayPal, Uber and Spotify. The association will be headed up by newly formed subsidiary Calibra, but – regardless of who else is involved – this is Facebook’s baby.
The heavy hitters attached to the project haven’t done anything to calm people’s skepticism around Libra. If anything, it has proved an antagonistic move that simply re-affirms just how big the coin could be and reminds people how badly wrong it can go if not regulated effectively.
Crypto regulation is still a work in progress
Part of the worry around Libra is because financial regulators are still working out how to supervise cryptoassets. There are some very real issues here, from what type of assets should be regulated, to how AML processes will be monitored, to consumer protection, to who should be managing what controls (eg the exchange vs the cryptowallet provider). Frankly, the regulatory environment around crypto just isn’t developed enough to handle a challenge on this scale, and there’s a danger of a knee-jerk reaction towards over regulation. The proposed ‘Keep big tech out of finance’ act is a case in point.
But that doesn’t mean Libra shouldn’t be regulated – the key question is by who? And to what extent? The association has been criticised for registering in Switzerland, making the crypto-friendly Swiss Financial Markets Supervisory Authority it’s default regulator. In last week’s congressional hearing, David Marcus was keen to impress that they were not trying to dodge regulatory oversight by being based there, and stated that the currency won’t be launched until it has ‘fully addressed regulatory concerns’. The Fed has also weighed in, saying that despite having an initial meeting with Libra, they have no power to oversee the cryptocurrency as it is not a bank – prompting Donald Trump to call for them to obtain a banking licence.
Libra was also the subject of a G7 banking committee last week, who re-affirmed the need for a banking licence if they intend to take deposits or extend into any other banking activities. If the coin takes off, it has every chance of becoming systemically important, especially if they fulfil their mission statement to support millions of unbanked across the globe. There are also concerns about the destabilising effect it could have on fiat currencies, and the potential impact on a central bank’s ability to regulate monetary policy. Putting appropriate supervisory measures in place will take years and will continue to evolve long after the launch of Libra.
Crypto’s not going anywhere
The sheer scale of the proposed project will push crypto into the mainstream, and sooner or later these regulatory debates were going to be bumped to the top of the agenda. In some ways it’s good that Facebook is the one doing it. With a poor track record, the organisation seems keen to prove itself and is all too aware of the scrutiny it will be under at every step of the way.
Promising low fees, the new currency system could open online commerce to millions of people around the world who lack access to bank accounts and make it cheaper to send money across borders. But it also raises concerns over the privacy of users’ data and the potential for criminals to use it for money laundering and fraud.