The arrival of Facebook in the world of cryptocurrencies could take these emerging financial technologies to the next level – and governments are only just starting to consider their response. Ian Hall reviews regulators’ and state banks’ reactions to the social media giant’s ambitious plans
Cryptocurrencies are already entering their third generation – and the world’s governments are unsure how to react.
The first generation, symbolised by Bitcoin, have enjoyed mixed fortunes. Bitcoin has rallied after spiking in late 2017, but many rival systems have struggled to win back buyers’ confidence. And some governments – including India and Zimbabwe – are attempting to clamp down on cryptocurrencies, fearing their potential for tax evasion, money laundering and financial instability.
In recent months, several governments – most recently South Africa – have announced plans to introduce their own cryptocurrencies, seeking to harness the technology to improve financial inclusion and support digital industries.
And now the major digital players are showing an interest, with Facebook last month confirming its plans to launch a global cryptocurrency in 2020. The company said people would be able to make payments using its Libra currency via its own apps, as well as on messaging service WhatsApp, which Facebook owns.
Facebook said Libra would be independently-managed and backed by real assets – placing it in the family of so-called ‘stablecoins’. Twenty-eight partner firms – including Mastercard, PayPal and Uber – have signed up to form the Libra Association to govern the new coin.
For governments and those delivering public services, Libra poses interesting opportunities. Facebook has said that “in time” it hopes to “offer additional services for people and businesses, such as paying bills with the push of a button, or riding your local public transit without needing to carry cash or a metro pass”.
However, politicians, central banks and regulators have reacted cautiously, worried about the potential volatility of the currency and data protection issues.
Trump tweets his reaction
On 11 July, US president Donald Trump criticised Libra and other cryptocurrencies, and demanded that companies seek a banking charter and subject themselves to US and global regulations if they wanted to “become a bank”.
“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” Trump wrote via his favoured communication channel, Twitter. “If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International.”
Trump’s comments came after US Federal Reserve chairman Jerome Powell said that the Fed had established a working group to follow the Libra project and was co-ordinating with other countries’ central banks, several of which have also expressed concern about Facebook’s digital currency project.
The US Securities & Exchange Commission (SEC) is also looking at whether Libra’s structure effectively makes it an exchange-traded fund (ETF), the Wall Street Journal reported on 13 July. If the SEC decides that Libra is an ETF, Facebook would need the regulator’s approval to launch the project.
European concerns
Across the Atlantic, the European Central Bank (ECB) is aware that it needs to formulate a response quickly.
ECB executive board member Benoit Coeure was quoted by Bloomberg on 7 July as saying: “It’s out of the question to allow them [Facebook] to develop in a regulatory void for their financial service activities, because it’s just too dangerous… we have to move more quickly than we’ve been able to do up until now.”
At a nation-state level in the UK, the three main financial regulators – HM Treasury, the Financial Conduct Authority and the Bank of England (BoE) – are working together on how to respond.
BoE governor Mark Carney has said the Bank is looking at Libra “with an open mind but not an open door”. He has said the currency could “substantially improve financial inclusion and dramatically lower the cost of domestic and cross-border payments”.
Elsewhere, watchdogs in nations such as Singapore and Japan have also been guarded over Facebook’s plans. For example, the Monetary Authority of Singapore will consider “appropriate regulatory responses” once further specifics about the cryptocurrency are provided, said senior minister Tharman Shanmugaratnam, who oversees the central bank. Reserve Bank of Australia (RBA) governor Philip Lowe has taken a similarly cautious stance.
Question of definition
Beyond the focused question of how to handle Libra specifically, Facebook’s plans raise broader and more fundamental challenges to financial regulators.
Global Government Forum reported in May on an ECB report that said crypto currencies’ potential implications for financial stability require “careful monitoring”.
The ECB report, ‘Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures’, said that crypto assets have triggered concerns with regard to money laundering, market integrity and consumer protection, and have possible implications for the financial stability of the eurozone.
In respect of stablecoins, the ECB report said that some stablecoins are not crypto-assets according to the definition used in its paper, but “might qualify as e-money under some national legislation”.
Policing the technology Wild West
In January this year, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) both released reports on crypto-assets in the EU context.
The EBA noted that “most crypto-assets typically fall outside current EU financial services regulation”. ESMA, meanwhile, warned that where crypto assets do not qualify as “financial instruments”, the absence of applicable financial rules leaves investors exposed to “substantial risks”. It said that, “at a minimum”, Anti Money Laundering (AML) requirements should apply to all crypto-assets and activities involving crypto-assets. It also recommended that there should be “appropriate” risk disclosure, so consumers can be made aware of the potential risks prior to committing funds to crypto-assets. Ever since Facebook and its social media rivals first emerged, they have massively disrupted both the media industries, and governments’ attempts to tax value creation. Our legislative and regulatory systems have never caught up. Now Facebook is entering the realm of cryptocurrencies; governments and regulators will have to start moving as fast as the technologies and the digital economy if they want to stay ahead of the risks to financial systems, users and the wider economy.
