Whether the launch of Facebook’s Libra will threaten global monetary and financial stability is a question that has been on all regulators’ and politicians’ minds since Facebook announced its cryptocurrency project on June 18, 2019.
Donald Trump himself tweeted that, as a virtual currency, Libra “will have little standing or dependability” and that Facebook should comply with the exact same regulation as standard banks do. And while no one can deny the overall benefits of innovation in financial services or that tech solutions in the payment services industry have acted as a wake-up call for a traditional banking system ripe for disruption, benefits often come with “consequences” and with the planned launch of Libra in 2020, the consequences of cryptocurrencies have suddenly become much more important.
On July 15, 2019, the U.S. Treasury Secretary, Steven Mnuchin, held a press briefing on cryptocurrencies. His message was clear and echoed by the conclusions of the latest G7 Finance Ministers and Central Bank Governors Meeting that took place two days after Secretary Mnuchin’s briefing. In short, whilst responsible innovation will always be supported, cryptocurrencies are raising a fair amount of potentially systemic regulatory, financial, monetary and legal issues, particularly now that the biggest social network in the world plans to launch its own cryptocurrency.
Among concerns include the potential for cryptocurrencies to be used as a convenient means for illicit activities such as cybercrime, money laundering, terrorist financing and tax evasion. These concerns are based on the anonymity of cryptocurrency users and the cross-border nature of the crypto market and players making identification quite difficult, if not impossible, as cryptocurrencies are not yet subject to any legally enforceable framework.
According to Secretary Mnuchin, cryptocurrencies are even a “national security issue” and therefore must comply with the same requirements as traditional banks in terms of anti-money laundering (AML) and countering financing of terrorism (CFT). Shortly after the Libra announcement, France announced the creation of a G7 task force on cryptocurrencies to identify how these types of digital assets could be governed. Indeed, regulators across the world seem to agree on something: cryptocurrency needs to be scrutinised and regulated as per the highest standards and a call for internationally harmonised regulation is now required.
Up until now, regulators and politics have watched cryptocurrencies by analysing the potential risks and remediation actions. However, Facebook’s announcement has clearly accelerated their work, or at least made the concerns more explicit. Among those right at the top of the list is monetary, and thus financial, stability. While the price of cryptocurrencies is volatile and disconnected from the general financial system, so far they had little impact on the global financial stability as they represent only a tiny portion. For example, at the time of writing this article, the total Bitcoin market capitalisation amounts to c. $175bn, which represents less than 2% of the global coins and banknotes in circulation.
But with Libra, the established order is likely to be disrupted. Unlike other cryptocurrencies, Libra is designed to be a digital stablecoin, backed by securities “such as bank deposits and short-term government securities in currencies from stable and reputable central banks” and held in a “Libra reserve”. However, Libra will remain a floating currency. At this point, it is difficult to assess the future stability or instability of such a reserve. With some 2.38bn active monthly Facebook users, Libra’s reach is enormous as are the potential risks. Therefore one can easily understand the reluctance and, in part, fierce opposition by U.S. congress during the July 16 and 17 Libra hearing involving the testimony of David Marcus who heads up the Libra digital currency project. As well as the obvious questions concerning tax treatment, criminal activity and anti-money laundering, U.S. Congress’ stand was also motivated by the recent issues faced by Facebook related to cybersecurity, foreign interference, extremism, data privacy, and fake news. As none of these issues has been addressed by Facebook at the time of Mr Marcus’ hearing, he had a hard time explaining why Facebook wanted to approach such a financial adventure without solving its current problems first.
Currencies have always been a matter for national governments, so the idea of a private company creating a currency with such potential reach raises obvious concerns. Libra could have major economic, financial, social and political consequences that are important enough to qualify as a systemic risk. And even though digital currencies have been here for a while and their popularity has been growing for many years, the regulatory landscape is still quite bare. The benefits brought by innovation can’t be denied and the traditional financial system is changing. However, first and foremost it is the responsibility of all market participants, regulators included, to ensure that innovation in the financial markets is both responsible and sustainable. Importantly, as innovation becomes a game changer in financial services, there needs to be the right regulatory mechanisms in place to address concerns going forward.
Contributors: Pauline Pelissier, Mazars UK and Meglena Grueva, Mazars Frankfurt
 At the date of writing this article, the Federal Trade Commission fined Facebook $5bn over privacy concerns