Regulators wary of Facebook’s Libra

According to some regulators, Libra could have global ramifications at each level of the financial system. Concerns raised include; depriving high street banks of customers, damaging the ability of central banks to maintain financial stability and even threatening national sovereignty.

Shadow banking

German European Parliament member Markus Ferber was among the first to voice concerns, warning that Libra could turn Facebook into a “shadow bank”, similar to the unsupervised private equity funds and broker-dealers that played a pivotal role in the 2008 financial crisis.

Drawing from Facebook’s 2.7 billion user base, Project Libra would be a shadow bank of unprecedented scale, and in the words of Bank of England Governor Mark Carney, could become "instantly systemic".

Local banks meanwhile, could be deprived of a large proportion of their customers. In a report by Nikkei Asian Review, the Bank of Japan claims that Libra users might withdraw their savings from small banks in favor of storing funds in the digital currency. Instead of storing customer funds, the banks would then have to accommodate huge deposits in the form of the Libra Reserve, which represents the assets backing the tokens.

With low to negative interest rates, Japan’s banks are particularly vulnerable to this scenario. Elsewhere, this seems less likely as Libra has no plans to pay interest on its tokens, and they will not be protected by government-provided insurance.

According to source links from BNC Newsfeed, regulators in China and India have also expressed concern about the Libra announcement.

In a more sinister interpretation, some US politicians have identified Libra as not just a shadow bank, but an entire shadow financial system.

A threat to financial sovereignty

In an open letter sent from the House of Representatives to Mark Zuckerberg, Sheryl Sandberg (Facebook COO), and David Marcus (CEO Calibra), five members of Congress have demanded that further development of Project Libra is called to an immediate halt, to give Washington enough time to consider the risks involved.

“These products may lend themselves to an entirely new global financial system that is based out of Switzerland and intended to rival U.S. monetary policy and the dollar", wrote the lawmakers. "This raises serious privacy, trading, national security, and monetary policy concerns for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy.”

With similar concerns, the mother of all central banks, the Bank of International Settlements, issued a general warning of the potential for corporations to gain power over nation states. In a report, Big tech in finance: opportunities and risks, the bank acknowledges the potential for tech firms to become "dominant through the advantages afforded by the data-network-activities loop, raising competition and data privacy issues", and suggests that regulators should aim to “respond to big tech’s entry into financial services so as to benefit from the gains while limiting the risks."

Libra is pegged to a basket of sovereign currencies, and it is unlikely that toppling the monopoly of central banks is the end goal. Nevertheless, Facebook’s tendency to ‘move fast and break things’ has led to several unintended consequences over the years. Facebook now has a reputation for playing fast and loose with user data, with major data breaches such as the Cambridge Analytica scandal.

Different views

Responding to some of the perceived misunderstandings around Facebook’s intentions, Project Libra head, David Marcus, wrote a blog post last week to address some common questions. He made it clear that Facebook won’t control the currency, won’t access user financial data, and it wants to help the unbanked participate in the global financial system.

A different view comes from Facebook co-founder Chris Hughes, who left the company in 2007. Hughes has released an ominous warning; urging global regulators to intervene to prevent the companies involved in the Libra Association from gaining the power to “disrupt and weaken” nation states.

But with a launch planned for the first half of 2020, global regulators will have to work fast. As European Central Bank executive board member Benoît Cœuré told Bloomberg, "it’s just too dangerous" to allow Libra to "develop in a regulatory void. We have to move more quickly than we’ve been able to until now."

Finally, Washington D.C. based Coin Center, a non-profit research and advocacy center focused on the public policy issues facing crypto assets, has published a blog post outlining the key differences between Bitcoin and Libra. It suggests that the two projects "use very different technologies and, as a consequence, each project faces different regulatory and legal challenges. It’s important that policymakers understand these differences so that they may appropriately tailor any necessary policy response."