Hours after Facebook revealed its plan to launch a new global digital currency called Libra, regulators, central bankers and politicians were ready with their responses.
In the US, Maxine Waters, the chair of the House committee on financial services, said Facebook should freeze until regulators have signed off on its plans, given the company’s “troubled past”.
France, which has the presidency of the G7 nations, called for a working group of central bankers and IMF officials to study the emergence of “stable coins” such as Libra, which are cryptocurrencies usually pegged to assets such as the US dollar.
Here are four big questions that regulators will want Facebook and its partners to answer.
1. What is it?
“There are really fundamental questions like: is this money? Is it a security? Is Facebook actually taking deposits? Or is it actually a fund?” mused one European central banker.
All of those questions have regulatory consequences and will affect which licence Libra will need and which regulator has oversight of the new currency.
“Anything that takes in money, invests that money, issues tokens in exchange for that money and promises the holders of those tokens security of value based on that investment, is currently either an investment firm or a bank,” said Simon Gleeson, a partner at Clifford Chance, the law firm.
Facebook could persuade regulators to create a new category to avoid the Libra consortium being run as a regulated fund or a bank, he added. “But the question is: Why should they?”
Libra could be classed as a security, because it will be underpinned by a basket of currencies and assets, but this would be anathema to Facebook and its partners.
“It would bring with it a whole heap of regulatory requirements and scrutiny, particularly in the United States and Europe,” said Peter Chapman, another partner at Clifford Chance. These could include the EU’s Mifid II rules and oversight by the US Securities and Exchange Commission.
The question of whether digital coins are a security, rather than vouchers to be exchanged within a limited community is determined by a Supreme Court evaluation dating back to 1946 called the Howey test, which analyses whether investors are purchasing some kind of promise with an expectation of profit.
If so, issuers have to comply with rules on registration, transparency and investor marketing that the SEC oversees.
2. Will new rules be needed or can existing regulations be applied?
“The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy,” Ms Waters said in a statement on Tuesday, as she called on regulators to “get serious”.
Until now, regulators have shied away from creating new rules for crypto assets, arguing that existing consumer protection rules or securities laws can be applied if necessary.
But the size of Facebook and the scale of its ambition may be the catalyst for new rules on how to deal with Big Tech as it begins to step into financial services and payments.
Olivier Guersent, the EU official in charge of financial stability said ahead of Libra’s unveiling that it was Facebook’s potential concentration of both personal and financial data that needed attention from regulators.
3. What is the balance between risk and opportunity with Libra?
Policymakers have been careful to calibrate their response to Facebook’s claims that Libra will help the 1.7bn “unbanked”, cut transaction costs and shake up traditional financial services.
Mark Carney, the Bank of England governor, said the UK central bank was keeping an “open mind” on the plans but would grant “no open door”. Some regulators appreciate the potential for Libra to introduce more competition into the banking sector.
Central bankers and regulators have been phlegmatic until now about crypto assets, which have remained a niche class. But if Facebook’s heft results in widespread adoption, that may change.
“There is always the potential that when a company this big introduces something new that it could quickly become something that central banks should keep a close eye on,” said one eurozone official.
The impact of stable coins on financial stability will be assessed by the G7, with the first report due in about a month.
Mr Carney said on Tuesday that if Facebook succeeded in its aims “it would instantly become systemic and will have to be subject to the highest standards of regulation”.
That raises further questions: Who is responsible if money is lost? Who steps in if Calibra, Facebook’s digital wallet, is hacked?
4. Will it be used for financial crime?
Libra brings with it a range of financial-crime concerns, from hacking to tax evasion.
But at the top of the list is money laundering. Before traditional lenders open accounts for customers, they must undertake rigorous background checks to ensure funds are not ill-gotten gains.
Facebook’s plans allow for “pseudonymous” users able to create multiple accounts not based on their real-life identity.
“This approach is familiar to many users, developers, and regulators,” its official documents read.
One UK official remarked: “This is particularly weasel-worded. We may be familiar with it but that doesn’t make us comfortable with it.”
No bank appeared among the roster of companies partnering with Facebook. In part, banks have been reluctant to sign up because of concerns around anti-money-laundering obligations, suggested a central banker.
New EU regulations on money laundering that take effect in January also apply to crypto exchanges and wallet providers. “There is incredulity among the banks that Facebook may somehow get around these obligations,” the central banker said.
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