Federal Reserve Board Governor Lael Brainard highlighted "core" legal and regulatory challenges regarding stablecoin projects with international reach, such as Facebook's Libra.
In a speech at the "Future of Money in the Digital Age" conference, Ms. Brainard identified numerous concerns about stablecoins (i.e., digital currency tied to an asset or basket of assets), which are designed to be a less volatile alternative to cryptocurrency. She clarified that Facebook's blockchain-based cryptocurrency "Libra" is a stablecoin and said that given the high number of monthly users on Facebook's platforms, Libra could grow quickly and can significantly impact the global payment system.
According to Ms. Brainard, Libra's business model poses:
- potential cross-border money laundering and terrorist financing concerns;
- a lack of clarity regarding consumer risks and protections, since consumers do not have rights to Libra's underlying assets and digital wallets lack deposit insurance;
- regulatory and enforcement issues, given the unknown nature of the financial activities that would be conducted using Libra;
- data privacy concerns regarding the public transactions ledger; and
- a potential threat to (i) the role of banks in payments, (ii) the role of central banks and monetary policy, and (iii) small or large economies if there were a widespread migration to one or more global stablecoin networks.
Ms. Brainard also expressed concern regarding the potential creation of central bank digital currencies, which continue to generate increased interest as alternatives to privately issued stablecoins. She noted that there are "compelling advantages to the current [U.S.] system" and that a central bank digital currency would open "profound legal, policy, and operational questions." She emphasized that the Federal Reserve does support payment innovation, as demonstrated by the anticipated launch of the 24/7 payment-by-payment interbank settlement service known as "FedNow Service."
Commentary
Facebook's highly ambitious effort to forge its own global cryptocurrency and digital wallet system seems to have met the regulatory reality that many U.S. and international stakeholders are not too keen on the concept. Political leaders ranging from President Trump to House Financial Services Committee Chairman Maxine Waters (D-CA.) have criticized the project, arguing that Facebook's struggles with protecting consumers' personal information is evidence that it cannot be trusted to operate as a de facto financial institution. Regulators in the European Union have pledged to keep a close eye on the project, concerned that it could undercut the euro. Criticism also stems from concerns that Libra would become a haven for money laundering, sanctions violations, and other criminal activity, a common concern for digital currency. But while several sponsors of the Libra project have walked away, including MasterCard, PayPal, and Visa, Facebook appears determined to forge ahead convinced there is demand for a better way to conduct cross-border transactions outside the traditional banking system. Time will tell if Facebook can successfully address these regulatory concerns and get Libra on track, or if it scales down to something less ambitious such as an online payment system pegged to the U.S. dollar.
Commentary
It is interesting that Governor Brainard describes Libra as a "stablecoin," as that uses the term rather broadly. Historically (if that is a word that can be used in connection with digital currencies), stablecoins were linked to a fixed amount of a single currency (although the term also could be applied to a digital currency linked to a fixed amount of multiple currencies or assets). Unlike these "traditional" stablecoins, Libra is not only not linked to a single currency, but the currencies or assets to which it would be linked have not been fixed. This means that Libra's value may vary not only with the value of any single currency to which it is linked, but it may also vary based on investment decisions made by Libra's operators as they decide from time to time how to allocate the assets supporting Libra. In short, rather than describing Libra as a stablecoin, it would perhaps be better to describe it as an "asset-backed coin" or an "ABCoin." (ABCoin has a nice ring to it.)
The reason that this distinction is important is that Libra presents some legal issues that are not inherent in all stablecoins. Accordingly, regulators ought not to impute all of the legal issues that Libra presents to stablecoins generally, as they might then needlessly be establishing barriers to the development of any stablecoins that go beyond what is really necessary.
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