‘Libra must meet regulatory standards’: Fed

The Federal Reserve has warned Facebook that it will be expected to meet a high threshold of legal and regulatory safeguards before launching its Libra cryptocurrency.

Speaking at the European Central Bank Colloquium in Frankfurt, Fed board member Lael Brainard laid out the US central bank’s concerns surrounding the rise of global stablecoins.

She pointed out that with nearly one-third of the global population being active users on Facebook, the Libra project stands out for the speed with which its payment network could reach scale.

“Stablecoin networks at global scale are leading us to revisit questions over what form money can take, who or what can issue it, and how payments can be recorded and settled,” Brainard stated.

“Without requisite safeguards, stablecoin networks at global scale may put consumers at risk… cryptocurrencies already pose a number of risks to the financial system, and these could be magnified by a widely accepted stablecoin for general use.”

This is not the first time the Fed has weighed in on the issue. In July its chairman Jerome Powell echoed concerns raised by lawmakers from the US and around the world over the potential for Facebook’s Libra currency to disrupt the global financial system if not properly regulated.

In response, David Marcus, a former PayPal executive who is leading Facebook’s Libra unit, told the US Senate Banking Committee that the company had heard concerns raised by governments and policymakers “loud and clear”.

Reflecting on increasing rates of cyber crime, Brainard contrasted the safeguards and legal recourse available with fiat currency, to the opaque structure of Facebook's Libra.

“Not only is it not clear whether comparable protections will be in place with Libra, or what recourse consumers will have, but it is not even clear how much price risk consumers will face since they do not appear to have rights to the stablecoin's underlying assets.”

She argued that if not managed effectively, liquidity, credit, market, or operational risks, could trigger a loss of confidence and run-like behaviour. “This could be exacerbated by the lack of clarity about the management of reserves and the rights and responsibilities of various market participants in the network.

“The risks and spillovers could be amplified by potential ambiguity surrounding the ability of official authorities to provide oversight, backstop liquidity, and collaborate across borders.”

For this reason, Brainard stated that Libra, like any stablecoin project with global scale and scope, “must address a core set of legal and regulatory challenges”.

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