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E-MailRoss Buckley is the KPMG Law-KWM Professor of Disruptive Innovation at the University of New South Wales Sydney; Dirk A. Zetzsche is Professor and ADA Chair in Financial Law at the University of Luxembourg and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf; and Douglas Arner is Kerry Holdings Professor in Law at the University of Hong Kong. This post is based on their recent paper.
On June 18, Facebook announced its proposal to launch a new cryptocurrency next year, named the Libra. In a new paper we analyse how Libra will work, discuss the governance of the organization behind it (the Libra Association), explore its transformative potential, and consider its likely regulatory implications.
Libra will serve as e-money. Its value will be tied to a basket of major government-issued currencies and for each Libra issued an equal value of such currency, or highly liquid government bonds, will be placed on deposit with a reliable repository. Libra will be a stablecoin—a cryptocurrency the value of which is tied to that of fiat currency. Libra is not the first stablecoin, but it will be the first stablecoin with such breathtaking global reach and utility as Facebook has over 2.3 billion active monthly users.
Libra’s usefulness may initially be limited in highly developed countries with good payment systems, but it will be potentially transformative for many of the 1.7 billion people who today lack access to the most basic financial services. Libra is mobile money in the Kenyan M-Pesa sense, but on a global scale: AliPay and WeChatPay for all.
Commentators suggest Libra lacks the cash-in / cash-out functions provided in mobile money networks by small stores that typically sell phone airtime and mobile money services along with groceries and cigarettes. However, the cash-in function will likely come in government salary, welfare and transfer payments to citizens. Welfare payments are bedevilled by what is politely termed ‘leakage’ in countries where recipients are often illiterate and lack a bank account. So we expect poorer country governments to embrace it. The cash-out function will follow as small business owners opt to receive Libra paid into their own Facebook account, in return for their goods or services, as has already happened in China with AliPay and WeChatPay.
Another field in which Libra will be transformative is remittances. The average global cost of remittances is 7% of the amount transferred. Libra should reduce that to well under 1%.
The Libra Association is structured as Swiss s.a.r.l., or for-profit limited liability company and its members will be entitled to dividends, while Libra holders will not.
Mark Zuckerberg has said that “In a lot of ways Facebook is more like a government than a traditional company”. Libra is his biggest step yet into the realm of the sovereign—Facebook will collect the seigniorage, the financial benefit of issuing currency which usually accrues to a sovereign, and here will be the interest paid on the cash on deposit or liquid government bonds. Whether this grab for seigniorage will work will depend on what the real sovereigns accept—by virtue of regulation.
In Libra’s case the question is not if, but which regulatory frameworks will apply. In the three weeks since Libra was announced, many of the world’s most influential financial regulators, including the Financial Stability Board, U.S. Federal Reserve, Bank of England and Bundesbank, have issued statements that they will carefully examine Libra, and apply to it tough regulatory standards. The Group of Seven (G7) nations have set up a high-level forum to examine the risks of digital currencies to the financial system led by the European Central Bank, and the U.S. House of Representatives’ Committee on Financial Services requested in a forceful letter on 2 July 2019 that “Facebook and its partners immediately agree to a moratorium on any movement forward on Libra.”
This regulatory response is unprecedented in breadth and speed, and for good reasons. Once Libra becomes well established in some countries, national governments will lose control of their money supply and lose monetary policy as a tool of economic expansion or contraction. They will also lose the capacity, in times of severe uncertainty, to impose capital controls to prevent capital flight. All of these changes may well prove highly destabilising to the entire global financial system. Regulators are absolutely right to be taking such acute interest in these developments. Libra will likely go from “too small to care” to “too big to fail” in record time.
Our paper provides some guidance and assistance on the regulatory requirements appropriate to Libra. Regulators will require Facebook to conduct money laundering and terrorism financing checks on all Libra users. The Libra plan includes a global digital identity to meet these requirements. Once Facebook achieves this regulatory compliance, expect an expanded suite of financial services—based on superior access to clients’ data—to follow over time, similar to what has happened in China, with Ant Financial, the payments and financial services subsidiary of Alibaba. Facebook will follow suit, but armed by far better data and data analytics once it combines its social media data with the payments data from Libra. The Libra White Paper suggests an information barrier between Facebook and this data in Libra, but Facebook’s track record on data usage renders such promises less than credible.
In addition to AML/CTF regulation, other fields of regulation to which Libra will likely be subject include licensing requirements, risk management (including systemic risk), the handling of the Libra Reserve, monetary policy, antitrust and data protection, and tax. Finally, coordinating supervisory and regulatory international efforts will pose an unprecedented challenge.
Looking forward, we argue that potentially the most important impact of Libra will not necessarily be the cryptocurrency itself. Rather, the transformative impact will come, firstly, from the possibility of a new global digital identification system which could underpin a very wide range of transactions, systems, businesses and institutions. Second, we suggest that the launch of Libra will likely trigger the launch of a range of other competing proposals, from BigTech, from the financial industry and from central banks. Third, Libra may well trigger a process of rethinking international monetary arrangements, a topic of increasing interest given global economic and political tensions and fragmentation.
The complete paper is available for download here.
2 Comments
This is interesting,and Libra may indeed have the capacity to deliver the advantages mentioned, but the note seems to overlook some critical regulatory issues. What about operational risk (which may include some multi-jurisdictional political risk)? Shouldn’t this entity be subject to at least the same standards as banks, and be regulated accordingly. What about capital requirements? The investment in “highly liquid government bonds” is not necessarily waterproof; to the extent that the new “coin” is based on a basket of currencies, there will also be exchange risk to manage; some kind of capital requirement is probably in order. Similarly, liquidity requirements should be imposed to make sure that the promised cash-out can be delivered. Not to mention the privacy concerns that most of the press coverage has focused on. The FSB should make it a priority to coordinate regulation of this and similar products.
A “global digital identity” managed by Facebook seems like a bad idea.