Several lawmakers have expressed concerns that Facebook’s Libra project would cut into countries’ monetary sovereignty.
Why is this a worry?
The Libra project is intended to be global, so there’s a worry people could abandon national currencies in times of crisis.
Shifting away from national currencies, towards projects such as Libra, is seen by many as a “privatisation” of money which may damage a country’s monetary sovereignty.
In a recent draft report, the G7 stated that global “stablecoins” have a potential to scale rapidly, stifling competition and threatening financial stability in the longer term.
It’s important, however, to remember that different jurisdictions have different approaches to regulation and monetary policy.
Libra must adhere to the rules of each jurisdiction.
The Bank of England, for example, has stated that payment systems, such as Libra, will have to “meet the highest standards of resilience and be subject to appropriate supervisory oversight”, something we agreed with.
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So, while monetary sovereignty may be protected in “stable” financial jurisdictions with well-developed regulation, it is likely to be more affected in jurisdictions with on-going financial issues, such as hyper-inflation.
What would it mean for the power relationship between Facebook and governments if Libra would become a reality?
The proposed scale of the operation, and the number of existing users that could be exposed to the technology and payment solution, explains why the media spotlight is currently focused on Facebook’s engagement with governments.
But Libra is not solely Facebook’s project – it’s a project of the Libra Association, of which Facebook is a co-founder.
Current partners include PayU, Uber and Spotify; although certain members including MasterCard, Visa, PayPal and eBay have recently all departed, citing concerns over the regulatory position.
It’s hoped the Libra Association will grow to about 100 members, each with equal voting rights.
Granted, Facebook intends to hold more of a “leadership role” during the initial phases of the project.
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However, after launch, it’s understood it will hold the same role and responsibilities as other members.
Therefore, the relationships between Facebook and governments might not change that much.
Also, even if Libra were to be a “Facebook product”, it would still be subject to the legal and regulatory requirements of each jurisdiction it operates in.
The Libra Association must ensure the “token” is appropriately regulated, legally sound and users are appropriately protected.
There have been other concerns regarding what it would mean for data privacy. What do you think about these concerns?
Facebook has access to a massive amount of personal data, and a questionable history regarding data/user privacy.
However, it’s important to remember that Facebook is distinct to Libra, forming only part of the Libra Association – so Facebook won’t have immediate insight into transactions on the Libra network.
To hold and receive Libra tokens, though, users will require a digital wallet. One of these, Calibra, is developed by a subsidiary of Facebook. Whilst Libra users have the option to choose Calibra or any other wallet, we consider this does raise a “flag” from a privacy perspective.
All entities would be subject to applicable regulation governing data processing and user privacy, such as the GDPR, but it’s unclear how financial data held by Calibra may be held or recorded and sit separate to the wealth of data from Facebook’s network.
What would the potential positive outcomes be if Libra was allowed to happen?
Libra and other cryptoassets provide an alternative method of p2p transfers of value, avoiding the need for “traditional” intermediaries.
A large proportion of the global population doesn’t have access to traditional banking or remittance services, but many have access to mobile phones and an internet connection.
Libra is an example of connecting the world’s “unbanked” and enabling them to transfer value in a new way.
Even if Libra doesn’t materialise soon, the project has brought together a range of parties – governments, regulators, banks and other institutions – to consider global operation of cryptoassets and regulatory treatment of blockchain.
A helpful step in the right direction to better develop the existing payment and remittance market, although issues of regulatory treatment and arbitrage, both from data privacy and financial services/securities perspectives, still require some further work.
Oliver Woodhouse is a regulatory lawyer at Capital Law and provides commercial regulatory advice to a range of clients. He has significant experience in the InsurTech and FinTech sectors, as well as building a specialism in Cryptoasset regulation.