The European Central Bank (ECB) and a number of countries in the region have stepped up their efforts in response to Facebook’s Libra, which has revived a competing ECB project for instant payments. As Facebook engages Switzerland’s financial regulator, the ECB clarifies how Libra can be regulated under EU laws.
A Wake-Up Call and ECB’s Project Revived
Facebook’s proposed Libra digital currency has given governments worldwide a run for their money. European Central Bank board member Benoit Coeure calls Libra “a wake-up call,” after discussing it at last week’s meeting of eurozone finance ministers in Helsinki. Amid concerns over a sovereign threat, 26 regulators worldwide, including the Bank of England and the U.S. Federal Reserve, reportedly met with representatives of Libra in Basel on Monday to discuss the scope and design of Libra.
Coeure told the press Friday that Libra had revived efforts of an ECB-backed project for real-time payments in the eurozone, the Target Instant Payment Settlement (TIPS). The project could allow consumers to use electronic cash, directly deposited at the ECB without the need for bank accounts, financial intermediaries or clearing counterparties. Just like with Facebook’s plans, financial intermediaries will be unnecessary in this new ECB system. “TIPS offers final and irrevocable settlement of instant payments in euro, at any time of day and on any day of the year,” the ECB described.
The project was launched last year and could last months or even years, Coeure revealed, adding that the technical feasibility remains to be seen and opposition from banks is likely. In addition, “We also need to step up our thinking on a central bank digital currency,” he suggested. France’s Finance Minister Bruno Le Maire said last week that the European Union should create a common set of rules for cryptocurrencies to counter the risks posed by Libra.
Strong Opposition by France and Germany
France and Germany have reportedly agreed to block Libra due to the risks the digital currency could pose to their financial sectors, the French finance ministry said. The two countries jointly issued a statement Friday, stating:
France and Germany consider that the Libra project, as set out in Facebook’s blueprint, fails to convince that those risks will be properly addressed … We believe that no private entity can claim monetary power, which is inherent to the sovereignty of nations.
Le Maire believes that Libra should not be allowed to operate in Europe while concerns persist about sovereignty and persistent financial risks. “We encourage European central banks to accelerate work on issues around possible public digital currency solutions,” he added in the joint statement with Germany’s Finance Minister Olaf Scholz. The two countries further called on banks to work on improving European payment systems at the European level.
Swiss License for Libra, New Stablecoin Guidance
Meanwhile, the Libra Association has engaged the Swiss Financial Market Supervisory Authority (Finma). The regulator has confirmed that the association has requested an assessment of how Finma would classify its planned Libra project including the issuance of a stablecoin under Swiss supervisory law.
Finma revealed that, based on information provided so far, such a project would fall under financial market infrastructure regulation and would require its payment system license, under the Financial Market Infrastructure Act (FMIA). The requirements under the Principles for Financial Market Infrastructures would also apply to the management of cyber risks. Swiss payment systems are subject to the Anti-Money Laundering Act.
Moreover, the FMIA sets out additional requirements for services that increase the risks of a payment system. “Due to the issuance of Libra payment tokens, the services planned by the Libra project would clearly go beyond those of a pure payment system and therefore be subject to such additional requirements,” the regulator clarified, adding:
A necessary condition for being granted a licence as a payment system would be that the returns and risks associated with the management of the reserve were borne entirely by the Libra Association and not – as in the case of a fund provider – by the ‘stablecoin’ holders.
In addition, Finma has updated its stablecoin guidance, which supplements its existing guidelines for initial coin offerings (ICOs). The regulator has acknowledged the rising number of stablecoin projects since mid-2018.
Finma detailed that the requirements for stablecoins may differ based on which assets they are backed by — such as currencies, commodities, real estate or securities — and the legal rights of its holders. “Money laundering, securities trading, banking, fund management and financial infrastructure regulation can all be of relevance,” Finma elaborated.
ECB Clarifies Libra’s Regulatory Challenges
European Central Bank executive board member Yves Mersch outlined the ECB’s approach to regulating Libra earlier this month. He described some “extremely concerning” differences between Libra and other cryptocurrencies. Firstly, he explained that “Libra’s ecosystem is not only complex, it is actually cartel-like,” citing several key areas that the Libra Association will have control over the coin’s functionalities. Unlike the decentralized and disintermediary nature of cryptocurrencies, he said that “similarly to public money Libra will actually be highly centralized, with Facebook and its partners acting as quasi-sovereign issuers of currency.”
Mersch raised several concerns regarding Libra such as its lack of a global lender of last resort and the limited liability of the Libra Association members. It is also devoid of the equivalent of a deposit guarantee scheme to protect its holders’ interests during a crisis, the executive detailed. He further pointed out that “the fact that Libra is backed by a basket of sovereign currency-denominated assets appears to defeat the very purpose of its issuance as a private currency.” Mersch then proceeded to outline some legal and regulatory challenges of Libra:
The first challenge concerns Libra’s fundamental legal nature. The choice is, essentially, whether to treat Libra as e-money, as a financial instrument or as a virtual currency.
In his view, Libra does not appear to qualify as e-money, as it does not embody a claim of its holders against the Libra Association. The second option is to treat it as a transferable security or a different type of financial instrument, which means that both the Libra Association and any entities providing investment services through Libra coins would fall within the remit of the Markets in Financial Instruments Directive. Lastly, if it were to qualify as a virtual currency then both Calibra and its authorized resellers would become subject to the obligations and registration requirements under the Anti-Money Laundering Directive.
Another challenge is to ensure that the relevant EU and member state regulatory and supervisory authorities can assert jurisdiction over Libra and its network, Mersch conveyed, adding that there is also the need for cross-border cooperation and coordination. “Because Libra will be used across borders, it is a matter of international interest.” He elaborated:
Its global nature would also call for a global regulatory and supervisory response to avoid regulatory arbitrage, ensure consistency of outcomes and guarantee the efficiency of public policy responses to Libra.
Mersch pointed out the joint efforts by the global community to mitigate risks associated with Libra, including efforts by the G7 countries, the G20 countries, and the Financial Stability Board (FSB). In its recently published report on how Libra could disrupt the financial system, the European Parliament wrote that “an international agreement is needed on harmonizing existing rules for crypto tokens.” The legislative body of the European Union believes that “Co-regulatory oversight of the Libra operation scheme by both state-operators and stakeholders would be needed to prevent money laundering, illicit transactions and consumer fraud.”