Facebook’s plan to create a digital currency has received a lot of backlash. The Federal Reserve is on of the many proponents of the Libra. Lael Brainard has fired an official warning shot at the social media giant once again.
Federal Reserve and Libra
There are genuine concerns as to how the Libra can become a threat to financial stability. Albeit its value is backed by a basket of reserve currencies, those concerns have not been quenched. In fact, as more time progresses, Facebook keeps generating more heat for this particular venture.
In a recent statement, Federal Reserve Governor Lael Brainard issued another warning. In the statement, it was mentioned how Facebook “needs to expect to meet a high threshold of regulatory and legal safeguards”.
That in itself won’t come as too big of a surprise to most. A technology giant issuing its own form of money will always create a lot of friction. The Libra remains very controversial at this time, and the risks and policy issues associated with the project should not be ignored.
Lael Brainard adds:
“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. Stablecoins aspire to achieve the functions of traditional money without relying on confidence in an issuer—such as a central bank—to stand behind the ‘money’. For some potential stablecoins, a close assessment suggests users may have no rights with respect to the underlying assets or any issuer.”
No Issuance Date yet
Due to all of these regulatory and legal concerns, Facebook has not provided a launch date for the Libra as of yet. Many central banks are worried how this payment system could gain global traction fairly quickly. If that were to be the case, it would become a new unit of account.
Brainard also explains how stablecoins pose even bigger risks than traditional cryptocurrencies. A very unusual stance, albeit one that is not necessarily incorrect. A widely accepted stablecoin for general use would be a bigger threat to central banks than bitcoin will ever be.
There are also worries regarding the rise of cybercrime. As the Libra does not officially protect consumers from such illicit actions, there does not appear to any recourse. Additionally, the owners of this stablecoin will not have rights to the underlying assets of Facebook’s currency. This aspect raises a lot of questions regarding price risk.
Last but not least, a popular stablecoin can trigger a bank run of sorts. If confidence in central banks decreases, it is a matter of time until all hell breaks loose. On a global scale, the potential consequences would become problematic to oversee. Addressing these potential risks will be a top priority for central banks around the globe.