Central bank initiatives accelerate pressure on Facebook

The Federal Reserve’s Lael Brainard this week tossed fresh regulatory pressure on Facebook’s Libra cryptocurrency project, comments that come as central banks around the world work on digital currencies to counter the social network’s cryptocurrency project.

Speaking at a central bankers conference in Frankfurt this week, Brainard, who’s a member of the Fed’s Board of Governors, said Facebook will have to meet a “high threshold” of regulatory safeguards before Libra can launch. It’s not the first time a government official or politician has criticized Libra, or promised a high regulatory hurdle—but it also comes as several central banks quickly advance plans to produce digital currencies of their own.

It sets up 2020 to be a battle between Facebook and these central banks, who will be racing to get digital currency into the market while navigating potential political battles at the same time.

“One of the battles is going to be between private stablecoins like Libra and central bank- issued currencies,” said Zilvinas Bareisis, a senior analyst at Celent. “Many central banks around the world are considering whether they should issue their own cryptocurrencies, partly as a way to forestall the threat from private ones, like Libra.”

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Brainard was particularly concerned about Facebook’s scale. Nearly one-third of the global population are active Facebook users, and the Libra project could quickly reach global scale, she told central bankers in Frankfort. Brainard earlier this year said she was concerned about Libra’s cross-border model, which would make it difficult to enforce anti-money laundering laws.

If not managed effectively, stablecoins could trigger a loss of confidence that negatively impacts liquidity, credit and cause “run-like” behavior that could cause larger economic instability, Brainard said this week.

The Fed and representatives for Libra did not return requests for comment. Brainard cast her comments in the broader context of cryptocurrency risk, which would be exacerbated by a large international stablecoin such as Libra.

“Libra would be outside of a single central bank authority, which is why the proposal is to have an association as the governing structure,” Bareisis said.

Facebook has faced almost nonstop pressure since it announced Libra, a stablecoin that still doesn’t exist. Most of the criticism has focused on how Facebook could operate outside of traditional monetary policy.

What’s different heading into 2020 is the growth of government-backed projects that will directly respond to Libra.

China’s central bank currency is the earliest and perhaps best example. China is speeding its project, and earlier this month announcing its first tests. The People’s Bank of China will use the digital currency to pay for transport, health care and other general services. China’s project will start immediately in two cities with a wider rollout in 2020.

Other central bank projects are also progressing, with tests and deployments likely in the next year.

The European Central Bank this week said it is developing a voucher system that’s designed to protect user privacy for central bank digital currencies—a selling point of cryptocurrency—while still vetting transactions for money laundering risk.

The Association of German Banks, which includes Deutsche Bank, Credit Suisse, Commerzbank and more than 200 other financial institutions, has called for a common European payments platform and a digital Euro. That project is aimed at improving the Single Euro Payments Area's efforts, though it is also a counter to Libra. France plans to test its central bank digital currency in the first quarter of 2020, and Lithuania's central bank plans its own digital currency in the same timeframe. Opposition to Libra has been particularly strong in Germany and France, with politicians vowing to "stop Libra" several times this year.

The Central Bank of Canada has also experimented with a blockchain-based digital currency. And U.S. Federal Reserve Chairman Jerome Powell has said the U.S. is considering a digital currency, though he has also hedged on that.

Central bank digital currencies could be used to settle accounts between banks, or serve retail use cases such as a substitute for electronic or paper money for consumers and businesses. These propositions face challenges. Writing for PaymentsSource, fintech consultant Collin Canright says there are valuation volatility challenges and efficiency shortcomings for central bank digital currencies.

“There is also an alternative view that cryptocurrencies are not necessary, and a ‘fiat currency stack’ can be upgraded to solve today’s challenges in payments,” Bareisis said. “I expect we will continue to see the renewed energy and investments into banking infrastructures and innovations, such as real-time payments, open banking, and especially, digital identity.”