Libra project, a scientist’s opinion
Interview with Dr Iwa Salami, senior lecturer in financial law and regulation at the Royal Docks School of Business and Law, University of East London.
How could the introduction of Libra (without regulatory interventions) impact the financial system (maybe also in connection to the recent critical ECB position)?
With Facebook’s over 2 billion regular users; 90 million small businesses; its links with 7 million advertisers, and WhatsApp’s 1.5 billion users who potentially would sign up to Libra, Libra is likely to have widespread usage in a very short space of time. Although its collapse is unlikely to pose a risk to the global financial system on the scale of the financial crisis of 2008 (when the Eurodollar market collapsed), Libra’s collapse is not likely to have negligible effects on financial systems. The reason for this is that the Eurodollar market was a wholesale financial market made up of systemically important financial institutions moving trillions of dollars around, while Libra would be a retail market consisting of people and merchants buying goods and services. The risk foreseeable with Libra, nonetheless, would be if there happens to be a run on it and the system fails to provide the 100 % reserve backing that the White Paper claims – thus resulting in the loss of some or all of the Libra held by owners. As this is a possible risk, and as Libra would have ‘bank-like’ operations, in that it would hold people’s money, it should be subject to capital and liquidity requirements like all other banks.
Much more pertinent are the money laundering and terrorism financing risks associated with Libra. Although the Calibra wallet — the main mechanism through which Facebook and WhatsApp users would be able purchase Libra — would be subject to AML/KYC (Anti-money Laundering, Know Your Customer) requirements such as those imposed by FATF (Financial Action Task Force) recommendations, other wallet providers facilitating Libra sale and purchase and located in jurisdictions with weak financial regulation, may not. This could result in regulatory arbitrage and make money laundering and terrorism financing a real risk for Libra.
How would European financial markets and EU-based businesses be affected?
It would depend on how Libra is defined by regulators. If it were treated as a security, it could be subject to onerous requirements such as those found in MIFID II, which may be difficult for Libra to address. Otherwise, if Libra were used and treated purely as a payment mechanism, it does not appear to have any significant impact on European financial markets, particularly as it would be a retail market consisting of individuals and merchants, as stated above. In that light, EU-based businesses are likely to find it beneficial — and more so small businesses — as they may find it a cheaper and quicker platform to effect payments for the sale and purchase of goods and services.
What effect could the cryptocurrency Libra have on EU citizens, individually and economically (considering the situation of the EU economy and EU legislation, and in contrast to China or the USA)?
Libra would be welcomed by Facebook users as it would provide them with a platform to engage in peer-to-peer electronic transactions globally, due to Facebook’s global reach. It would also benefit financially excluded users across the EU who have no access to bank accounts or services. Nonetheless, as it would involve access to financial data of users, there is a concern about the potential mishandling of such data by Facebook as happened in the Cambridge Analytica case.
What intentions could both China and Facebook be pursuing with their recent move into the cryptocurrency market?
China : The introduction of Libra has raised concerns for regulators and central banks across the world that Libra could result in the loss of monetary policy control and carry foreign exchange risks. Although some central banks have been working on their own central bank digital currency (CBDC), the People’s Bank of China (PBOC) appears to have expedited theirs due to the announcement of Libra; it is very likely that other central banks will follow suit. This move appears to be sensible, as it would help PBOC and other central banks that issue digital currencies gain control of the digital currency space as a payment mechanism. Central banks need to be able to offer a nationally recognised substitute to digital currencies such as Bitcoin, Ethereum or even Libra. This would be essential for them to provide effective oversight of digital currency operations, especially in the event that they need to place limitations or stop the operation of certain digital currencies in the face of foreign exchange and/or monetary policy risks.
Facebook : It is argued that the real interest of Facebook is neither financial inclusion nor an interest in delving into the financial services business but, instead, to be the global standard-setter for digital identity — an ambition that is ‘nicely’ hidden in the Libra White Paper. If this happens, Facebook could gain access to the personal data of anyone who engages in any digital transaction. It is believed that the idea is for Facebook to monetise the data it collects for this purpose. This, of course, is hugely concerning due to Facebook’s chequered history of data mishandling.