Cryptocurrencies are gaining in popularity. The Portuguese football club S.L. Benfica now accepts cryptocurrency payments, and New Zealand has officially established rules on how to tax salaries paid in cryptocurrencies. In June 2019, Facebook announced its plan for the ‘Libra’ cryptocurrency. It is underpinned by a privately governed board (the Libra Association) and a digital wallet (Calibra). Things are actually moving fast: the messaging service Telegram intends to launch its own cryptocurrency, the Gram, within the next two months.
The global nature of cryptocurrencies
Cryptocurrencies are not a new phenomenon. DigiCash, one of the first forms of electronic payment, was launched in the USA in 1989. In contrast to physical money and standard banking, cryptocurrencies – the most notable being Bitcoin – are digital, decentralised, peer-to-peer, pseudonymous, encrypted and global. These characteristics could potentially connect markets because around one third of all adults in the world do not have a bank account. This is why Libra could also be attractive in countries where banking is less developed. The declared relative value stability is supposed by its creators to enable cheap, simple international transfers. Furthermore, users of the Facebook-owned Calibra wallet could also pay through WhatsApp, Instagram and Messenger. However, Libra appears to have some unusual characteristics. In comparison to other cryptocurrencies, the Libra Association would centrally manage the Libra Reserve assets and ascertain that their value meets certain policy criteria. Because of that, the Libra Association may compete with commercial and central banks, rather than Libra competing with other cryptocurrencies.
Data protection concerns and institutional reactions
Libra might seem to be a new, convenient means of global, digital and smart banking, but the personal data exchange between the apps entails risks for users.
As Maurizio Mensi, lawyer, professor at the Italian National School of Administration (SNA) and adjunct professor at the LUISS Guido Carli University of Rome, analyses : “While Facebook and Calibra, its crypto wallet-focused entity (a subsidiary regulated by FinCEN, the US authority), have made broad public statements about privacy, they have failed to specifically address the information handling practices that will be in place to secure and protect personal information. […] Simple procedures have to be in place, allowing people to exercise the privacy rights of participants, and incorporate privacy by design principles in the development of its infrastructure. And, given the transnational nature of the activities, the Libra network would need to demonstrate that it can ensure that its data privacy policies, standards and controls apply consistently across its operations in all jurisdictions.”
European politicians have raised concerns about the introduction of Libra in the EU. In addition to checking its compliance with existing rules, they are assessing the legal framework specifically linked to cryptocurrencies. MEP Markus Ferber (EPP, DE), Member of the European Parliament Committee on Economic and Monetary Affairs, comments:
“The European Parliament already highlighted last term during a plenary debate with the Commission that we have huge concerns about the lack of a proper regulatory framework governing virtual currencies. I am confident that the newly elected European Parliament will follow up on this – until the European Commission comes up with a convincing legislative proposal. Arguably, Libra will always be in the back of everyone’s mind when designing the respective legislation.”
European Central Bank (ECB) President Mario Draghi also raised concerns about the Libra ecosystem, specifically on potential misuses for tax evasion, money laundering and terrorism financing, as well as on the impact on monetary policy, global financial stability, payment systems and cybersecurity. He called for a comprehensive assessment by the relevant authorities, of the resulting risks and implications from a regulatory perspective. As part of the G7 working group on stablecoins, the European System of Central Banks (ESCB) already carries out its assessment on stablecoin initiatives as well as on their potential impact on the tasks of central banks. The European Commission currently assesses which cryptocurrencies are covered by EU rules and whether the legislation hinders innovation. It also assesses a ‘common regulatory approach at EU level’, in particular to safeguard consumers. The evaluations are expected in April 2020.
Towards a ‘crypto-euro’?
In a written question to the ECB, MEP, former STOA Chair and rapporteur of the EP resolution on distributed ledger technologies and blockchains Eva Kaili (S&D, EL) highlights the interdependence between crypto payments, smart cities and the upcoming connected Internet of Things (IoT) environment. She takes a more technology-pragmatic stance on cryptocurrencies, and favours fostering a discussion about the creation of a ‘crypto-euro’. “A crypto-euro is a possibility the ECB should urgently explore. Crypto is actual money, not virtual”, Eva Kaili underscored.
The idea of national digital currencies is also supported by Iwa Salami, senior lecturer at the Royal Docks School of Business and Law, University of East London:
Dr Iwa Salami : “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”.
So far, the EU has not put forward its own cryptocurrency proposals. With or without a ‘crypto-euro’, public regulatory oversight of foreign digital currencies is necessary, especially if private actors are in charge.
Indeed, Maurizio Mensi explains that: “The advent of digital technology is shaping a new way of life, where social relations, business, private and public services are digitally interconnected. All this is underpinned by a huge amount of data, much of it personal data. In so-called surveillance capitalism, data privacy and antitrust enforcement are closely interwined […] to avert the need for additional privacy regulation in the economy of digital platforms. Data processing techniques may also have an impact on economic governance and democratic processes […]. In other words, while privacy was once perceived as a right to protect individuals against unjustified interference by public authorities, in the modern era it may also be threatened by the powers of private actors.”
Actors, interests and prospects for the cryptocurrency domain
The Libra Association is composed of private businesses – mostly active in the financial services industry and digital commerce – and a few non-profit-organisations. As seen in the Cambridge Analytica case, Facebook has already exchanged personal data for profit maximisation. This risk also persists in the Libra network, specifically with regard to sensitive financial data of Libra users,
as Dr Iwa Salami explains : “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 that 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.”
Politicians worldwide announced they would further examine Libra ahead of its scheduled launch in 2020. While it is not clear whether Libra will be authorised, for now, European policymakers may be well advised to take the trend towards cryptocurrencies and their social, economic and ethical implications seriously. The discussion around regulatory oversight mechanisms could be complemented by a truly European alternative to the Libra network. A more proactive path could explore options for a cryptocurrency consistent with the EU’s standards and values, which would safeguard the public monetary system in the EU while guaranteeing citizens’ rights.