18 May 2020
By Sumitra Krishnan, AusPayNet Innovation Analyst
Facebook’s Libra project - first announced almost a year ago was met with intense scrutiny from governments, central banks and regulators across the globe. There were concerns about a private entity creating its own currency that might adversely impact central banks’ national currency and monetary policies if it achieved enough scale, and Facebook has over 2 billion users.
Global regulators and policy makers upped the pressure on Libra amid concerns it could heavily disrupt the global financial system. European Central Bank board member, Benoit Coeure warned at the time that digital currencies like Libra “could challenge the supremacy of the US dollar.” This sentiment was echoed by the finance ministers from France and Germany who rallied against Libra, stating that Facebook’s blueprint for the currency “fails” to address key risks around financial security, investor protection and anti-money laundering laws. In Australia, RBA Governor Philip Lowe said that “there’s a lot of water under the bridge before Facebook’s proposal becomes something we’re using all the time [...] There are a lot of regulatory issues that need to be addressed and they’ve got to make sure there’s a solid business case, so we’ve got to be careful before we jump to conclusions.”
The intense regulatory pressure had an enormous effect on Libra’s governing body, the Libra Association which initially had 28 founding members including PayPal, Visa, Mastercard, Stripe and eBay. The CEOs of some of the members received letters from US Senators outlining the immense risks inherent in the Libra project, including facilitating criminal and terrorist financing and destabilising the global financial system. The letters also suggested that further involvement in the Libra project would result in the companies facing increased oversight from financial regulators not only on Libra-related activities, but on all payment activities. It wasn’t long before some of the initial members pulled out of the project. In January 2020, when Vodafone withdrew, it was the eighth company to leave the Libra Association, which was formalised in October 2019.
Facebook went back to the drawing board and one year on has unveiled the newly redesigned Libra 2.0. The revised white paper outlines key changes that have been made to address concerns previously raised.
The new Libra payment system will include a series of single-currency stablecoins, such as LibraUSD, LibraEUR, LibraGBP or LibraSGD, and a multi-currency Libra coin (LBR). Each single-currency stablecoin will be backed on a one-to-one basis by the Libra Reserve of cash or cash equivalents and very short-term government securities denominated in the equivalent fiat currency. In addition to only being minted and burned in response to market demand, the single-currency stablecoins will enable people and businesses to transact in a stablecoin denominated in their own local currency.
The Libra Coin (LBR) will be a digital composite of some of the single-currency stablecoins and can be used to effect cross-border payments to countries that do not have a single-currency stablecoin on the Libra network; for example, a Libra user in the US sending LBR to someone in Australia (where there is no single-currency stablecoin as yet). The proposal outlines that the receiver could convert the LBR into Australian dollars through a third-party financial service provider and make purchases.
The economic design of the Libra network has been revised to include key protections within the Libra Reserve to mitigate risk and foster trust in the payment system, and in turn gain widespread adoption of the Libra currency:
The revised approach also addresses compliance. To ensure the Libra payment system is legally compliant and safe, and meets the AML/CTF and sanctions requirements, the Libra Association and its subsidiaries will implement a comprehensive compliance program that will:
The Libra compliance program will be overseen by a designated Chief Compliance Officer.
The initial plan for the Libra project was to start as a permissioned network and eventually transition to a permissionless system, where anyone who meets the technical requirements could help run the network with no single authority having control. The new Libra 2.0 will now remain as a permissioned network that will maintain open and competitive principles. New entrants to the network will have the ability to compete for:
The Libra Association hopes that maintaining a permissioned network will assure regulators that it has oversight and control over the governance of the Libra network.
Last month, the Libra Association applied to the Swiss Financial Market Supervisory Authority (FINMA) for a payment system licence. Due to the international scope of the project, FINMA will work with the Swiss National Bank and more than 20 other supervisory authorities and central banks globally as it commences the formal licensing process.
In its submission to the Senate Select Committee on Financial Technology and Regulatory Technology, the RBA outlined its views on Libra:
"The G7 [...] noted that such proposals raise significant legal and regulatory risks, including consumer/investor protection, data privacy, monetary policy, and financial stability. Accordingly, it cautioned that private sector global stablecoin initiatives should not be permitted to launch until all risks and regulatory requirements have been addressed. The Bank is supportive of this view."
The RBA submission also highlighted that "in Australia, it is unclear that there will be a strong demand for global stablecoins even if they do meet all regulatory requirements, particularly for domestic payments." The RBA’s view is that “Australia is already well served by a range of low-cost and efficient real-time payment methods”.
In saying that, it looks like Australia may be ready to regulate Libra if and when it is launched here. Also to the Senate Select Committee on Financial Technology and Regulatory Technology, APRA noted that it could potentially regulate the Libra stablecoin project. APRA said in its submission that it has proposed a new regulatory framework that would allow it to oversee wallets that are “widely used as a means of payment,” for example “potentially Facebook’s Calibra proposal.” This new proposal may turn out to be a positive development for Libra in Australia.
One of the key highlights at our 2019 Summit was The Big Debate: “Is Australia ready for digital currency innovation such as Libra?” While both sides presented persuasive arguments, the audience voted that we were not quite ready for a digital currency like Libra. Perhaps not then, but with the revised Libra 2.0 onboard, that may change in the future.