Facebook's Swiss currency woes just the start of a global crackdown

News that Facebook’s virtual-currency project Libra will have to be regulated like a bank in its home town of Geneva looks like just the tip of the iceberg.

Beyond Switzerland, financial regulators are still scratching their heads about how to deal with the Libra Association's currently vague plans to offer cheaper digital payment services. For the time being, officials are monitoring a moving target; but their early rhetoric suggests they intend to take regulatory aim soon enough.

Even before Facebook’s June announcement, European Commission officials were already pondering how to protect those who invest in the often risky financial assets built on distributed-ledger technology. Bitcoin, until now the most notable virtual currency, by its nature is open to use by criminals to buy illicit goods or launder funds — a worry for regulators. But so far, its scale of operation has been too small to threaten the overall financial system.

The involvement of a giant like Facebook in Libra, backed up by payment incumbents like Visa and Mastercard, changes the game. Stabilized by a basket of conventional currencies, Libra in principle should be less volatile and more trustworthy than a fly-by-night cryptoscam. But the scale and ambition of the project behind it brings a whole host of new regulatory woes.

​— Target —

The first task is to figure out what kind of animal Libra is. EU competition officials are already trying to find out, via a wide-ranging questionnaire covering the commercial motivations of the project, its use of data and any tie-in with other Facebook products, such as Whatsapp.

Their financial counterparts, meanwhile, are finding it hard to pin down where the cryptocurrency would fit within the current legal framework. Libra probably isn’t e-money, meaning it escapes the EU prudential rules that apply to cashless payments made with cards or phones.

It may not be a financial instrument of the kind the EU’s share-trading laws are designed to regulate, either.

The Swiss financial regulator Finma has said it wants to be “technology neutral.” That was once a rallying cry for those who wanted incumbent regulations to be flexible in allowing digital market innovations.

But in this context, the phrase offers not a promise, but a warning. Facebook is venturing from largely unregulated social media into the highly scrutinized world of banking. It must hold capital against the risk of cyberattack, of loans souring, or of markets diving, Finma has said. It also needs to hold liquid assets to stop bank runs and insulate users from any volatility in the reserves it holds.

But Libra has global ambitions; regulating it is too great a task for a single nation to tackle. Global financial-stability watchdogs, and governments of the world’s seven biggest developed economies, have already discussed how to tackle this problem. Finma wants that work to continue.

— Carneycoin —

The Libra project itself brushes off these financial-stability concerns, arguing that in practice, the size of the reserve would be too small for a run on the cryptocurrency to trigger a wider financial panic.

“We don’t expect people to hold Libra for a long time,” the Libra Association’s Bertrand Perez told an audience in Paris today.* He argued that consumers will fill their virtual wallets only as a holding measure while they transfer sums from one traditional currency to another.

The reserve would be “tens of billions … but not BlackRock trillions of dollars,” he said.

Financial stability is one thing. But central banks are, after all, only part-time overseers of the lending and payment markets. They also worry the arrival of a new widespread cash-like product on the market could interfere with their day job: setting monetary policy.

The privatization of currency, a public good, was “treacherous” and “cartel-like,” the European Central Bank’s Yves Mersch said in a Sept. 2 speech.

This morning, French finance minister Bruno Le Maire went further, calling the incursion a threat to nationhood.

“The monetary sovereignty of states is at stake,” Le Maire told the same conference in Paris.

Beyond the rhetoric, many central bankers have decided on a counterintuitive response: if you can’t beat them, join them.

In an Aug. 23 speech at Jackson Hole, Bank of England governor Mark Carney proposed launching a state-backed rival to Libra. Christine Lagarde, soon to be Carney’s counterpart at the European Central Bank, appears intrigued by the idea of a publicly issued virtual currency.

Other central banks — including Switzerland's — are rather more skeptical, worried that the business case is weak and the risk of bank runs too great.

A discussion of the idea by finance ministers meeting in Washington DC in mid-October would allow “concrete proposals within a few months,” Le Maire has said.

If it does take off, the idea has far-reaching consequences for the financial system.

Consumer banks largely exist because the average citizen, unable to open an account at the central bank, understands that retail-bank deposits are safer than cash under the mattress. Give that citizen the possibility to transact directly with the central bank via their smartphone, and the future of Main Street banks seems less certain.