In what can be a pointer to what’s in store for Facebook’s proposed stablecoin “Libra”, a member of the US Federal Reserve’s Board of Governors, Lael Brainard has warned of the key risks associated with cryptocurrency in general and Libra in particular.
Expressing apprehensions about the safety of consumers’ money, Brainard said statutory and regulatory protections on bank accounts in the US mean that consumers can reasonably expect their deposits to be insured up to a limit.
However, that’s not the case with stablecoins like Libra and other digital currencies. It is not yet clear whether comparable protections will be put in place for Libra, or what recourse consumers will have. Besides, it is not even clear how much of a price risk consumers will face since they do not appear to have the rights to the stablecoin’s underlying assets, she said.
Speaking at the European Central Bank (ECB) colloquium on Monetary Policy: The Challenges Ahead; Brainard cautioned the world that the Libra project has a core set of legal and regulatory challenges to face before it can be launched. She said more clarity is needed about the basket of currencies underlying the stablecoin as its model is still unproven in the world so far.
The member of the US Federal Reserve Board of Governors further said that Libra, and for that matter any stablecoin project with such a global scale and scope, should address a core set of legal and regulatory challenges before it can facilitate a first payment.
The risks associated with cryptocurrency in general and Libra, in particular, could be aggravated by the lack of clarity about the management of reserves and the rights and responsibilities of various market participants in the network.
When Facebook CEO Mark Zuckerberg announced his decision to launch Libra sometime in the middle of next year, US and European regulators were worried about the impact of such a project because of the sheer size of Facebook’s reach in the world.
What would set Facebook’s Libra apart, if it were to proceed, is the combination of an active-user network representing more than a third of the global population with the issuance of a private digital currency opaquely tied to a basket of sovereign currencies, Brainard said.
She further warned that if requisite safeguards are not in place, global stablecoins pose a risk to consumers as it is not even clear how much price risk consumers will face since they do not appear to have rights to the stablecoin’s underlying assets.