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Blow to Facebook’s Libra as G7 raises questions over stablecoins

By Francis Jay

G7 working group says stablecoin technology could pose risks to the financial system

Stablecoins, such as Facebook’s proposed Libra currency, could pose risks to the financial system that fall outside existing frameworks, the G7 has said in a report to finance ministers.

The report: G7 Working Group on Stablecoins: Investigating the impact of global stablecoins (October 2019), says that stablecoins may contribution to the “development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements” but are untested and may pose significant risk.

These currencies, which are usually backed by traditional money and other assets, will require compliance with the highest regulatory standards, while existing standards may need to be revised and new standards and regulations put in place, the G7 said. The working group, however, did recognise the potential of stablecoins to speed up crossborder transactions.

Stablecoin developers, including Facebook, may now have to undergo stringent regulatory checks before they are allowed to launch their products.

The potential to grow to a global scale

In the report to finance ministers gathered in Washington for the IMF and World Bank meetings, the G7 working group said stablecoin initiatives built on an existing customer base may have the potential to scale rapidly to achieve a global or other substantial footprint. However, this carries with it a significant threat and could affect the entire financial system.

The news is a blow to the Libra cryptocurrency that Facebook announced in Jun. The project has already had a setback after eBay, PayPal, Visa and Mastercard all pulled out.

Libra was designed to respect national sovereignty over monetary policy, as well as rules against money laundering and other efforts to stop illicit finances, Facebook said in a statement.

Libra is backed by currencies from the dollar to the euro and government debt. Like other stablecoins, it is trying to avoid the extreme volatility and price changes that have prevented cryptocurrencies from being used as a mainstream payment method.

Risk versus reward

The G7 report recognised that cross-border payments remained slow, and that stablecoins might help to address this issue.

“There are 1.7 billion people globally who are unbanked or underserved with respect to financial services,” the report said. “Stablecoins have many of the features of cryptoassets but seek to stabilise the price of the “coin” by linking its value to that of a pool of assets. Therefore, stablecoins might be more capable of serving as a means of payment and store of value, and they could potentially contribute to the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements.”

However, it sounded a strong note of warning on the risks involved.

It said stablecoins, regardless of size, posed legal, regulatory and oversight challenges and risks related to:

• Legal certainty

• Sound governance, including the investment rules of the stability mechanism

• Money laundering, terrorist financing and other forms of illicit finance • Safety, efficiency and integrity of payment systems

• Cyber security and operational resilience

• Market integrity • Data privacy, protection and portability

• Consumer/investor protection

• Tax compliance

It added that stablecoins that reach global scale could pose challenges and risks to monetary policy and financial stability.

“In particular, such arrangements will need to adhere to necessary standards and requirements and comply with the relevant laws and regulations of the various jurisdictions in which they will operate,” it said. “They will also need to incorporate sound governance and appropriate end-to-end risk management practices to address risks before they materialise.”

More regulatory checks and balances needed

The report concluded that the G7 believed no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed.

“The Financial Stability Board (FSB) and standard setting bodies are intensifying their efforts to assess how their existing principles and standards could be applied to stablecoins, and/or developing new policy recommendations for stablecoin arrangements in a globally consistent and coordinated manner.”

Global stablecoins might end up having a significant influence on the monetary system that could have “significant adverse effects, both domestically and internationally” and could hinder efforts to combat money laundering and terrorist financing.

“They could also have implications for the international monetary system more generally, including currency substitution, and could therefore pose challenges to monetary sovereignty,” it said.

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