Fed’s Brainard Raises Red Flags Over Facebook’s Libra Project

(Bloomberg) -- Federal Reserve Governor Lael Brainard warned of dangers that a digital currency proposed by social networking giant Facebook Inc. could pose to consumers and financial stability while offering a potentially valuable tool to criminals.

“Libra, like any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges,” Brainard said in the text of a speech she’s scheduled to deliver Wednesday in Frankfurt. “A significant concern regarding Facebook’s Libra project is the potential for a payment system to be adopted globally in a short time period and to establish itself as a potentially new unit of account.”

Fed’s Brainard Raises Red Flags Over Facebook’s Libra Project

Brainard acknowledged that progress toward private cryptocurrencies has pushed central banks to examine the feasibility of digital sovereign currencies. She countered, however, that central bankers may be better off, for a time, improving the options for real-time payments methods.

“A more relevant question may be whether some intermediate solutions may be able to offer the safety and benefits of real-time digital payments based on sovereign currencies without necessitating radical transformation of the financial system,” she said.

Facebook set off alarm bells among central banks in June when it announced plans to create a digital currency. Fed Chairman Jerome Powell has said the proposal would face substantial regulatory hurdles in the U.S. The European Central Bank’s Yves Mersch, a member of the bank’s executive board, described Libra as “beguiling but treacherous.”

Brainard raised a series of red flags, beginning with risks to consumers used to the security of banks that offer fraud protections and government deposit insurance. In addition, she said digital currencies could have significant implications for financial stability.

“If not managed effectively, liquidity, credit, market or operational risks, alone or in combination, could trigger a loss of confidence and run-like behavior,” she said.

She added that a widely-adopted digital currency, either a private-sector or sovereign version, could have problematic implications for monetary policy makers in smaller economies.

“In many respects, these effects may be similar to dollarization,” she said, referring to the use of U.S. dollars as the preferred currency over the domestic currency in some countries.

Facebook’s Libra could represent a special danger, she said, because of the social network’s global reach.

“With nearly one-third of the global population as active users on Facebook, the Libra stablecoin project stands out for the speed with which its network could reach global scale in payments,” she said.

Brainard also pointed to the utility digital currencies provide for criminals, citing research estimating about half of bitcoin transactions are associated with illegal activity.

“Technology will continue driving rapid change in the way we make payments and the concept of ‘money,”’ she said. “Given the stakes, any global payments network should be expected to meet a high threshold of legal and regulatory safeguards before launching operations.”

©2019 Bloomberg L.P.

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