Facebook’s (FB - Free Report) upcoming cryptocurrency, Libra, has drawn attention of banking and financial market regulators and policy makers globally. While the announcement has been applauded by cryptocurrency issuers, users and enthusiasts, it met a fast and worried response from central banks and regulators.
This is because regulators believe that entry of tech giants like Facebook into the banking and financial systems through cryptocurrencies like Libra, without any regulation, is too dangerous for consumers.
A recent statement by European Central Bank (ECB) executive board member Benoit Coeure, quoted by Bloomberg, also suggested this. Per Coeure, “It’s out of the question to allow them to develop in a regulatory void for their financial service activities, because it’s just too dangerous.”
Notably, Coeure heads a G7 task force created by France. Per Reuters, the task force’s aim is to study how central banks govern and regulate cryptocurrencies like Libra.
Libra Faces Intense Scrutiny in the US
Recently, Maxine Waters, the House Financial Services Committee chairwoman, officially sent a letter requesting Facebook to stop the development of Libra and digital wallet Calibra until the Congress and regulators investigate the products.
Per The Verge, the letter stated that “If products and services like these are left improperly regulated and without sufficient oversight, they could pose systemic risks that endanger U.S. and global financial stability.”
Notably, The Senate Banking Committee is scheduled to hold a hearing related to Libra on Jul 16. Per MarketWatch, the House Financial Services committee plans to hold a hearing on Jul 17.
Regulators Lag in Drafting Guidelines
Facebook’s Libra is expected to face close scrutiny from central banks in France, Germany, Australia and Indonesia. According to the Bank of England governor Mark Carney, cited by The Guardian, Libra will face tough regulatory inspection.
However, despite all the uproar, nothing concrete has materialized in terms of regulating cryptocurrencies and related transactions.
Coeure also urged financial regulators to draft guidelines faster. “We have to move more quickly than we’ve been able to do up until now,” he said on Jul 7 in Aix-en-Provence in southern France.
The delay can be attributed to the unpreparedness of the central banks and regulators. Lack of consensus among global regulators over the viability of cryptocurrencies and digital wallets as an alternative to paper money has been a major roadblock in drafting guidelines.
According to an ECB paper in May, cryptocurrencies do not perform the functions of money. ECB stated that cryptocurrencies were not a threat to financial stability in the euro zone as the combined value of crypto-assets was lesser than the financial system.
Notably, cryptocurrency and initial coin offerings (ICOs) are considered as securities by the SEC in the United States. However, bitcoin and ether are commodities regulated by the CFTC.
Facebook’s Libra is aimed to be a stablecoin, which implies it is less volatile than other cryptocurrencies as it is backed by real assets, including a basket of bank deposits and short-term government securities. Libra’s low-fee transaction is most likely to encourage consumers to hold and use the digital currency.
Facebook is also expected to use Libra to penetrate the underbanked population in regions like South-East Asia, East Africa and Latin America. Additionally, support from global companies like Mastercard, Visa, PayPal (PYPL - Free Report) , Booking Holdings, eBay (EBAY - Free Report) , Lyft, Spotify (SPOT - Free Report) , Uber and Vodafone (these companies are also founder members) is expected to boost Libra’s adoption.
Moreover, we believe intense scrutiny and regulation will improve consumer confidence in Libra. This will further enhance Facebook’s growth opportunities in the banking and financial space over the long haul.
Facebook currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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