WASHINGTON — With policymakers casting doubt on Facebook's cryptocurrency and some of the social media giant's partners pulling out of the project, a Federal Reserve governor continued the drumbeat of criticism against the plan.
Fed Gov. Lael Brainard said in a speech Wednesday that with Facebook's user network exceeding a third of the world population, "it should be no surprise that Facebook's Libra is attracting a high level of scrutiny from lawmakers and authorities."
She argued that Facebook’s size and breadth would make it difficult for the stablecoin to comply with anti-money-laundering and know-your-customer laws.
“Libra's business model is inherently cross-border, and, as such, each participant in the system deemed to be a financial institution would need to ensure compliance with each national jurisdictions' anti-money-laundering laws,” Brainard said in prepared remarks for an event sponsored by the Peterson Institute for International Economics and Princeton University.
“Libra's intended global reach would likely necessitate a consistent global anti-money-laundering framework in order to reduce the risk of illicit transactions.”
The remarks come as Facebook has faced a series of woes in trying to advance the cryptocurrency plan. Fed Chairman Jerome Powell and lawmakers
More recently, high-profile partners involved in the project — Mastercard, Visa, Stripe and PayPal announced —
Brainard also sounded apprehensive about the Fed attempting to issue its own digital currency, and expressed concerns generally about unintended consequences of a stablecoin with worldwide reach.
“In the extreme, widespread migration to one or more global stablecoin networks could disintermediate the role of banks in payments,” she said.
“If consumers and businesses reduce their deposits at commercial banks in favor of stablecoins held in digital wallets, this could shrink banks' sources of stable funding, as well as their visibility into transactions data, and thereby hinder banks' ability to provide credit to businesses and households,” she continued.
As policymakers await additional details on Libra, Brainard argued that it was critical that customers know exactly what protections would be in place for them in the event of a data breach or fraudulent activity.
“Consumers need to be cautioned that stablecoins are likely to be starkly different from sovereign-issued currency in legal terms,” she said.
“In the United States, as elsewhere, statutory and regulatory protections have been implemented with respect to bank accounts so that consumers can reasonably expect their deposits to be insured up to a limit; fraudulent transactions to be the liability of the bank; transfers to be available within specified periods; and clear, standardized disclosures about account fees and interest payments,” Brainard continued.
“Not only is it not clear whether comparable protections will be in place with Libra, or what recourse consumers will have, but 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.”
Yet Brainard stressed that the Fed was not opposed to stablecoins in all cases and acknowledged that most banks would “likely ... adapt by offering alternative methods of peer-to-peer settlement and by incorporating stablecoins into their business models.”
Meanwhile, she highlighted risks of central banks such as the Fed adopting their own digital currencies.
“Central bank digital currency for general-purpose use — that is, for individual consumer use — would raise profound legal, policy and operational questions,” Brainard said.
It would also likely be a logistical nightmare for the Fed, she added. “For starters, this might require the Federal Reserve to develop the operating capacity to access or manage individual accounts, which could number in the hundreds of millions,” Brainard said. “A myriad of other operational challenges would need to be addressed, including electronic counterfeiting and cyber risks.”
“Given the stakes,” Brainard concluded, “global stablecoin networks should be expected to meet a high threshold of legal and regulatory safeguards before launching operations.”
