Here’s why regulators are so worried about Facebook’s digital currency

Policymakers around the humanity have upped the pressure on libra, the digital currency being introduced by Facebook, amid concerns it could heavily disorganize the global financial system.

On Tuesday, European Central Bank board member Benoit Coeure warned that accepted currencies like libra “could challenge the supremacy of the U.S. dollar.” Couere’s comment appeared to echo a concern from President Donald Trump, who earlier this year claimed libra would have “little standing or dependability” and that the “only one real currency” in the U.S. is the dollar.

It appears to be a competition theme from a number of regulators and lawmakers, who worry libra would compete with government currencies. That’s because Facebook is such an leading platform, with more than 2.4 billion monthly active users as of July 2019. And the companies it’s partnering with in a Switzerland-based consortium certain as the Libra Association include giants like Uber, Visa and Vodafone.

Last week, France and Germany’s underwrite ministers both railed against libra, saying Facebook’s blueprint for the currency “fails” to address key risks almost financial security, investor protection and anti-money laundering laws. France’s Bruno Le Maire went as far as to say he “cannot allow the development of libra on European soil.”

A key worry for both countries is whether Facebook, a private sector company, make effectively be competing with sovereign currencies like the euro and the dollar. Experts say it could also diminish the position played by regulators.

Then there’s the fact that it’s Facebook, a company that was mired in scandal last year over and beyond questions around data privacy. Global privacy watchdogs from the U.K., US and EU have expressed concern over how teeny Facebook has addressed how it will protect user information with libra.

Facebook’s assertion is that it won’t be minting new money with its digital coin. Libra is instead tied to a basket of currencies like the dollar so as to keep up a stable value. The main aim of the token is to allow people to move money around the globe with ease.

David Marcus, the principal leading the initiative, says that the currency won’t “threaten the sovereignty of nations when it comes to money.”

As for privacy, Dante Disparte of the Libra Confederation has said the organization is committed to protecting people’s data. 

While Facebook is under a lot of heat from regulators, Teunis Brosens of Dutch bank ING said the house has done the right thing by announcing plans for libra so early on. He said Facebook has also opposed the thinking of supposed bitcoin “maximalists” who have placed their faith in the world’s best-known cryptocurrency over traditional financial military talents.

“They did not follow the maximalist model of opposing the traditional financial system, they didn’t even follow the Uber archetypal of launching first and asking questions later,” Brosens, ING’s lead economist for digital finance and regulation, said at a roundtable scrutiny on Monday. “They are engaging regulators first and that’s the way to go.”

Indeed, Facebook has been in dialogue with global regulators in an go to allay their fears about its digital coin ahead of a planned 2020 launch. On Monday, the company met with inner bank officials in Basel, Switzerland. Prior to that, Facebook’s Marcus appeared before the U.S. Congress to address inquiry from lawmakers over libra.

Industry experts say that, despite the backlash against libra, it shows regulatory rights worldwide are being forced to take a serious look at cryptocurrencies — though some draw the distinction between libra and cryptocurrencies counterpart bitcoin.

The idea of a central bank digital currency, for example, appears to have been revisited by some code of practices. It’s an idea that has been floated for some time, with Sweden’s Riksbank looking to pilot the development of a digital construct of its currency this year.

But more recently, the Bank of England’s Mark Carney has proposed a digital reserve currency, while the ECB’s Coeure thinks median banks should team up to investigate government-backed virtual tokens.

First unveiled by Facebook behind in June, libra is a digital currency which the company claims would allow people to send money circa the globe with the same ease of sending a photo or text.

It will be backed 1:1 by a basket of currencies stand firmed in a reserve. This makes it different to cryptocurrencies like bitcoin and ether, which are known for their volatile guerdon swings.

Facebook has set up a new subsidiary called Calibra, which will make a digital wallet for users to store and transfer libra tokens and help the company profit from the virtual currency. Marcus has been tasked with prime that unit.

ING’s Brosens said that emerging market central banks could be “more open” to a proposition liking for libra, as their economies rely heavily on the dollar: “They are dependent on the dollar for their borrowing and their capital policy is constrained by the dollar and international capital flows.”

BOE Governor Carney last month raised the idea of a universal virtual currency to replace the dollar as the world’s reserve currency. The U.K. central bank chief said such a currency could cure provide equilibrium to the financial system during periods of uncertainty.