Libra: the legal and regulatory aspects will be decisive for the new currency
The Libra Association, founded by Facebook and 27 other organizations, intends to promote the construction of a global financial infrastructure and issue from it a new cryptocurrency called Libra, enabling operators to carry out payment transactions and other financial solutions for consumers and businesses throughout the world.
The Association has published a number of documents describing the technical side of the Libra Blockchain platform, and others presenting the project’s organizational and financial side. This second set of documents brings to light a number of legal and regulatory factors.
The Association will carry out funding rounds among its current and future members and other investors and will invest the proceeds in the Libra Reserve, a geographically diverse collection of liquid, low-volatility, financial assets from “the real world” denominated in strong and stable official currencies –fiat-. The Libra Reserve will back the issue and ability to convert Libra, which, unlike other cryptocurrencies, will therefore have an intrinsic and foreseeably stable value linked to that of the Libra Reserve.
As use and demand for Libra spreads and grows, buyers of the new currency will purchase new coins from the Association and pay for them in fiat, which will feed and grow the Libra Reserve. As a result, the number and value of Libra in circulation will always match the value of the Libra Reserve. Holders of Libra will always be able to resell them to the Association and receive their value in fiat out of the Libra Reserve.
The Association’s goal is for billions of people and businesses to hold their cash in Libra and use them to make payments from their smartphones. So, according to this plan, the number of Libra in circulation, along with the size of the Libra Reserve, could reach giant proportions.
This whole system will stand on the technical infrastructure and on the Libra Reserve owned and managed by the Libra Association, a not-for-profit organization established in Switzerland, which therefore ambitions to have global systemic importance, in the parlance of international financial regulation.
The published documents reflect an awareness that the technical platform must be very safe and that the Libra Reserve will be managed with the objectives of diversifying risk and preserve its value; its assets will be held by a geographically diverse collection of solvent custodians.
The Association reports that it will continue working to complete the building and setting up of the technical and financial platform with a view to concluding and launching it in the first half of 2020. The documents it has published identify the remaining steps and actions in this process.
Among those steps and actions it makes no mention of the Association applying for and obtaining any authorization from the financial regulatory or supervisory authorities, as market infrastructure, a payment system, an asset manager or in any other role.
And this is not because the Association has lost sight of the regulatory or compliance dimension of the Libra ecosystem: it says it is committed to strong protection of the consumer of financial products or services and that it recognizes that the regulators overseeing consumer protection will be keen to engage with the entities building solutions or services from the platform to be offered in their jurisdictions.
However, the Association appears to be referring here to electronic wallets and other endpoint services that third parties will offer to private parties through applications that will be developed on the platform. One of the many entities that will be providing endpoint services is Calibra, a subsidiary created by Facebook and regulated by FinCEN, the U.S. authority. The documents do not refer, by contrast, to the platform itself or to the Association as issuer of Libra and manager of the Libra Reserve.
The Association also states it commitment to combating money laundering and mentions as a point in its favor that the technical platform, by being built on blockchain technology, will be accessible to everyone and may be analyzed by third parties to identify and prevent illegal transactions.
It does not explain any data protection mechanisms although it specifies that Calibra was created to ensure separation between social and financial data.
Extended hand or challenge?
The Association and its founders say they are committed to working with the authorities to shape a regulatory environment that encourages technological innovation while maintaining high standards of consumer protection. They also mention that collaboration and innovation with the financial industry and its regulators is the only way to ensure the sustainability and safety of the new system.
So the Association has extended a hand to regulators, although it does not appear to submit its determination for the launch of Libra and its infrastructure and the creation and management of the Libra Reserve to any authority. We will continue to watch this and the many other legal and regulatory aspects set to have a decisive outcome for the success of the Libra project.