Digital currencies can be risky, but Facebook’s Libra could be a massive challenge given the potential for rapid spread and the dubious safeguards, a Federal Reserve official said today.
“Cryptocurrencies already pose a number of risks to the financial system, and these could be magnified by a widely accepted stablecoin for general use,” Fed Governor Lael Brainard said in a speech.
Expected to launch in the first half of 2020, Libra is designed to be backed by a basket of currency assets to avoid the wild swings of bitcoin and other cryptocurrencies.
But Facebook’s project has been met with fierce resistance from officials worldwide, especially due to the lack of clarity over how it will be governed and monitored.
“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,” Brainard said.
And unlike national currencies that are backed by central banks, and deposits insured by governments, it is “not clear whether comparable protections will be in place with Libra, or what recourse consumers will have.”
“Without requisite safeguards, stablecoin networks at global scale may put consumers at risk.”
And because Libra could be distributed worldwide upon launching, regulation and oversight must be global since no one country could handle it alone, Brainard said.
She noted the “staggering” losses from fraud and theft of cryptocurrencies from US$1.7 billion (1.4 billion euros) in 2018 to over US$4.4 billion (3.9 billion euros) in 2019, based on one industry estimate.
“The hacking of exchanges represents a significant source of the theft,” she said.
A Facebook official last month said Libra would take decades rather than years to establish itself.
And in response to the resistance from regulators, the social media giant’s chief executive Mark Zuckerberg last month opened the door to scaling back plans for Libra if it cannot win approval as a new currency for global exchanges.