Facebook’s new cryptocurrency, Libra, won’t compete with sovereign notes such as the dollar, euro, and yen, a company executive said Monday, responding to growing concern from U.S. lawmakers and President Trump.
The Geneva-based consortium of 28 companies managing Libra, which will be backed by a basket of currencies including the greenback and the British pound, will work with the Federal Reserve and other central banks to ensure it doesn’t interfere with those currencies or monetary policy, David Marcus, head of the digital wallet Facebook is creating for Libra, said in written testimony.
The currencies in the basket, dubbed the Libra Reserve, “will be subject to their respective government’s monetary policies – policies those governments will continue to control,” Marcus added in the testimony, prepared for a Senate Banking Committee hearing on Tuesday.
Fed Chairman Jerome Powell made clear in testimony last week “that the process for reviewing Libra needs to be patient and thorough, rather than a sprint to implementation; we strongly agree,” said Marcus. “Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”
Libra is important to Facebook because it positions the social media giant to take advantage of a lucrative new market. With the cryptocurrency and its Calibra wallet, Facebook could offer payment capabilities to 1.7 billion people in developing nations who lack access to banks but carry smartphones built on Google’s Android platform that can tap digital cash, said Justin Post, an analyst with Charlotte, North Carolina-based Bank of America.
The regulatory hurdles Facebook faces first are significant, however. Among them are broad concerns with cryptocurrencies generally, which increased after the value of one of the best-known forms, bitcoin, took a nosedive in 2018.
Generated through so-called mining — validation of transactions on a shared digital ledger known as blockchain — cryptocurrencies are issued by neither governments nor companies, meaning users have no recourse when their value sinks.
Trump administration officials from Treasury Secretary Steven Mnuchin to Securities and Exchange Commission Chairman Jay Clayton have worried that cryptocurrency investors don’t understand what they are buying and that the products could undermine financial stability. Trump himself has made clear he shares their concerns.
“If Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations,” the president said. “We have only one real currency in the U.S.A., and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the world.”
I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity….
— Donald J. Trump (@realDonaldTrump) July 12, 2019
While Libra’s connection to existing sovereign currencies appears designed to ease some of the fears, Facebook’s sprawling audience of roughly one-third of the world’s population means the digital currency could become big enough overnight that its failure might imperil the financial system, Powell told lawmakers last week.
The potential scale means Libra should be “subject to the highest level of expectations” as well as regulations requiring risk-controls and capital reserves for crises, Powell said.
“The question is, ‘Who is going to provide that and how and when?'” he added, explaining the Federal Reserve has already
developed a working group to evaluate the matter.
Marcus said Facebook’s overall goal is to “democratize” financial services as it has communications, but with a difference: “We will relinquish control.”
The company will ultimately have no more voting power than any other member of the Libra Association, which may comprise 100 organizations including nonprofit organizations and universities by the time the digital currency is introduced, he explained.
“All decisions will be made democratically and transparently,” Marcus said. While Facebook has led creation of the Libra blockchain and the association, it will “not be in a position to control the wholly independent organization.”
