The Federal Reserve's Lael Brainard has warned Facebook that it will be expected to meet a high threshold of legal and regulatory safeguards before launching its Libra cryptocurrency.
Speaking at a central bankers' conference in Frankfurt, Brainard layed bare the risks and policy issues facing regulators from the rise of global stablecoins.
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, she told the audience.
"Stablecoin networks at global scale are leading us to revisit questions over what form money can take, who or what can issue it, and how payments can be recorded and settled," she says. "Stablecoins aspire to achieve the functions of traditional money without relying on confidence in an issuer—such as a central bank—to stand behind the 'money'. For some potential stablecoins, a close assessment suggests users may have no rights with respect to the underlying assets or any issuer.
A significant concern for central banks regarding Facebook's Libra project is the potential for a payment system to be adopted globally in a short time period and to establish itself as a potentially new unit of account.
"Without requisite safeguards, stablecoin networks at global scale may put consumers at risk," she says. "Cryptocurrencies already pose a number of risks to the financial system, and these could be magnified by a widely accepted stablecoin for general use."
With global cyber-crime on the rise, Brainard contrasts the safeguards and legal recourse available to consumer use of fiat money to the opaque nature of Facebook's Libra.
"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."
Financial stability and monetary policy issues are also top of mind.
"If not managed effectively, liquidity, credit, market, or operational risks, alone or in combination, could trigger a loss of confidence and run-like behavior," states Brainard. "This could be exacerbated by the lack of clarity about the management of reserves and the rights and responsibilities of various market participants in the network. The risks and spillovers could be amplified by potential ambiguity surrounding the ability of official authorities to provide oversight, backstop liquidity, and collaborate across borders."
For this reason, "Libra, like any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges," she concludes.