One of America’s top central bankers has joined a growing regulatory chorus of concerns over the prospects of large stablecoin projects like the Facebook Libra running roughshod throughout the world without adequate accountability.
That banker is Lael Brainard, a member of the Board of Governors of the U.S. Federal Reserve, who voiced those concerns during remarks at a European Central Bank (ECB) sponsored conference on December 18th.
Per her new comments, Brainard said “global stablecoins” — or cryptocurrencies pegged to fiat currencies that are stateless and designed for international users — have the potentially to be rapidly adopted in the comings years because of 1) “increasingly fast rates of tech adoption” and 2) the recent rapid expansion of the payments sector in general.
The implication of this dynamic is that projects like the Libra stablecoin, which could tap into an “active-user network representing more than a third of the global population,” could effectively become too big too fail in short order to the detriment of consumers, Brainard said:
“A significant concern 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. Unlike social media platforms or ridesharing applications, payment systems cannot be designed as they develop, due to the nexus with consumers’ financial security.”
What Protections Will the Libra Offer?
That’s the grand question, according to Brainard, who went on to note that “consumers in the United States and euro area have come to expect strong safeguards on their bank accounts,” and that such safeguards were big points of uncertainty for projects like the 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 [cash] assets,” Brainard said.
Accordingly, the central banker asserted the main takeaway for stablecoin projects was to have no illusions about needing to be prepared to pass through a regulatory gauntlet ahead of hitting the world stage.
“Given the stakes, any global payments network should be expected to meet a high threshold of legal and regulatory safeguards before launching operations,” the Federal Reserve Governor added.
Notably, Brainard’s comments come only a few weeks after Federal Reserve Chairman Jerome Powell answered questions from the U.S. Congress about whether his institution had any plans for launching a digital dollar backed by blockchain, with Powell saying the Fed was “not currently developing a U.S. dollar central bank digital currency … but continues to carefully evaluate the costs and benefits of issuing a general purpose CBDC.
The Homework Is Being Done Now
There might not be a Fed-backed tokenized dollar coming any time soon, but CBDC chatter has been picking up in Europe as of late.
For example, the European Central Bank made crypto headlines earlier this week on the heels of releasing a report that detailed how the major financial institution had created a Corda-powered proof of concept that could allow for privacy apportionments to CBDC users.
Specifically, the system entails the use of anonymity vouchers. It would let users making small transactions use valueless anonymity tokens to spend their transactions privately. The purported advantage of this design would be avoiding an all-encompassing privacy dragnet while still maintaining compliance around larger transactions that couldn’t similarly use the privacy vouchers.
That proof of concept report came just days after ECB President Christine Lagarde argued that the bank needed to get “ahead of the curve” on stablecoins.
“There is clearly demand out there that we have to respond to,” Lagarde said.