Facebook’s Libra digital currency project must not go ahead until the social media giant demonstrates it is safe and secure, according to a G7 report.
The world’s largest economies warned that cryptocurrencies such as Libra pose a threat to the global financial system and backers must ensure the coins are not used to launder money or fund terrorism, according to a draft of the report seen by the BBC.
This fresh regulatory blow comes as Libra faces intensifying regulatory scrutiny from authorities across the globe.
The proposed currency is facing a crucial test of support at a meeting of backers in Zurich today, shortly after major backers including Mastercard, Visa, and Ebay abandoned the project.
G7: risks need to be ‘adequately addressed’
While the draft G7 report does not single out Libra specifically, it said that “global stablecoins” that have the potential to “scale rapidly” pose a range of possible problems.
Stablecoins such as Libra are tied to fixed-value assets in an attempt to reduce the huge fluctuations in value experienced by other cryptocurrencies such as Bitcoin.
“The G7 believe that no stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed,” said the draft report. Dante Disparte, Libra’s head of policy and communications, said on Twitter that Libra agreed with the G7 on this point.
The G7 also cast doubt about the viability of the Libra project even if Facebook can satisfy the concerns authorities have raised, warning: “Addressing such risks is not necessarily a guarantee of regulatory approval for a stablecoin arrangement.”
Among the possible issues addressed in the report was the potential for Libra to stifle competition from other providers, or even threaten financial stability if there was a sudden “loss of confidence” in the digital currency.
The report – which is due to be presented to finance ministers at the International Monetary Fund’s (IMF) annual meetings this week – was produced by a taskforce that included senior central bank officials, the IMF, and the Financial Stability Board (FSB), which coordinates regulations for the G20 countries.
In a letter to G20 finance ministers published on Sunday, FSB head Randal Quarles warned that global stablecoins “pose a host of challenges” and “regulatory gaps should be assessed and addressed as a matter of priority”.
Responding to Quarles’s letter, a Libra spokesperson told City A.M.: “The Libra Association and its members are committed to working with applicable regulatory authorities to achieve a safe, transparent, and consumer-friendly implementation of the Libra project.”
Pivotal meeting of backers
The first meeting of the Geneva-based Libra Association is taking place today, just days after several major payment firms quit the project.
Mastercard, Visa, and Ebay all abandoned the project on Friday, alongside fintech startup Stripe and payment firm Mercado Pago.
Paypal became the first company to leave the Libra Association earlier this month. Facebook is now left without the backing of any major payment firms for Libra, which is due to launch by June next year.
Remaining members of the association, which include Vodafone, Uber and Lyft, are set to review a charter and appoint a board at today’s meeting, the Wall Street Journal reported.
Libra losing the backing of major payment firms presents yet another regulatory headache for the Libra project, which has come under intense scrutiny from authorities since it was announced in June.
The Bank of England last week outlined strict regulatory conditions that digital payment systems such as Libra would have to meet before they could launch in Britain, which include the need for demonstrable operational and financial resilience across the entire payment chain.
Authorities in France pledged last month to block Libra from operating in Europe, while US Federal Reserve chair Jerome Powell has suggested the project would be unable to advance in the country until regulatory concerns were addressed.
“The Libra Association maintains its commitment to comply with applicable laws and will not launch until this is achieved,” said a Libra spokesperson.
“This is enshrined in our long launch runway, which has helped inform regulators, policymakers and other stakeholders around the world about our commitment to responsible financial innovation and regulatory oversight.”
Main image credit: Getty