Fitch Ratings does not see stablecoins (cryptocurrencies backed by reserves) such as Facebook’s Libra accepted by global authorities until their backers are regulated akin to large, systemic banks. The global pushback by regulatory and monetary authorities accompanies the recent departures of MasterCard and Visa (among others), depriving Libra of payment specialists with deep regulatory and anti-trust experience. This matters as Facebook’s financial subsidiary Calibra and Libra are likely to still face competitive and/or anti-trust restrictions if accepted for use. Consequently, we expect no short- to medium-term impact on North American and European banks.
However, digital coins for retail use issued by central banks or by fully regulated commercial banks for a limited range of wholesale and institutional counterparties could be more successful. Longer term, Libra-like initiatives could also increase fee and commission revenue pressures, with cross-border payment specialists such as Western Union and MoneyGram and high-priced correspondent banking networks potentially more vulnerable.
Mark Zuckerberg’s Congressional testimony this week may reveal more about Libra and how it may be regulated given the systemic footprint of Facebook’s 2.7 billion users. Little has been divulged since its white paper in June, although Libra is still targeting a mid-2020 launch. Policymakers are seeking to assess and address policy gaps, including multilateral responses, as a matter of priority.
“A thorny issue is that the public may prefer holding a CBDC instead of bank deposits, which could facilitate a bank run during a downturn or stress event.”
A working group of the seven leading (G7) central banks recently reported that retail stablecoin could provide faster, cheaper remittances at lower costs while supporting financial inclusion. However, this did not offset the potential public policy risks of lax anti-money laundering and data protection rules, privacy concerns and elevated cyber risks. They concluded that global financial stability, public trust in global payments and operation of monetary policy could be at risk from broad-based use of stablecoins.
The Financial Stability Board (FSB) advised the group of 20 (G20) leading finance ministers that global stablecoins must meet the highest regulatory standards and be subject to prudential supervision and oversight. The FSB will submit a report to the G20 and Central Bank Governors in April 2020 and a final report in July 2020, with any multilateral policy responses and regulatory views likely pending till then.
The EU’s Financial Commissioner proposed new rules to regulate virtual currencies like Libra due to potentially systemic effects on financial stability of a global user base. Last week, the Fed’s Lael Brainard cautioned of the potential for a global stablecoin to amplify risks and spillovers due to potential ambiguity on the ability of global authorities to provide oversight and backstop liquidity.
Monetary authorities are seemingly less concerned about proposed issuance of digital coins by regulated commercial banks for non-retail use. Since 2015, a group of banks led by UBS have been investigating a “utility settlement coin” for clearing and settling trades between wholesale counterparties backed by each type of major currency. JPMorgan has trialed the JPM Coin with a small number of its institutional clients.
Most central banks are exploring the issuance of central bank digital currencies (CBDCs). A thorny issue is that the public may prefer holding a CBDC instead of bank deposits, which could facilitate a bank run during a downturn or stress event. The ECB’s crypto-task force in May questioned CBDCs purpose in light of real-time central bank payment and settlement systems. The Fed’s announcement in August that it would develop a round-the-clock real-time payment and settlement service, FedNow, could similarly blunt the business case for a U.S. CBDC.
Nonetheless, the Cambodian central bank plans to issue a blockchain-based payment system for payments between retail and commercial sectors, with the Central Bank of Uruguay and the Swedish Riksbank also considering CBDC issuances.