According to European Central Bank Executive Board member Yves Mersch, the Libra project is “beguiling but treacherous”.
Mersch expressed this view during a speech at the ESCB’s Legal Conference in Frankfurt at the ECB’s headquarters, in which he hoped that Europeans would not be tempted by this idea, so as not to give up the security and solidity of traditional payment channels.
In his speech, he started with the concept of trust, saying that public trust in money is also a measure of trust in public institutions. He also said that money is an “indispensable social convention” that can only work if users trust its stability and the ability of the issuing authorities to maintain it even during difficult times.
At this point he asks three questions about Libra:
- How does it differ from other private currencies and public money?
- What legal and regulatory challenges does it pose?
- What position should a central bank like the ECB have towards it?
According to Mersch, Libra is no different from other private currencies. It would be similar to cryptocurrencies and e-money, but with some worrying differences.
The ecosystem behind Libra would be complex and cartel-like. In fact, the Libra Association will control the blockchain and its Council will take decisions on the governance of the network, and on the funds kept in reserve.
The coins will be distributed exclusively through a network of authorised dealers, with a centralised access system.
“With such a set-up, it is difficult to discern the foundational promises of decentralisation and disintermediation normally associated with cryptocurrencies and other digital currencies. On the contrary, similarly to public money Libra will actually be highly centralised, with Facebook and its partners acting as quasi-sovereign issuers of currency”.
He then adds that centralised public currencies are traditionally an expression of state sovereignty.
“When it comes to money, centralisation is only a virtue in the right institutional environment, which is that of a sovereign entity and a central issuance authority. Conglomerates of corporate entities, on the other hand, are only accountable to their shareholders and members. They have privileged access to private data that they can abusively monetise. And they have complete control over the currency distribution network”.
The other problem related to trust would be the lack of a global lender of last resort. The question is: “Who will stand behind it in a liquidity crisis situation?”.
The regulatory challenges posed by the project are the fundamental legal nature of this new form of money, the guarantee that the relevant regulatory and supervisory authorities in the EU and the Member States can enforce their jurisdiction over its network, and the need for cross-border cooperation and coordination.
Libra would not qualify as electronic money, transferable securities or any other type of financial instrument. If it were to be classified as a virtual currency, its authorised dealers would be subject to the requirements of the anti-money laundering and anti-terrorism directive and its registration requirements.
Moreover, as it will circulate freely throughout the world, its global nature would also require a global regulatory and supervisory response.
Mersch also says that the ECB is very interested in market innovations that could directly or indirectly affect the control of the Eurosystem and Libra could reduce the ECB’s control over the euro, undermine the monetary policy transmission mechanism and undermine the international role of the European currency, for example, by reducing demand for it.
“The notion of stateless money is an aberration with no solid foundation in human experience”.
At this point, according to Mersch, only an independent central bank with a strong mandate can provide the institutional support needed to issue reliable forms of money and strictly preserve consumer confidence in them.
“So private currencies have little or no prospect of establishing themselves as viable alternatives to centrally issued money that is accepted as legal tender”.
Finally, Mersch argues that it is unlikely that the rise of cryptocurrencies and other forms of privately issued instruments that can perform some of the functions of money will fundamentally disrupt this landscape. Quite the contrary, it may help in making even more evident the key role of central banks as the ones responsible for public trust in money.