27 November 2019

Why does Libra put so much pressure on the regulators?

Alexandre Lourimi

We no longer present Libra, the Facebook-driven project that is frightening regulators and raising dizzying questions. For some, Libra is an opportunity – for economic development, equal access to financial services, etc. – but for others, it’s not. -For others, cryptocurrency is a source of fear – money laundering, privacy, deregulation, and above all, an attack on the monetary sovereignty of States.

If a vision of society clearly resounds behind this new tool, it seems appropriate to us to return to the outcry which seems to us particularly disproportionate.


What is libra ?

Unveiled on June 18, 2019, the libra is not just another cryptocurrency but is a complete payment system that is materialized by a network in the form of a consortium blockchain; a payment token (the libra) whose price is guaranteed by a basket of assets and currencies; an ecosystem of payment applications like Paypal or Lydia, ensuring the interface between users and the network; and a legal entity bringing together the network’s actors – the Libra association.

A tool for “money laundering or terrorist financing” according to US Treasury Secretary Steven Mnuchin, “risks to financial stability and monetary sovereignty” according to Benoît Coeuré, member of the ECB’s executive board, “risk to monetary stability” according to Bruno Le Maire, the project has provoked strong reactions from three main factors:

  • firstly, the power of the project’s initiators, namely Facebook, Uber, Lyft, Booking and Spotify ;
  • secondly, the reputation of Facebook, which has been implicated in numerous scandals (Cambridge Analytica);
  • lastly, the arrival of these “digital ogres” in the highly regulated field of payment and – ultimately – finance.


Libra is not a problem of sovereignty

Paradoxically, it is in the countries least threatened by the project that reactions have been the strongest.

Thus, according to Bruno Le Maire, French Minister of Economy and Finance, “Libra is in fact asking States to share their monetary sovereignty with a private company”.

From a political point of view, the argument of the infringement of monetary sovereignty implies to linger on this concept which, according to Professor Jérôme Blanc, can be considered in a primary or absolute form:

  • monetary sovereignty is thus absolute, when the sovereign – the State – has the capacity to impose its monetary instruments in internal payment practices (i.e. ban any other means of payment) ;
  • monetary sovereignty is primary, when the sovereign is content to assert itself as such – by virtue of the fact that it has the “competence of its competence”, to quote Jellinek -, that it defines a unit of account, and a monetary symbol. In this sense, the consecration of a currency by law, as an expression of the general will and of the sovereign people, makes it one of the components of the social contract.

If the euro has legal tender, a forced exchange rate (i.e. the prohibition to contest the nominal value of a banknote or coin) and a liberating power (i.e. the prohibition to refuse a payment in euro), contractual freedom allows everyone to accept in payment another currency or any object of value (i.e. in bitcoin or libra).

It is clear from the definition of monetary sovereignty that the libra is not likely to diminish it, since, if it manages to stand out for its efficiency and to be intensively used in payment, it will have no impact on the Sovereign’s power to define his own currency.

In this respect, Libra recently made a rather laconic reminder that the token libra “would not be designed to replace the dollar or any other currency”.

Thus, the libra should at most be seen as an attack on the monopolistic position of States in issuing “means of payment” which would be, after Bitcoin, a further step towards the monetary competition advocated by Hayek and a test of Gresham’s law (“bad money chases good money”).


Libra is just a new player in an ongoing market

In 2015, the Ministry of the Economy noted that “the capacity of means of payment to accompany users in Internet commerce (…) is a significant factor that constitutes a challenge for payment players”. In 2012, he recommended “encouraging efficient, open and competitive business models [for payment services]”.

From a functional point of view, libra should simply be considered as a new product in the competitive market of means of payment – in the economic sense – in which traditional players, such as Western Union, well-established electronic wallets, such as Paypal, and now the digital giants are already present, benefiting from the open banking enshrined in the DSP2 directive and opening up the initiation of payment services to players such as Apple with Apple Pay, but also Facebook, which seems to be reopening its payment service via Messenger, despite a previous failure due to a lack of user appeal and difficulties in forging partnerships with European banks.

Alongside this major but belated evolution, the libra appears as an opening of the payment sector to forceps allowed and founded by a technological change: a blockchain and a stable corner.

However, the fact that Libra will not use a legal tender or a currency in the legal sense does not exempt it from any regulation, all the more so as, as a reminder, each Libra will be backed by a basket of currencies whose stability will be ensured by a reserve.

As explained in a previous article, and despite qualifications that are still uncertain, regulators in all countries, if they do not unite, will have a range of regimes at their disposal to ensure the protection of users: electronic money institution, payment service provider, sui generis regimes applicable to digital assets, etc.

Consequently, Libra will be subject to the same obligations and will offer the same guarantees as any other player in the financial sector. On the specific subject of the fight against money laundering, Facebook’s expertise in data collection and processing as well as in compliance makes it an entity that is fully qualified to apply French and European obligations to the letter.

Moreover, the association has never shown any hostility towards the regulators and, on the contrary, is careful to show its white paw by reiterating its willingness to submit to a high – or even higher – level of regulation on the one hand and, on the other hand, to offer its users all the pleasures of liberalisation.

« The Libra Association is committed to building a system that replicates or exceeds current standards for consumer protection, financial stability, and global cooperation to prevent money laundering and illicit finance while preserving national sovereignty over monetary policy. The distributed governance of Libra is structured to provide more choice for consumers, greater access, higher interoperability and lower prices.»

But Libra could become a strategic interlocutor of the central banks

If Libra does not in fact present a stake in terms of sovereignty, the association could become a strategic interlocutor for central banks, whose importance will depend on the amount of assets and currencies that the reserve will have to manage.

Assuming that the effectiveness of cryptocurrencies leads to mass adoption in States where monetary stability is lacking, which would imply an increase in the money supply of the libra, the reserve will be both a development tool and a means of pressure for the currencies on which cryptoccurencies will be based (euro, dollar, etc.).

From a certain stage, the trade-offs that the reserve will make on the basket of assets and currencies that will constitute the guarantee of its payment system will thus be likely to produce macroeconomic effects that the monetary powers must control.


“Setting oneself up too much as a trader is not always the best quality for negotiation”
Cardinal de Retz
s a result, demonstrations by the authorities appear to be motivated less by the need to defend an allegedly threatened sovereignty than as the first displacement of a game of chess that is likely to last.


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