Federal Reserve Gov. Lael Brainard noted key risks associated with cryptocurrency on Wednesday, including Facebook Libra in particular.
The Board of Governors of the Federal Reserve member was speaking to the European Central Bank (ECB) colloqium in Frankfurt on “Monetary policy: the challenges ahead.”
The event was held to honor EXC Executive Board member Benoît Coeuré.
“At the start of Benoît’s ECB term, bitcoin’s market capitalization was small, and only a handful of cryptocurrencies existed. In the eight years since then, bitcoin’s market capitalization has grown rapidly and now exceeds 100 billion euros, and thousands of cryptocurrencies have been created,” Brainard said in her speech.
She pointed to anti-money laundering (AML), counter-terrorist financing (CTF) and know your customer (KYC) concerns, including monetary policy implications as concerns regarding Libra. She cited a report that found approximately two-thirds of the 120 most popular cryptocurrency exchanges have weak frameworks to deal with AML, CTF, and KYC.
“Statutory and regulatory protections on bank accounts in the United States mean that consumers can reasonably expect their deposits to be insured up to a limit,” said Brainard. “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 assets.”
Stablecoins, which are backed by fiat or securities, are “leading us to revisit questions over what form money can take, who or what can issue it, and how payments can be recorded and settled.”
Coins launched by big companies can scale quick, leading to greater concern.
“Unlike social media platforms or ridesharing applications, payment systems cannot be designed as they develop, due to the nexus with consumers’ financial security.”
Digital currencies can be risky, but Facebook’s Libra could be a massive challenge given the potential for rapid spread and dubious safeguards.
“Cryptocurrencies already pose a number of risks to the financial system, and these could be magnified by a widely accepted stablecoin for general use,” Brainard said.
Libra is expected to launch in the first half of 2020. Backed by a basket of currency assets to avoid volatility, the project has faced resistance from officials all over the world.
“With nearly one-third of the global population as active users on Facebook, the Libra stablecoin project stands out for the speed with which its network could reach global scale in payments,” Brainard said.
She has concerns over consumer protections.“Without requisite safeguards, stablecoin networks at global scale may put consumers at risk.”
She highlighted what she called “staggering” losses from fraud and theft of cryptocurrencies, and the $1.7 billion in 2018 lost to such activity, and $4.4 billion in 2019.
“The hacking of exchanges represents a significant source of the theft,” she said.
Brainard noted in October that Libra could complicate central banks’ efforts.
“Libra, and indeed any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges before it can facilitate a first payment,” she said at the time.