| Facebook’s debut of the Libra global cryptocurrency on June 18 sparked a public furor over so-called “stablecoins.”
In contrast to more traditional cryptocurrencies, like Bitcoin or Ethereum, which suffer from a number of limitations, including extreme price volatility, the value of a stablecoin is linked to a pool of assets such as, in the case of Libra, a basket of global fiat currencies.
In the months since the announcement, several congressional committees have held hearings, prominent members of the Libra consortium have withdrawn and government officials around the globe have weighed in.
Although Libra’s launch may be delayed indefinitely, it has nevertheless sparked a serious debate among central bankers, economic policymakers and lawmakers about the future role of stablecoins as an alternative to fiat currencies and the myriad concerns around legal and regulatory risks, cybersecurity, financial stability and monetary policy.
Regulatory Issues of Stablecoins
Last month, the G7 Working Group on Stablecoins, Federal Reserve Board Governor Lael Brainard and, at the request of the G20 nations, the Financial Stability Board, offered views on the impact of global stablecoins. The respective statements offer insight into some of the potential issues associated with stablecoins that need to be considered and addressed if stablecoins are to be adopted in the United States and globally.
The G7’s report stated that no global stablecoin project should begin operation until “legal, regulatory and oversight challenges and risks are adequately addressed” and core public policy goals are met.
Governor Brainard remarked that “global stablecoin networks should be expected to meet a high threshold of legal and regulatory safeguards before launching operations.” And the Financial Stability Board noted that harnessing the potential benefits of global stablecoins, while containing associated risks, “requires adequate and comprehensive regulatory and oversight arrangements to ensure that any potential risks to financial stability and market functions can be identified and adequately addressed.”
All three identified several common concerns about stablecoins, regardless of size, including: money laundering, terrorist financing and other forms of illicit finance; consumer protection; cybersecurity and operational resilience; market integrity; data privacy, protection, and portability; and whether and how stablecoins fit into the existing regulatory structure.
They also identified the challenges and risks associated with global stablecoins, such as Libra, generally noting those risks could impact monetary policy, financial stability, the international monetary system and fair competition.
Central Bank Digital Currencies
Governor Brainard also addressed whether the Federal Reserve and other monetary authorities ought to develop a central bank digital currency of their own as an alternative to private global stablecoin systems.
While noting that central bank digital currencies may be a safer alternative because they would be a direct liability of the central bank, Governor Brainard demurred by noting the advantages of the current system.
She cited a robust demand for the dollar, which remains an important reserve currency globally, the diversity and reach of the existing U. S. banking system, and the widely expanding variety of digital payment options. She also cited potentially daunting operational challenges to manage a massive digital currency as a major hurdle.
Governor Brainard, however, did not rule out the launch of a digital currency in the future noting that the Federal Reserve “will continue to analyze the potential benefits and costs of central bank digital currencies and look forward to learning from other central banks.”
Challenges Ahead
Many of the cited challenges and risks can be addressed.
In some sense, the G7, Governor Brainard and the Financial Stability Board are outlining a roadmap for private stablecoin developers to follow if they intend to offer alternative digital currencies. Indeed, Governor Brainard stated that any stablecoin project with global scale “must address a core set of legal and regulatory challenges before it can facilitate a first payment.”
Of course, whether this can be accomplished satisfactorily, and what governments and regulators will do if a major stablecoin is launched without these risks and concerns being addressed, remains to be seen.
Thomas J. Curry and Jason J. Cabral are partners in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Curry is the former U.S. Comptroller of the Currency and all are members of the firm’s banking and financial services group.
