ECB’s Löber: Facebook’s Libra a “black hole” of legal certainty

Fundamental issues need to be addressed before stablecoins such as Facebook’s Libra gain regulatory assent, according to the European Central Bank, although global standards in place today are already fit for accommodating transfers of value using new technology.

Klaus Löber, head of the oversight division at the ECB, said Libra was known in regulatory circles as “the project that is not to be named”, and terms such as stablecoin were “genius marketing because they are neither stable nor a coin”.

Stablecoins are cryptocurrencies pegged to the value of other assets such as one or more fiat currencies, either by algorithms or physically backed methods, and they can use distributed ledger technology to determine the ownership of assets. 

Earlier this year, JP Morgan became the first major bank to issue a prototype stablecoin, the dollar-backed JPM Coin, which it is testing with institutional clients for business-to-business money movement.

Löber said Facebook’s current Libra proposition represents a “black hole” of legal certainty, in terms of the rights that exist for holders of the asset and the roles of the various parties involved.

He also cited Libra posing challenges to public policy, oversight regulation, money laundering, competition, consumer protection, data protection, tax application, financial stability and monetary policy.

Löber was speaking at the International Swaps and Derivatives Association Technology Forum in London on November 6.

How do you deal with liabilities and remedies? And, in conflicts of law, what is the relevant forum for settling disputes?

Klaus Löber, European Central Bank

The Bank for International Settlements, Financial Stability Board and Group of 7 (G7) are among the international standard-setters that have begun scrutinising Facebook’s plans for its new currency.

Löber posed several general questions in relation to the practical operation of digital assets, which require definitive answers: “Can you use these assets as collateral? Can you net a position in a digital asset with positions you have in traditional assets? How do you treat insolvency? How do you deal with liabilities and remedies? And, in conflicts of law, what is the relevant forum for settling disputes?”

However, he said the ECB had conducted an exercise to see if current global standards are sufficiently “tech-neutral” to address developments in the new systems that underpin digital assets.

“We came to the conclusion that basically they are in practice,” he said. “Amongst the 65 financial market infrastructures (FMIs) that the Eurosystem oversees, we already have FMIs operating based on new technology.”

This month, the International Organization of Securities Commissions (Iosco) said its analysis has shown stablecoins “can include features that are typical of regulated securities”. This means its existing principles and standards may apply to stablecoins, depending on how they are structured.

Value transfer

In another report in October, the G7 said that whether or not stablecoins constitute securities or financial instruments in a particular jurisdiction will depend on the features of the coin and applicable legislation.

According to Löber, since “at its core is a proposition to transfer value”, Libra should be regulated as a payment system.

Speaking on the same panel, Harriet Territt, partner at law firm Jones Day, said she believes stablecoins will become important for managing volatility risk and currency risk, to the extent that they exchange currencies from a hedging perspective.

Territt added that central bank digital currencies (CBDCs) are set to be “transformative”.

Several projects are under way to create digital currencies backed by central banks, including the utility settlement coin (USC), designed by a group of banks to speed up financial transactions. The USC will be fully backed by cash held in reserve at central banks.

Territt said: “You can see instantly how, for the derivatives market, having that would unlock a huge amount of potential.”

Clearmatics, the decentralised digital cash-settlement system provider behind the USC’s technology, last month announced it has been working with non-bank liquidity provider XTX Markets to build a member-owned network for the automation of collateral management and settlement.

However, with respect to the take-off of CBDCs, Löber sounded a note of caution, pointing out there are other methods by which the benefits of CBDCs can be achieved.

He said: “From my perspective, [the benefit of CBDCs] is access to safe settlement money. But that can also be achieved through widening access to real-time gross-settlement systems for the wholesale markets. CBDC is a conversation, but it’s not the only one.”