In brief 7 min read
In a bold new play, a consortium led by social media giant Facebook has announced plans to enter the financial services sector through the launch of a cryptocurrency called Libra. Both a currency and a blockchain backed payment system, the project could have a profound impact on the financial services landscape. We take a first look at what this project involves, including the initial reactions of regulators, and the likely application of Australian financial services and anti-money laundering laws.
- The consortium plans for the Libra currency and payment network to be operating from 2020.
- The proposal has generated keen interest from regulators globally, including ASIC and the Reserve Bank in Australia.
- Libra would likely be subject to multiple regulations in Australia, including being classified as a financial product in Australia requiring a financial services license, as well as enlivening obligations under anti-money laundering and counter-terrorism financing laws.
Legal teams, as well as those working in strategy for technology companies, banks and financial services companies should monitor the potential market impact of Libra.
This announcement has been seen by some as a triumph for blockchain and cryptocurrency generally, potentially providing legitimacy and scale which proponents of the technology have long dreamed of.
On 18 June, Facebook and a consortium of other organisations announced their intention to enter the financial services sector through the launch of a new cryptocurrency product called Libra (currently slated to be operating from next year). Libra will operate as both the currency and underlying payment system, utilising blockchain technology.
The announcement has generated a considerable amount of buzz, both given the size and scale of participants involved in the 'Libra Association' (which, alongside Facebook, involves a stable of tech companies and payments operators with considerable pedigrees, such as PayPal, Visa, Mastercard, Spotify, Uber and E-Bay), and the use of blockchain technology. This announcement has been seen by some as a triumph for blockchain and cryptocurrency generally, potentially providing legitimacy and scale which proponents of the technology have long dreamed of. It also represents a major and significant shift for technology platforms to integrate with financial services, leveraging their incredibly large user base to potentially accelerate adoption.
For some Libra Association members (such as the payments operators), their involvement in this platform offers an interesting window into their own view of potential future state payments infrastructure, and can be seen as a hedge against future risks to their business model.
Libra will be the currency unit for the network. In contrast to many other cryptocurrencies, a user will need to buy 'Libra' from the Libra Association using fiat currency. According to statements made by the Libra Association, this money will be used to back issued Libra against a basket of 'stable' assets (currently to be determined, but likely including stable currencies and assets). Exchanging Libra back into fiat will result in the relevant Libra being 'destroyed', meaning there will only ever be as much Libra in circulation as is currently backed.
Libra won't be pegged against any specific currency, but rather will be linked to the basket of fiat currencies it is backed against. This means the value of Libra may fluctuate as against specific currencies, but is designed to limit fluctuations across the board. This creates an interesting tension on using it for payments, particularly internally within a jurisdiction (where value may fluctuate to some extent).
The payment system will be able to be embedded within social network tools such as Facebook Messenger and WhatsApp, or within the 'Calibra' digital wallet project which is being run by Facebook. Calibra will operate as a subsidiary of Facebook. Facebook has publicly stated that Calibra's financial data will be kept separate from social data and not used as part of Facebook's targeted advertising.
According to the proposal, payments using the Libra network will attract zero to nominal fees, and will operate seamlessly across borders. Unlike many other blockchain networks, which often have scale issues, the Libra network has been designed to enable a large volume of transactions (1000 per second in the initial release). This puts it in a position to realistically compete with existing payments architecture and infrastructure, while sitting outside of the traditional banking and financial services sector.
In many ways, the Libra project is not necessarily unique technically, or offering services that can't be obtained elsewhere in a broadly equivalent manner.
However, the potential pulling power of its contributors is the standout factor which has resulted in global interest in the project.
A social network issuing digital money won't happen overnight (or necessarily easily). Regulators and legislators worldwide have already begun to circle this proposal, including the Bank of England and the US Congress1. Facebook's involvement and existing market power has caused concern, particularly given its chequered last 24 months. Incredibly, members of the US House Financial Services Committee recently wrote directly to Facebook with a request to halt the project until it can be investigated further by US lawmakers2.
In Australia, ASIC has invited Facebook to 'come and talk to us', whilst the Reserve Bank and AUSTRAC also expressed caution3. This is on the back of Australian regulators looking to take a clearer stance on cryptocurrencies and crypto assets more generally, with ASIC releasing updated information sheet INFO225 on Initial Coin Offerings (ICOs) and crypto-assets in May4, Treasury releasing a consultation paper on ICOs in January5 and the ATO providing further guidance on the tax treatment of cryptocurrencies in June of 20196.
While it is early days, there are a number of specific regulatory hurdles Libra would likely have to clear in Australia before it can be issued and used widely. This may include the following authorisations or regulatory approvals and processes:
Getting the project approved by regulators globally will be one of Libra's real challenges and regulators are likely to approach the project with rigour.
- Australian Financial Services Licence (AFSL): as the Libra network will allow users to make non-cash payments, it will likely be a non-cash payment facility, which would require the issuer of the facility to have an AFSL from ASIC covering the provision of the facility. Who the issuer of the facility is will depend on the way it is offered and who is responsible for the obligation to the user to process the payment.
- APRA Authorisation: Libra may be a purchased payment facility, which will require the holder of stored value to be an APRA authorised deposit taking institution (or to be authorised or exempted by the RBA).
- RBA Authorisation: the Libra network may be a 'payment system', and the Reserve Bank may seek to regulate the system by imposing standards or an access regime, or giving directions to participants.
- AUSTRAC: Libra and/or Calibra will almost certainly need to comply with Australian anti-money laundering and counter-terrorism financing (AML/CTF) laws in relation to the provision of any exchange between fiat currency and Libra. Australian AML/CTF laws have recently been extended to cover digital currency exchanges, which require compliance with the AML/CTF framework as well as a specific registration with AUSTRAC.
This list represents the potential regulatory requirements of offering Libra just in Australia. Getting the project approved by regulators globally will be one of Libra's real challenges, and regulators are likely to approach the project with rigour.
There will also be potential concerns that may be raised in Australia and globally by competition regulators such as the ACCC and privacy regulators such as the OAIC, who are already closely monitoring digital platform players. With the ACCC due to release the final report of its Digital Platforms Inquiry imminently, we can expect that any move by platform operators into new markets will be monitored closely. Particular focus will likely be placed on data arrangements and the use of financial data, and how this may impact individuals' privacy.
- Richard Partington, Bitcoin passes $11,000 on news of Facebook's cryptocurrency plan The Guardian, (25 June 2019) & Robert Schmidt and Benjamin Bain, Facebook’s Libra Gambit Forces Washington’s Hand on Crypto Policy Bloomberg (20 June 2019).
- Frances Coppola, Congressional Committee Calls For A "Moratorium" On Facebook's Libra Project Forbes (2 July 2019).
- Eryk Bagshaw and Jennifer Duke, 'Facebook's cryptocurrency calls for driver's licences, stoking privacy fears', Sydney Morning Herald (20 June 2019).
- Australian Securities and Investments Commission, 'INFO225: Initial coin offerings and crypto-assets', (May 2019)
- Treasury, 'Initial Coin Offering Consultation', (30 January 2019)
- Australian Taxation Office, Tax treatment of cryptocurrencies (18 June 2019)