Stablecoin regulatory risks need addressing, says G7 report

Company-created digital currencies such as Facebook’s Libra could “pose challenges for competition and antitrust policies” and should not be launched until all legal and regulatory risks are addressed, the G7 has recommended, in the latest blow to the project.

A report published on Thursday by the G7 group of major western economies and Japan warned that stablecoins — digital currencies such as Libra that are pegged to stable real-world assets — that reach a global scale could “undermine competition in financial markets”, as well as threaten financial stability and monetary policy. 

The creation of a global stablecoin could “lead to significant market concentration” due to “the strong network effects that initially spurred their adoption, the large fixed costs needed to establish operations at scale and the exponential benefits of access to data”, the report explained. 

This would be the case particularly if the currency was “based on a proprietary system, as this could be used to prohibit entry or increase barriers to entry to such system”, it said. 

The comments represent another blow to Facebook’s ambitious plans to launch its own global digital currency together with a group of technology companies including Uber, Spotify and Vodafone. The Libra project has attracted fierce criticism from politicians and regulators, prompting several initial backers, such as Visa and Mastercard, to withdraw. 

In a response to the G7 report, the Libra Association, a group of companies invested in the project, said it welcomed competition among service providers operating on the system.

“We expect that the open-source nature of the Libra project will spark responsible innovation by a global ecosystem of start-ups, institutions, fintech developers, and financial services firms …financial institutions and startups will be free to use and accept Libra, and to apply for membership in the association,” it said in a statement.

The G7 warnings also come as Facebook is facing a flurry of antitrust investigations in both the EU and the US. On Thursday, Bruno Le Maire, France’s finance minister, wrote in the Financial Times that Facebook’s Libra plans were “unacceptable” because they “would mean a private company controlling a common good and taking over tasks normally discharged by states”. 

Mr Le Maire said it was questionable whether a private company such as Facebook should have the same control over currencies as nations. “It is a matter of democracy, not just a simple economic question,” he said.

He added that officials from several G7 member states, especially Germany, had expressed concern that the rollout of Libra would lead to them ceding control over their monetary policies.

Mark Zuckerberg, Facebook’s founder and chief executive, is due to testify in Congress next week on the project. 

The G7 report said that stablecoin projects designed by private sector groups might have to adhere to extra regulation. “Depending on the unique design and details of each stablecoin arrangement, approval may be contingent on additional regulatory requirements and adherence to core public policy goals,” the report said. 

On top of the risks posed by global stablecoins, the report outlined nine “significant risks” posed by any stablecoin, from the potential for money laundering to tax compliance.

The report also encouraged public bodies — such as finance ministries and standard-setting bodies — to seek to improve and innovate the payments system, noting that central banks were “individually and collectively” exploring whether to issue their own digital currencies.

Additional reporting by Claire Jones in London


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