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VP(R)'s Picks: Libra's Challenge to the Global Financial System

VP(R)'s Picks: Libra's Challenge to the Global Financial System
Professor Douglas Arner


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Facebook’s cryptocurrency project, Libra, has the potential to be a gamechanger for the financial world – on a par with the end of the gold standard in the 1970s, according to Professor Douglas Arner and his colleagues. They have been assessing the regulatory implications.

In June 2019, Facebook unveiled the Libra project, a private cryptocurrency that would bring a data giant into the global financial system, potentially changing the world payment and monetary system and giving 1.7 billion unbanked people access to financial services. The move attracted the immediate attention of Professor Douglas Arner in the Faculty of Law and his collaborators Dirk Zetzsche of the University of Luxembourg and Ross Buckley of the University of New South Wales.

The three scholars have been at the forefront of research on financial technology (FinTech) and produced an influential report on FinTech for financial inclusion that was adopted in 2018 by the global Alliance for Financial Inclusion, which represents bankers from more than 90 countries. Arner and his co-authors believe Libra could be a gamechanger, but there are significant challenges for regulators.

On the positive side is the fact that, through Facebook’s reach, Libra could be a cash equivalent for billions of people, particularly in poor countries that lack financial services. This would require creating digital identities for individuals, which the authors said could be an even more powerful impact than the cryptocurrency itself.

Libra could also result in lower fees, which are currently based on decades-old costs that have largely been eliminated through technology. This would be at the expense of incumbent financial institutions and potentially new FinTech entrants. Yet both private and public organisations (including banks) could be inspired to put forward their own cryptocurrencies.

On the negative side, Libra could pose a challenge to governments with weak institutions and be a systemic risk to the global financial ecosystem. Moreover, like other cryptoassets, Libra lacks accountability in its structure. Its links to Facebook could be problematic given the potential for the social media giant to have undue influence over the 100 or so corporate members in Libra’s consortium. Data privacy is another concern because if the data pools of Libra and Facebook were merged, they would provide unprecedented insights into and control over users’ social and financial lives.

The world’s major financial regulators will need time to assess how to regulate Libra. Arner and his co-authors expect the biggest challenge to be cross-border supervision and co-operation, which has been patchy and largely untested for financial services. They conclude that regardless of whether Libra succeeds, it is prompting the first real re-think of global monetary arrangements since the end of the link between the US dollar and gold in the 1970s.

How Libra works

(Image reproduced/adapted from: Zetzsche D.A., Buckley R.P. and Arner D.W., “Regulating LIBRA: The Transformative Potential of Facebook’s Cryptocurrency and Possible Regulatory Responses”, University of New South Wales Law Research Series UNSWLRS, 2019, 19-47.)