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Is Libra a Virtual Currency, Financial Instrument or E-Money? We Might Find This Out on Sept 6

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 The Economic and Financial Committee has requested the European Commission to explore the risks posed by Facebook’s Digital Currency Libra and analyze if it will be regulated as virtual currency, a financial instrument or e-money.

Potential Threat to Monetary Policy

The national government envoys will delve into the analysis provided by the European Commission on the 6th of September. The EFC discussion comes after a warning issued by ECB’s executive member Yves Mersch this week.

He said on Monday (2 September) that,

“Libra could reduce the ECB’s control over the Euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the single currency’s international role, for instance by reducing demand for it”.

He further added

“I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favor of the beguiling but treacherous promises of Facebook’s siren call.

 Categorization of Libra is a Concern

The regulators and decision-makers are trying to figure out the most appropriate bracket for Libra, whether it be categorized as a virtual currency, a financial instrument or e-money.

Libra backers include a list of multinationals such as MasterCard and Uber. The currency addresses the volatility of digital assets by anchoring the coin to certain sovereign currencies.

However, the regulators’ list of concerns includes its potential to become a global source of financial instability. Considering that Facebook can directly offer this asset to almost 2.4 Billion users.

Coordinating the European Response

Furthermore, the debate intends to follow up on the G7 finance ministers and central bankers’ discussion held in Chantilly (France) in July. The discussion was held to help coordinate the European response. The G7 working group on this issue concurred that Facebook still needs to work on meeting the said requirements before it is approved. The requirements include “highest regulatory standards and “sound legal basis“.

As lawmakers are renewing their efforts to “define and rein in Libra”, others in the field are worried about lawmakers’ activities hindering the growth of Bitcoin and other cryptocurrencies. Kristin Smith, who is the director of the Blockchain Association said;

“What we don’t want to happen is members of Congress for the first time come in and author legislation that aims to go after Facebook and inadvertently takes out the other part of the industry,”

Besides regulators, reports mentioned that the Libra is witnessing some of its partners leaving as well.

Postponement Owing To Community Backlash

Facebook had earlier planned to launch its project during the first half of 2020. However, owing to backlash from the global crypto community, it decided to postpone its release till all the necessary regulatory concerns were addressed.

Moreover, the project suffered a serious setback when senior officials from the G7 central banks, the International Monetary Fund, the Bank for International Settlements and the Financial Stability Board affirmed that Libra was a “serious risk” for the international financial system.

While the European Commission addresses the concerns, further work is required on the part of the G20 and the Financial Stability Board, given the importance of international coordination to address the cross-border nature of the project.

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