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Federal Reserve sets out regulatory challenges facing Facebook’s Libra

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Via Financial Times

Facebook will need to make a series of promises on money laundering, consumer protection and privacy before it can launch its digital currency, a top US official has warned — the first time a regulator has gone into detail about what they want from Project Libra.

Lael Brainard, one of the governors of the Federal Reserve, has set out for the first time what she called the “core set of legal and regulatory challenges” the social media company must overcome before the cryptocurrency is allowed to make its first transaction.

In a speech on Wednesday she said Facebook and its partners would have to be more specific than they have been so far about what protections they would offer consumers and how they would prevent the system being used by criminals.

Facebook has promised it will not launch Libra, which it has pitched as an effort to shake up the current payments system and boost financial inclusion, without the go-ahead from regulators in both Europe and the US. But in recent weeks officials from across the world have warned that securing this would be difficult, given the risks it poses to the financial system as a whole.

Seven of Facebook’s initial partners — regulated companies including PayPal, Visa, Mastercard and eBay — have dropped out of Libra in the past two weeks, wary of the threat of increased scrutiny over their existing businesses.

Next week Mark Zuckerberg, Facebook’s chief executive, will testify before Congress as he seeks to wrest back momentum for the troubled project.

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But days before he does so, Ms Brainard made clear the stark legal challenge which remains for Facebook and its remaining 20 partners, including Uber, Lyft and Spotify.

Ms Brainard said Libra would have to make promises in three broad areas: anti-money laundering, consumer protection and the types of financial transaction being undertaken by each partner.

Several regulators have warned about the potential for criminals to use Libra coins to launder money, given Facebook has said it would not necessarily monitor everyone who eventually uses its system.

Ms Brainard said Libra would have to guarantee that it met anti-money laundering rules in each country in which the cryptocurrency was used, and that it was maintaining consistent policies across those jurisdictions.

She even hinted that global regulators could join forces to establish an international framework to prevent digital currencies being used for money laundering. “Libra’s intended global reach would likely necessitate a consistent global anti-money-laundering framework in order to reduce the risk of illicit transactions,” she said.

Ms Brainard added that the Libra companies would also need to spell out what guarantees they would offer users, such as bank-style deposit insurance, as well as identifying who should be liable for any data breaches.

Finally, she warned that each company involved in Libra would need to clarify what kind of transactions it was carrying out before regulators were able to assess whether it should be judged as a financial institution or merely as a payments system, which would involve far lighter scrutiny.

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Ms Brainard said, however, that the Fed was in no rush to launch its own digital currency, as other central banks have suggested. She warned that such systems would raise “profound legal, policy and operation questions”.

Facebook, meanwhile, has made clear it intends to press ahead with Libra despite the backlash and said it was willing to co-operate with regulators.

“Towards the end of last week there was a lot of pressure mounting,” David Marcus, co-creator of Libra, said of the exodus in a television interview on Tuesday.

But he criticised politicians for “telling people that you should not explore innovation at a time where . . . our core financial system hasn’t evolved much in the past 50 years”. adding “consumers are paying the price”.

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