G7 warns on ‘serious risks’ posed by Libra and other digital coins

Cryptocurrencies such as Facebook’s Libra will need to be tightly regulated or they could destabilise the global economy, according to a working group set up by the G7 group of major western economies and Japan.

The financial innovations risk being used for money-laundering and the financing of terrorism, said a preliminary report from the group led by Benoît Cœuré of the European Central Bank, which was published on Thursday.

“[T]hey give rise to a number of serious risks related to public policy priorities including, in particular, anti-money laundering and countering the financing of terrorism, as well as consumer and data protection, cyber resilience, fair competition and tax compliance,” according to the report.

“They could also pose issues related to monetary policy transmission, financial stability and the smooth functioning of and public trust in the global payment system.”

The US and France are among the governments that have been most vocal in their criticism of Libra, which would be a so-called “stablecoin” — a cryptocurrency anchored to a reference asset such as a sovereign currency or a basket of assets.

Steven Mnuchin, US Treasury secretary, said the G7 finance ministers and central bankers all had “very strong concerns about Libra and stablecoins in general”, although they believed in financial innovation and the need for cheaper international payments processing.

Libra is a particular worry, according to French finance minister Bruno Le Maire, because Facebook has hundreds of millions of customers — a situation that could confer on the proposed coin the attributes of a sovereign currency without the normal rules and controls.

“The sovereignty of nations might be weakened or jeopardised by these new currencies,” Mr Le Maire said at the G7 finance meeting in France.

The report — drafted by officials at G7 central banks as well as representatives from the International Monetary Fund, the Bank for International Settlements and the Financial Stability Board — said “significant work” and more negotiations would be required from stablecoin developers before they could expect approval from the relevant authorities.

“As large technology or financial firms could leverage vast existing customer bases to rapidly achieve a global footprint, it is imperative that authorities be vigilant in assessing risks and implications for the global financial system,” the report said.

G7 governments have nevertheless acknowledged shortcomings in existing banking systems, especially for international payments, that some stablecoins would seek to simplify at the same time as lowering costs.

The working group laid out four main recommendations. First, stablecoins should ensure public trust by meeting the highest regulatory standards and being subject to prudent supervision and oversight.

Second, stablecoin initiatives should demonstrate a sound legal basis, in all relevant jurisdictions, to ensure adequate protection and guarantees to all stakeholders and users.

Third, they should ensure “operational and cyber resilience”. And, fourth, the management of the assets must be safe and transparent to ensure market integrity.