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Facebook’s LIBRA Currency in trouble

Facebook’s LIBRA Currency in trouble

Tag:GS3 || Science & Technology || Fourth Industrial Revolution || Cryptocurrency

Why in news?

  • Facebook’s digital currency dealt with another blow.

 What is Libra?

  • Libra is a permissioned blockchain digital currency proposed by the social media company Facebook.
  • The currency and network do not yet exist, and only a rudimentary experimental code has been released.
  • Libra was formally announced on June 18, 2019. The launch is planned to be in 2020.
  • Libra is for everyone:
    • Moving money around the world should be as easy and cheap as sending a text message. No matter where you live, what you do, or how much you earn.
    • Flexible, so it can power the Libra ecosystem’s governance as well as future innovation in financial services.
  • Mission of Libra: Libra is a simple global currency and financial infrastructure that empowers billions of people.
  • In contrast to cryptocurrencies such as bitcoin which use permissionless blockchains, Libra is not decentralized, relying on trust in the Libra Association as “a de facto central bank”.
  • In September, Facebook announced that the reserve basket would be made up of 50% United States dollar, 18% Euro, 14% Japanese yen, 11% Pound sterling and 7% Singapore dollar.

Libra Association:

Facebook established the Libra Association to oversee the currency, founded in Geneva, Switzerland. The Following Members Are:

  • Payments: PayU
  • Technology and marketplaces: Facebook’s subsidiary Calibra,] Farfetch, Lyft, Spotify, Uber
  • Telecommunications: Iliad SA, Vodafone
  • Blockchain: Anchorage, Bison Trails, Coinbase, Xapo
  • And many Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking.
    • The association is the only party able to create (mint) and destroy (burn) Libra.

The latest development in Libra:

  • Seven other companies left before the first Libra meeting on 14 October 2019: Booking Holdings, eBay, Mastercard, Mercado Pago, PayPal, Stripe and Visa Inc.
  • The association hopes to grow to 100 members with an equal vote, while Facebook expects to “maintain a leadership role through 2019.

 Why these companies left the libra:

  • The report says global cryptocurrencies like Libra can pose problems, including for policymakers setting interest rates.
  • The report says global cryptocurrencies like Libra can pose problems, including for policymakers setting interest rates.
  • No stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed.
  • It also cast doubt over the viability of the project even if Libra’s backers satisfy concerns raised by governments and central banks.
  • Addressing such risks is not necessarily a guarantee of regulatory approval for a stablecoin arrangement.

 The multiples hurdles for libra:

  • Libra may generate many risks such as money laundering, terrorist financing, and questions about data and consumer protection, Libra’s global ambition could trigger antitrust risks and undermine financial stability. The current legal framework is not ready to manage all these risks, nor would it protect the consumers using this currency.
  • Is regulatory response is sufficient to be able to address all these risks: The answer is no because Libra is asking states to share their monetary sovereignty with private companies. In fragile countries where many don’t have access to a bank account or a stable currency, people could simply stop using the national currency and turn to private currencies instead. Some countries may end up surrendering their monetary sovereignty and control over their economy.

Countries Respond to Facebook’s Libra Cryptocurrency:

  • China: Facebook’s plans to create its own cryptocurrency have forced China’s central bank into stepping up research into creating its own digital currency as Libra could potentially pose a challenge to Chinese cross-border payments, monetary policy, and even financial sovereignty.
  • Singapore: Depending on its nature, Libra may be regulated under the PS Act, and be subject to requirements on anti-money laundering and countering the financing of terrorism imposed under the MAS Act.
  • Japan: As for Libra, we must bear in mind that the potential global user-base could be enormous.

 Zukerberg to testifying:

  • Facebook CEO Mark Zuckerberg will testify before the House Financial Services Committee on Oct. 23.

 What has India’s stand on cryptocurrency been till now?

  • Previously on multiple occasions, the Indian government and regulators have made a hard-line stance on cryptocurrency assets. In 2013, the RBI had warned all customers of “the potential financial, operational, legal, customer protection and security-related risks” involved with cryptos.
  • Later in April 2018, the RBI banned all regulated entities from transacting in virtual currency assets over fears of money laundering and tax evasion. Furthermore, the Subhash Garg committee constituted in 2017 to study cryptocurrency has reportedly drafted a bill to put a blanket ban on all cryptocurrency assets under the Prevention of Money Laundering Act. While none of the cryptocurrencies such as Bitcoin or Ripple have been backed by investors as big as Facebook, the government may still hold back on allowing immediate launch considering its past hard-line stance, say experts.

G7 Report:

  • Facebook’s Libra cryptocurrency must not go ahead until the firm proves it is safe and secure, according to a report by the G7 group
  • The G7 task force that produced the report includes senior officials from central banks, the International Monetary Fund (IMF) and the Financial Stability Board, which coordinates rules for the G20 economies.
  • It says backers of digital currencies like Libra must be legally sound, protect consumers and ensure coins are not used to launder money or fund terrorism.
  • it says “global stablecoins” with the potential to “scale rapidly” pose a range of potential problems.

Is Libra is a new, revolutionary form of fiat currency:

  • For the first time in history, we are witnessing the emergence of a currency that’s backed and sponsored not by a sovereign government, but by large multibillion-dollar corporations.
  • Libra will be backed by financial assets, including fiat currencies and government bonds denominated in those currencies.
  • But many platforms such as M-Pesa is already giving financial inclusion services in many countries. M-Pesa is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom. But it is criticized due to higher costs.

Challenge:

  • European Central Bank executive board member Yves Mersch said that the first challenge concerns Libra’s fundamental legal nature. The choice is, essentially, whether to treat Libra as e-money, as a financial instrument or as a virtual currency.

 Way forward:

  • European Parliament wrote that “An international agreement is needed on harmonizing existing rules for crypto tokens.”
  • Co-regulatory oversight of the Libra operation scheme by both state-operators and stakeholders would be needed to prevent money laundering, illicit transactions, and consumer fraud.

Additional info:

  • Cryptocurrency is a type of digital currency. It’s called “cryptocurrency” because it uses a very secure form of cryptography to verify transactions. Cryptocurrencies are built on blockchain technology, and the value of a cryptocurrency depends on the type of blockchain it is built on.
  • Blockchain technology: It is a technology that can safely store transaction records on a peer-to-peer network instead of storing them in a single location. Independent servers around the world, called nodes, make up the network that operates the blockchain.

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