Libra, the stable cryptocurrency project that Facebook is trying to promote with the collaboration of other large companies, looks like it is titanic and could pose risks to market stability, according to the European Central Bank. The highest monetary authority of the Old Continent has carried out a study with simulations and, in the most extreme of all scenarios, the ECB calculates that the project led by Zuckerberg could “manage” up to three trillion euros. To get an idea of what this size represents in a currency, the total sum of the value of all euros in circulation and demand deposits reached 9.33 trillion euros at the end of March.
Stable-type cryptocurrencies such as pound, known as stablecoins, aim to establish themselves as an alternative to traditional money and extend access to the financial system. In order to become a global payment system, these types of currencies leave aside the volatility of other virtual currencies such as bitcoin. To achieve that stability in its exchange rate, a kind of central authority of the stablecoin supports the value with a basket of currencies and creates or destroys the currencies based on demand.
In the Facebook pound example, every time a user requests a pound, the Libra Association, the central authority created by Facebook and other companies, issues a coin and keeps the money received in exchange in its reserve . This reserve is made up of cash or bank deposits (20% according to the latest data from the association itself) or low-risk investment assets, such as short-term debt from countries (the remaining 80%).
Although leaning on currencies, the ECB is afraid of the effects of a loss of confidence of end users in the stablecoin. "This could happen for example in the case of cyber attacks, thefts or if users realize that the reserve's basket of assets is losing value," he illustrates. "Unlike stablecoins, bank deposits are covered by the appropriate guarantee system," they emphasize, stressing that in the event of problems, the user of the currency would be the main cost bearer unless the Libra Association did so.
In its simulation, the ECB calculates that the pound would mean an injection of 527.1 billion euros more in investment assets denominated in euros. If users abruptly sold the stablecoin, it could put pressure on countries' sovereign debt by suddenly selling off the assets that make up the reserve.
"If the proceeds from the sale of cryptocurrencies are not held in deposits and instead are invested in non-zero-risk financial assets, the value of the currency would be exposed to the inherent risks of that investment," explains the ECB. . In the eyes of the institution, the value of the currency would not be fixed, but would depend on the value of the basket of assets that make up the reserve and, in that case, having one of these currencies would be comparable to having a participation in an investment fund. .
Need for new regulation
The ECB concludes its document by appealing that if the world wants to reap the benefits of stable cryptocurrencies without facing its risks to financial stability, it must prevent them from operating in a legal vacuum.
According to the ECB, promoters of stablecoins should comply with some parts of existing legislation. Examples are the electronic money directive (EMD), the directive that regulates investment of funds (UCITS), the directive of management of alternative funds (AIFMD) and the regulation on funds that invest in liquid assets (MMF). Furthermore, the ECB believes that a new law "comprehensive, holistic and coordinated at the international level" should be promoted.