Even Crypto-Friendly Japan is Worried by Threat of Facebook’s Libra
The list of regulators eyeing Facebook’s cryptocurrency with apprehension keeps growing less than a month since Libra was announced. According to the Nikkei Asian Review, the Bank of Japan is worried that Libra will be a big risk to the existing financial systems as it is hard to regulate.
Part of the reason for this concern is the fact that the price of Libra will be tied to a basket of currencies. Consequently, by not being pegged to one particular fiat currency, individual countries will exert little to no regulatory influence over the digital currency.
Libra will kill small banks
The BoJ has also expressed concerns over the fact that since domestic users of the cryptocurrency might withdraw their deposits and savings in small local financial institutions to buy Libra, it might deprive these fringe players their financial base.
This is because Facebook, per the white paper, will deposit the funds with the big banks such as Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group. There is no guarantee that having purchased the cryptocurrency, domestic users will later sell it and transfer the funds back to the smaller financial institutions.
Japan’s central bank is also worried that Libra will hurt the stability of financial systems. With Facebook expected to invest the funds (that are generated from users purchasing the cryptocurrency) in government securities, this could result in interest rate volatility. This volatility, in addition to the outflows from the smaller financial institutions, could destabilize the financial system.
Zero interest earned for holding Libra
Additionally, since those who will hold Libra will not earn any interest, increasing or lowering interest rates to achieve monetary policy goals will be inconsequential going forward.
Japan’s central bank is also concerned that Libra will exploit the existing financial system structure without incurring any expenses. According to one BoJ official per the Review, Libra will be ‘piggybacking for free on a financial system that takes heavy [running] costs’.
While central banks have faced bank runs before, the BoJ is also fearful that if the same were to happen to Libra, it would be on an unprecedented scale.
U.S. Congress steps in
BoJ’s concerns over Libra coincide with a U.S. congressional committee listing various ‘privacy, trading, national security, and monetary policy concerns’ regarding the Facebook cryptocurrency. The House Financial Services Committee has consequently called on Facebook to halt its cryptocurrency plans ‘until regulators and Congress have an opportunity to examine these issues and take action’.
#RELEASE: Committee Democrats Call on #Facebook to Halt #Cryptocurrency Plans
READ: https://t.co/S1aieAdsR1 pic.twitter.com/BIXajbg8ZR
— Financial Svcs Cmte (@FSCDems) July 2, 2019
A full House Financial Services Committee hearing under the banner “Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System” will be convened on July 17.