Fed’s Brainard: Stablecoins Pose Risk To Consumers

Federal Reserve Gov. Lael Brainard

Federal Reserve Gov. Lael Brainard on Wednesday (Dec. 18) outlined key risks associated with cryptocurrency in general and Facebook’s Libra in particular.

A member of the Board of Governors of the Federal Reserve System, Brainard spoke at the European Central Bank (ECB) colloquium in Frankfurt on “Monetary policy: the challenges ahead.” The event was in honor of ECB Executive Board member Benoît Coeuré. 

“At the start of Benoît’s ECB term, bitcoin’s market capitalization was small, and only a handful of cryptocurrencies existed. In the eight years since then, bitcoin’s market capitalization has grown rapidly and now exceeds 100 billion euros, and thousands of cryptocurrencies have been created,” Brainard said in her speech.

Regarding some of the concerns with digital currency such as Libra, she pointed to anti-money laundering (AML), counter-terrorist financing (CTF) and know-your-customer (KYC) concerns as well as monetary policy implications. Brainard cited an industry report which found that roughly two-thirds of the 120 most popular cryptocurrency exchanges have weak frameworks to deal with AML, CTF and KYC practices.

“Statutory and regulatory protections on bank accounts in the United States mean that consumers can reasonably expect their deposits to be insured up to a limit,” said Brainard. “Not only is it not clear whether comparable protections will be in place with Libra, or what recourse consumers will have, but it is not even clear how much price risk consumers will face since they do not appear to have rights to the stablecoin’s underlying assets.”

She said stablecoins (cryptocurrencies backed by fiat or securities) at global scale are “leading us to revisit questions over what form money can take, who or what can issue it, and how payments can be recorded and settled.”

Coins launched by big technology companies are of particularly concern because of how quickly they can scale globally, Brainard said. “Unlike social media platforms or ridesharing applications, payment systems cannot be designed as they develop, due to the nexus with consumers’ financial security.” 

She also pointed to quick adoption in the payments environment. In five years, Venmo transactions grew over 66 times to $21 billion. Mobile payments reached $8.2 trillion.

India’s Unified Payments Interface (UPI) grew nearly 400 times to $500 million between the fourth quarter of 2016 and the first quarter of 2019.

In October, Brainard said a stablecoin like Libra could make central banks’ efforts to conduct monetary policy “complicated.” 

“Libra, and indeed any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges before it can facilitate a first payment,” she said at the time.


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