Currency plans concern regulators

David Marcus, head of Facebook's Calibra (digital wallet service), testifies before a United States Senate Banking, Housing and Urban Affairs Committee hearing on "examining Facebook's proposed digital currency and data privacy considerations'', in Washin
David Marcus, head of Facebook's Calibra (digital wallet service), testifies before a United States Senate Banking, Housing and Urban Affairs Committee hearing on "examining Facebook's proposed digital currency and data privacy considerations'', in Washington last month. Photo: Reuters
Facebook's plans to launch a global digital currency next year has regulators running scared.

In June, the social media giant released a white paper outlining its libra global currency, a type of cryptocurrency designed to enable everything from simple payments to ''smart money'' such as blockchain-based loans or insurance.

To ensure its financial stability and largely to avoid tarring the currency with the corporate Facebook brush, libra has been launched using open source technology. The plan is to peg its value against a global basket of currencies, run by the Swiss-based, otherwise neutral, Libra Association, which Facebook founded as a non-profit entity.

Financial analysts say this set-up has advantages over bitcoin, in that it would be fully backed by safe assets denominated in reputable currencies.

The governance entity will have up to 100 founding members, led by Facebook. Each will invest a minimum of $US10million ($NZ15.7million) to fund operations. Visa and Mastercard have been quick to join, as were Paypal, Vodafone, EBay, Uber and Spotify, attracted by potentially cheaper and easier global payments. Major international banks are notable by their absence.

The delivery mechanism will be through Facebook's digital wallet, Calibra, which it plans to launch next year as a stand-alone app that will also integrate with its Messenger and WhatsApp applications.

Libra is the brainchild of David Marcus, the former president of PayPal and lead of Facebook's blockchain technology, who conceptualised libra to provide financial services to ''anyone with a $40 smartphone and connectivity''.

Michael Collins, an investment specialist at New Zealand and Australian investment company Magellan said libra was likely to have appeal in emerging markets, particularly for those who had little trust in their local currency.

Mr Collins said a major feature would be that money transfers within a secure private network could be close to costless, instantaneous and hassle-free.

''Digital currencies would thus take business away from the expensive, inconvenient and sluggish payments, settlement and money-transfer systems that are run by commercial and central banks under country-based regulatory systems,'' he said.

According to World Bank estimates, almost a third of adults around the globe in 2018 had no bank or mobile money provider.

Virtual currencies are also likely to be popular with expatriates who pay high fees to send money home via agencies such as Western Union, TransferWise or major banks. The UN estimates $US613billion was remitted to global households in 2017. With transaction costs averaging around 7.1%, that translates to around $US40billion.

Mr Collins notes that libra needs to address regulatory concerns, chief of which are around security and privacy.

''If Libra were to become mainstream, the Libra Association's investment decisions could destabilise state currencies and asset prices. Libra's success could force central banks to issue digital currencies, which could weaken financial stability if savers were to flee traditional banks to hold central-bank money,'' he said.

The prospect of a privately managed cyberspace money issued by large social and consumer platforms such as Facebook, Amazon, Apple, or even Alibaba or Tencent, has filled policymakers with dread.

This week, the EU's antitrust regulator announced it would launch a probe into the proposed currency, while data protection officials from Australia, the US, UK and Canada released a statement over privacy concerns, money laundering, tax evasion and financial disruption.

New Zealand regulatory agencies are also taking a very close look at the evolution of digital currencies like libra.

A Financial Markets Authority (FMA) spokesman said it was following the development of cryptocurrencies closely and was working with other local and international regulators, to understand what was happening in their jurisdictions.

''It was the FMA's role to promote innovation and flexibility in financial markets and to ensure that the regulatory regime remains agile, though those companies that wanted to provide a financial service in cryptocurrencies will still need to comply with fair dealing requirements under the Financial Markets Conduct Act 2013.''

However, he warned cyber currencies of this nature were high risk and highly volatile.

''Cryptocurrencies, crypto-exchanges and the people who use them are also often the targets of hacking, online fraud and scams. Many overseas cryptocurrency exchanges are unregulated and operate exclusively online, with no connection to New Zealand,'' he said.

According to a CERT NZ 2018 summary report, 3445 incidents of cyber fraud were reported last year, and New Zealanders lost the equivalent of more than $14million.

The majority of scams related to phishing and credential harvesting.

So far in 2019, there were almost 1000 reports of financial losses of which 770 related to phishing, scams and fraud, according to the cyber agency.

New Zealand Reserve Bank assistant governor Christian Hawkesby said there was a lot going on in the space of new currencies, but that the Reserve Bank would adopt an 'open mind'.

''We are still in a learning stage but we'd move with society in the way that society wants to act financially. But we also need to take into consideration what safeguards there are,'' he said.

''The reality is that means of payments and the way in which we transact is going to change over time so it's about having a system that is robust and resilient that meets the needs of society.''

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