Facebook’s Libra cryptocurrency suffered another setback on Wednesday when Switzerland said the proposed payments system could face strict rules that typically apply to banks, on top of tough anti-money laundering laws.
The world’s largest social media network announced plans in June to launch the new currency as it expands into e-commerce but Libra has come under fire from regulators around the world who fear it could destabilize the global financial system.
The statement by Switzerland’s financial market supervisor FINMA came as the Libra Association, which is based in Geneva, said it planned to apply to become a licensed payments system in the country.
FINMA said the project would be more than just a global payments system and would therefore be subject to extra requirements, from liquidity and capital allocations for risk to the management of reserves that will back the digital tokens.
“For bank-like risks, for example, bank-like regulatory requirements would apply,” FINMA said in an initial assessment of the project based on the information it has so far.
A spokesman for Libra said getting clarity on how its new digital currency would be regulated in Switzerland was key for the project’s development and FINMA’s guidance “now define what the Libra ecosystem is, and what it is not.”
To try to avoid the volatility that plagues cryptocurrencies such as bitcoin, Libra will be backed by a reserve of assets, including bank deposits and short-term government securities, which will held by a network of custodians.
FINMA said the risks and returns associated with such a reserve must be borne entirely by the Libra Association and not the digital coin holders.
Libra aims to launch in June 2020 but the project has drawn sustained criticism from politicians and lawmakers around the world concerned about its impact on the financial system, user privacy and its potential for use in money laundering.
“The highest international anti-money laundering standards would need to be ensured throughout the entire ecosystem of the project,” FINMA said in a statement.
The Swiss authority said wider questions about tax, competition and data protection thrown up by Facebook’s plans for Libra would fall outside its remit.
LOW FRICTION, HIGH TRUST
Even if FINMA were to eventually give the project a green light, it’s not clear yet whether that would satisfy authorities in other jurisdictions.
The Group of Seven advanced economies warned in July that it would not let Libra proceed until all regulatory concerns have been addressed, saying that a prolonged discussion over the project may first be required.
When Facebook announced its plans for Libra in June, politicians and regulators in the United States and other major economies almost immediately voiced concerns over a digital coin linked to Facebook’s 2.4 billion monthly users.
“Increased clarity on a regulation pathway in Switzerland is key for the association’s development and will help inform our conversations with regulators in other markets,” Dante Disparte, the Libra Association’s head of policy and communications, said in an e-mailed response to Reuters questions.
“The Libra coin is simply a proxy for an instantaneous payment system that is low friction and high trust,” he said.
In a sign of increased scrutiny on how Switzerland will handle the application, a senior U.S. Treasury official said on Tuesday in the Swiss capital Bern that Libra must meet the highest standards for combatting money laundering and terrorism financing if it is to get off the ground.
U.S. Under Secretary of Terrorism and Financial Intelligence Sigal Mandelker told reporters that any cryptocurrency project, including Libra, that operates in the United States would have to clearly satisfy U.S. regulatory standards.
“Whether it’s bitcoin, Ethereum, Libra, our message is the same to all of these companies: anti-money laundering and combatting the financing of terrorism has to be built into your design from the get-go,” Mandelker said.
The head of the global anti-money laundering watchdog Financial Action Task Force told Reuters it was monitoring Libra developments closely while a delegation of U.S. Congress members visited Switzerland to discuss the cryptocurrency.
“FINMA itself is also under pressure,” said Ronald Kogens, a lawyer specializing in cryptocurrencies and blockchain at Froriep, a law firm in Zurich. “Everyone outside of Switzerland wants to see that the project is well regulated in Switzerland.”
Applications for payments systems licences usually take eight to 12 months, Kogens said, and that may affect Facebook’s planned launched date.
“I think most likely the launch date will be postponed,” he said.