ECB’s Yves Mersch slams Facebook’s Libra as “siren call”

Whereas the UK Government has downplayed concerns associated with Libra and the Australian regulators have stated they would keep an eye on Facebook’s virtual currency plans, the European Central Bank (ECB) appears to be way more critical in this respect.

Yves Mersch, Member of the Executive Board of the ECB, has today delivered a scathing speech regarding Libra.

Libra, which is scheduled for release in the first half of 2020, has behind it the very same people who had to explain themselves in front of legislators in the United States and the European Union on the threats to democracies resulting from their handling of personal data on their social media platform, Mersch stressed.

One of the most worrisome aspect of Libra, according to Mersch, is that its ecosystem is not only complex, it is actually cartel-like.

“To begin with, Libra coins will be issued by the Libra Association – a group of global players in the fields of payments, technology, e-commerce and telecommunications. The Libra Association will control the Libra blockchain and collect the digital money equivalent of seignorage income on Libra”, Yves Mersch says.

The Libra Association Council will take decisions on the Libra network’s governance and on the Libra Reserve, which will consist of a basket of bank deposits and short-term government securities backing Libra coins. Libra-based payment services will be managed by a fully owned subsidiary of Facebook, called Calibra. Finally, Libra coins will be exclusively distributed through a network of authorised resellers, centralising control over public access to Libra. With such a set-up, according to Mersch, it is hard to discern the foundational promises of decentralisation and disintermediation normally associated with cryptocurrencies and other digital currencies. On the contrary, similarly to public money Libra will actually be highly centralised, with Facebook and its partners acting as quasi-sovereign issuers of currency.

Importantly, Mersch warns that Libra lacks a global lender of last resort. Thus, it remains unknown who will stand behind it in a liquidity crisis situation. Libra is also devoid of the equivalent of a deposit guarantee scheme to protect its holders’ interests during a crisis. Moreover, the limited liability of the Libra Association members raises serious questions about their resolve to satisfy the claims of Libra holders with their full faith and credit, as central banks do with public money.

The ECB takes a close interest in market innovations that could directly or indirectly affect the Eurosystem’s control over the euro or shift some of its monetary policy to third parties.

“Depending on Libra’s level of acceptance and on the referencing of the euro in its reserve basket, it could reduce the ECB’s control over the euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the single currency’s international role, for instance by reducing demand for it”, Mersch says.

Although some of Libra’s aims are legitimate, reductions in cross-border fund transfer costs and other efficiency gains can also be obtained through established instant payment solutions.

“I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favour of the beguiling but treacherous promises of Facebook’s siren call”, Yves Mersch concluded.