Yves Mersch, a member of the executive board of the European Central Bank, on Monday said that cryptocurrencies were an “aberration with no solid foundation in human experience” and warned European citizens not to fall for the “siren call” of Facebook's Libra project.
The speech was aimed squarely at the cryptocurrency project of Facebook and its Libra Association partners, but Mersch also took a sideswipe at cryptoassets in general, making very unfavorable comparisons between cryptos and currencies issued and backed by central banks.
But his central theme remained Libra, which some crypto-enthusiasts deny is a cryptocurrency at all, given that it is set to be issued by a centralized authority. This, indeed, was Mersch’s first line of attack.
He said that centralization was only a virtue in the appropriate institutional environment of a sovereign entity, its central bank and underlying financial system. These institutions are critical for instilling trust – the most important attribute of money and its effective transmission.
In contrast, Mersch said, corporate entities were only accountable to their shareholders and members.
They have privileged access to private data that they can abusively monetise. And they have complete control over the currency distribution network. They can hardly be seen as repositories of public trust or legitimate issuers of instruments with the attributes of 'money'.
Mersch proposed to answer three questions:
- How does Libra differ from other private currencies and from public money?
- What legal and regulatory challenges does it pose?
- What position should central banks be taking towards Libra?
The answer to the first question came back to the issue of trust. It lacked a lender of last resort that would stand by it in a liquidity crisis, he said. “Why bank on a proxy when one can put one’s trust in the genuine article?”
The main regulatory challenge, once the problem of Libra’s classification as either a security, a cryptocurrency or other financial instrument is solved, is whether – as a means of cross-border currency transmission – it can be effectively overseen by the world’s domestic regulators. It will take much cooperation and coordination between these institutions, Mersch said, as well as greater roles for international bodies such as the G20 Financial Stability Board and the Financial Action Task Force.
In answer to his third question, Mersch advised caution. He said that in the context of monetary policy, the central banks like the ECB should take close interest in innovations that could reduce their control over their currencies and impair transmission mechanisms.
Joining the Choir
Mersch had been relatively quiet on the subject of Libra – although he has been a critic of cryptocurrencies, saying they should be closely monitored. He joins a growing chorus of central bankers, government officials and regulators overtly warning of the dangers posed by the launch of Libra.
Among the most outspoken has been French finance minister Bruno Le Maire who expressed concerns that Libra could threaten the euro or other sovereign currencies.
John Isige, analyst at FXStreet, said in response to Mersch’s speech:
The social media giant has a lot to prove to the regulators in the US and around the world that it will not use Libra to demean sovereign currencies. Moreover, Facebook’s questionable track record of user data violations must be cleared in order to win regulatory approval.
In concluding his speech, Mersch emphatically stressed the importance of established institutions of money transmission. He ended with this warning:
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.