Facebook Libra crypto-currency revamped to comply with laws
After intense regulatory pressure, the Facebook-backed Libra crypto-currency project has undergone four major changes to comply with regulatory requirements.
In an updated white paper, released by the Libra Association, the group behind the crypto-currency outlines the significant work it has done on the re-design of the Libra payment system since its launch in June 2019.
According to the Libra Association’s revised white paper, the four key changes that have been made to the crypto-currency in order to address regulatory concerns are: introducing a robust compliance framework to enhance safety, developing a permission-less system while maintaining its key economic properties,building strong protections into the design of the Libra Reserve, andoffering single-currency stable coins in addition to the multi-currency coin.
At the launch of the Libra crypto-currency project last year, Facebook shared plans for Calibra, a newly-formed Facebook subsidiary, whose goal is to provide financial services that will let people access and participate in the Libra network.
The first product Calibra planned to introduce was a digital wallet for Libra, a new global currency powered by blockchain technology. The wallet would be available in Messenger, WhatsApp and as a standalone app, and Facebook had said it expects to launch it this year.
In a blow to the Libra Association, in October last year some of the world’s most powerful payment processors, which had already signed on to the crypto-currency, such as PayPal,eBay, Visa and MasterCard, pulled out of the project, due to concerns around specific regulatory requirements dealing with fraud, money-laundering and sanctions enforcement.
The Facebook-led digital currency was supposed to change the world, but regulatorsraised questions about the perimeter of control for the Libra network − in particular, that it could interfere with their countries’ national currencies and monetary policies if it scaled enough to be used by Facebook’s 2.5 billion users.
Robust compliance framework
Michael Engle, developer at the Libra Association, says since its June 2019 announcement, the association has been working closely with regulators, central bankers, elected officials and various stakeholders to adapt an innovative approach to ensure Libra is a regulated and licensed payment system.
“Our goal is to develop a system designed to ensure compliance with applicable laws and regulations while supporting our objectives of openness and financial inclusion,” notes Engle.
“Integrated safeguards enable people and businesses to trust the security and integrity of the Libra payment system. The association has incorporated feedback from regulators and continues to develop a comprehensive framework for financial compliance and network-wide risk management, as well as strong standards for anti-money-laundering.”
Combating the financing of terrorism, sanctions compliance and the prevention of illicit activities are among the listed priorities of the payment system, according to the white paper.
To implement this, the Libra Association says it has established the financial intelligence function to help support and uphold operating standards for network participants. The four categories of participants are: designated dealers, virtual asset service providers(VASPs), VASPs that have completed a certification process approved by the association, and all other individuals and entities seeking to transact or provide services through the Libra network(unhosted wallets).
The association says it continues to develop its certification process for other VASPs and its compliance framework for unhosted wallets based on the feedback received from regulators.
Planning for the worst
To ensure strong protections in the design of the Libra Reserve, the association says it had constructive discussions with regulators on how to handle extreme situations − in particular, how the reserve would function in stressed scenarios and what protections are in place for Libra Coin holders.
“We have incorporated strategies in the design and structure of the reserve that are based on approaches in other systems. The reserve will hold assets with very short-term maturity, low credit risk and high liquidity. It will also maintain a capital buffer,” notes the white paper.
Instead of using existing stable coins, such as tether, the association says it has augmented the Libra network by issuing Libra’s single-country stable coins, and the Libra coin (LBR) will be separate from them. Initially, Libra’s stable coins will be the currencies that make up the proposed LBR basket, such as the Librausd, Libraeur, Libragbp and Librasgd.
“We hope to work with regulators, central banks and financial institutions around the world to expand over time the number of single-currency stable coins available on the Libra network,” adds Engle.
“This will allow people and businesses in the regions whose local currencies have single-currency stable coins on the Libra network to directly access a stable coin in their currency.”