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Bank of England warns Libra on oversight

The Bank of England’s Financial Policy Committee (FPC) has warned Libra that it faces the prospect of being held to the ‘highest standards’ following the FPC’s latest quarterly meeting on 2 October 2019. The record of the Committee meeting shows the UK central bank increasingly concerned about Facebook’s Libra digital coin.

The Committee said, “Libra has the potential to become a systemically important payment system.” As such it is a hot topic for the Financial Policy Committee whose responsibility, under the UK’s Financial Stability Objective, relates to managing systemic risks so as to protect and enhance the resilience of the UK financial system.

The Bank of England believes that Libra would ‘need to meet the highest standards of resilience and be subject to appropriate supervisory oversight’. The Committee meeting’s Minutes note, “The terms of engagement for innovations such as Libra must be adopted in advance of any launch. UK authorities should use their powers accordingly. The resilience of the proposed Libra system would rely on the stability of not just the core elements of the Libra Association and Libra Reserve but also the associated critical activities conducted by other firms in the Libra ecosystem such as validators, exchanges or wallet providers.”

The Bank of England’s FPC has put forward a set of principles that will guide its assessment of how prudential regulation and supervision should adjust to fast-moving developments in payments activities, saying that regulation and supervision should:

  • Reflect the financial stability risk, rather than the legal form, of payments activities;
  • Ensure end-to-end operational and financial resilience across payment chains that are critical for the smooth functioning of the economy; and
  • Ensure that sufficient information is available to monitor payments activities so that emerging risks to financial stability can be identified and addressed appropriately.

The first principle aims to ensure that the same level of risk attracts the same level of regulation. For example, if payment tokens were used widely to facilitate routine payments, they should have the same level of operational resilience and safeguarding as the use of debit cards to make payments from current accounts.

The overall resilience of any payment chain is dependent on the resilience of each individual link in the chain, said the Bank of England. This underlines the second principle on the need for end-to-end management of risk.

The Committee agreed that an important aspect of the third principle is to ensure that sufficient data are available to monitor emerging risks, both within and outside the existing regulatory perimeter. Data on some new types of payments activities are currently more limited than for traditional payment systems.

It is worth noting that one in six UK adults are now registered to make smartphone or online payments using digital wallets and use of e-money is increasing. The Bank of England said infrastructure underpinning payments is becoming more complex. New technology and business models had allowed non-bank financial institutions and companies outside the financial sector to play a larger role in payments chains and the resilience of payment systems now requires resilience in a greater number of links in payment chains.

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