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Facebook's Libra must define financial activities, Fed Governor Brainard says

Federal Reserve Governor Lael Brainard is the latest regulator to speak out about Facebook Inc.'s aim to create a digital currency.

"It should be no surprise that Facebook's Libra is attracting a high level of scrutiny from lawmakers and authorities," Brainard said at the Peterson Institute for International Economics. "In light of the 2.7 billion active monthly users on Facebook's platforms, the Libra stablecoin project stands out for the speed with which its network could reach global scale in payments."

The Fed official called for the project's financial activities to be specifically defined, so jurisdictions can assess whether existing regulatory and enforcement mechanisms will provide adequate oversight and consumer protection.

Brainard's comments are the latest sign that regulators, both in the U.S. and internationally, are keeping a close eye on Libra. Her comments also come amid a shake-up at the Libra Association, the Geneva-based consortium of Facebook and other entities created to oversee the project. Days before the association formalized its council members and executive team, major payment providers pulled back from the project. Visa Inc., Mastercard Inc., PayPal Holdings Inc., Stripe Inc. and eBay Inc. have all backed away from the initiative.

Brainard called know-your-customer compliance "essential" to ensuring that the stablecoin, a digital currency tied to the value of a fiat currency, is not used for illegal activities or illicit finance. Since Libra's business model is inherently cross-border, the project would also "likely necessitate" a consistent global anti-money-laundering framework that each participant in the system would comply with, Brainard added.

She said U.S. regulators are "closely examining" the functions of stablecoins and cryptocurrencies more broadly to determine if additional authorities or guidance are needed. No regulator has full authority over payments systems operating in the country. The Fed itself is a licensed payments operator. Neither is it clear whether the Financial Stability Oversight Council, an interagency group of regulators, would be able to designate any cryptocurrency issuer as a systemically important institution that requires heightened scrutiny.

With the rise of Libra and other stablecoins, some central banks around the world are planning to launch or are considering launching digital currencies themselves. Brainard pushed back against the notion of the Fed undertaking such a task.

"We will watch those developments very closely and look forward to learning from them," Brainard said of other central bank plans. "But we're also going to be exceptionally cautious and mindful of the profound differences a full-on central bank digital currency would imply."

One question is whether the Fed has the authority to issue currency in digital form and, if so, does it then have authority to establish digital wallets for the public, the Fed governor said. A central bank digital currency that households and businesses use directly without involving a commercial bank intermediary also threatens the traditional structure of the Fed holding reserve currency, Brainard said. She also raised concerns about monetary policy implications, financial stability concerns and operational risks.

"Some jurisdictions may move in this direction faster than others, based on the particular attributes of their payments and currency systems," Brainard said. "Prudence cautions [the Fed] against rushing into untested approaches to central bank digital currencies."