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Facebook's Libra coin is likely to run a regulatory glove



NEW YORK / SAN FRANCISCO (Reuters) – Facebook Inc is facing an unprecedented regulatory control over a new digital currency that social media firm hopes will become globally recognized legal tender within one year.

FILE PHOTO: Virtual currency representations appear in front of the Libra logo on this illustration image, June 21, 2019. REUTERS / Dado Ruvic / Illustration / Photo

Since Facebook revealed its cryptocurrency, called Libra, 10 days ago, Reuters has talked to more than a dozen people with experience in financial regulation, financial technology, payments or cryptography. Few expected government agencies continue easily.

The company's announcement was met with immediate setbacks by US lawmakers and regulators across the globe who are concerned that Facebook is already too massive and careless with users' privacy.

Randal Quarles, chairman of the Financial Stability Board, coordinating financial rules for the G20 countries, warned this week that wider use of cryptographic supplements for retail payments requires close global control of regulators. Cryptocurrencies such as bitcoin remain one of the least regulated financial areas.

"It is a complete disaster from a legislative perspective," says Barry Lynn, CEO of the antitrust reporting group Open Markets Institute. "This is a company that has fires all over the world with regulators. It will only get worse."

The plan for Libra involves depositing customers' deposits, investing them in government bonds, keeping traditional currencies in reserve and offering cross-border services , and transactions in the new coin will require engagement with central banks, financial regulators and enforcement authorities across the globe.

The Facebook subsidiary formed to handle Libra transactions, called Calibra, has applied for money transfer licenses in the United States and registered with the US Financial Crimes and Enforcement Network (FinCEN) as a money business, says a spokesman.

It has also applied for permission to run a cryptocurrency business in New York from the State Department of Financial Services, a person familiar with the matter, said. Representatives of the UK's Financial Conduct Authority, Bank of England and Swiss Finance Minister FINMA have also said that Facebook has been in contact.

"The study we have seen is something we expected and welcome," says a Facebook spokesman. "We announced this early on with design to get this discourse open and gather feedback."

Reserves would be subject to monetary policy in countries where funds are placed, the spokesman said. Calibra is not planning to apply for local bank permits, he added.

Facebook also formed a Geneva-based association to manage the new coin and keep the reserves together with several major partners.

They plan to launch the entire system in the first half of 2020 and intend to offer a wide range of financial services, including loans.

"They won't get a free passport anywhere," said Sean Park, founder and chief investment officer, at Anthemis, a venture capital firm that supports digital financial service companies. "And in view of their intention to be global, they will eventually literally have hundreds, perhaps thousands of licenses from hundreds of different regulators across the globe."

In addition to central banks, regulators markets, consumer protection watchdogs and money laundering agencies, tax evasion, and other financial crimes, Facebook's payment network can also comply with the principles of financial market infrastructure set by the Bank of International Settlements and the International Securities Committee.

There is also privacy and antitrust regulators across the globe with whom Facebook is already struggling.

"Just in the form of new regulators, it's a whole new ball game," said Jeff Bandman, a former US Commodities Futures Trading Commission official, now running the fintech regulatory consultancy Bandman Advisors. "One year is enough time to meet with regulators, find out where the real problems are, and potentially scale it back to something narrower."

But it's a challenge that Facebook seems to be willing to take as the potential payout of 2.4 billion users and the ability to replicate the success of Chinese social networks like WeChat, which has boosted profits by offer financial services on its apps.

RBC analysts described Libra as a "potential water resource" for Facebook in terms of revenue and user engagement.

However, the costs can be significant before the revenue begins to roll in. It must establish an internal compliance framework with employees who switch transactions to illegal activity and verify customer identities.

For example, Money Transfer giant Western Union Co has spent $ 1 billion over the past five years, a spokesman said.

Western Union is registered with the FinCen and regulated under the US Bank Secrecy Act, licensed in 49 states, plus Washington, D.C. and three US territories. It has licenses in more than 30 countries and reporting obligations of more than 54. "19659004]" I would say the risks correspond to the return – potentially large, "said Pascal Bouvier, managing partner of MiddleGame Ventures, a financial technology venture capital company.

Reporting of Anna Irrera in New York and Katie Paul in San Francisco; Editing Lauren Tara LaCapra and Susan Thomas

Our Standards: Thomson Reuters Trust Principles.

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