The Libra cryptocurrency planned by US technology giant Facebook is unlikely to become a reserve currency – one backed by central banks and used in international trade – as it may not win the necessary regulatory approvals, a report by S&P Global Ratings said.
“Libra resolves some of the main issues related to cryptocurrencies as a means of exchange and store of value and, if successful, could disrupt some financial services activities – payments and money transfers most directly,” the paper published on Wednesday said.
“The main hurdle we see to its success is whether it will receive the regulatory approvals required across the globe. We expect some divergence in the regulatory stance.”
This week the International Financial Stability Board and UK markets regulator the Financial Conduct Authority joined the Bank of England and the G7 group of advanced global economies in saying they would not allow Facebook to launch Libra without close scrutiny.
Intense examination could either lead to delays or limited scope in Libra’s initial rollout, targeted for the first half of 2020, S&P said. In addition, due to financial and macroeconomic concerns, governments “may prevent Libra from becoming a parallel source of credit creation outside central banks’ monetary policy”.
Facebook is working with 27 technology and e-payments companies, including Uber, Lyft, Visa and Mastercard, to devise a new cryptocurrency that aims to disrupt the global payments market. Using Libra, customers will be able to transfer money instantaneously and almost for free, Facebook says.
Global interest in virtual currencies has soared in recent years but market volatility – particularly in Bitcoin, the value of which had tumbled since January last year only to soar above $10,000 last week for the first time since then – has spooked investors and prompted governments and central banks to seek tougher legal frameworks to regulate their use.
Each of Facebook's Libra partners has pledged to invest $10 million in the project and joined an association that would govern the Libra cryptocurrency. However, The New York Times reported on Wednesday that the pledges were non-binding and no money has changed hands. Some partners are yet to join the association until they receive greater clarity on how Libra works, the newspaper reported.
In its paper, S&P noted that no banks are among the 28 founding members of Libra. “In our view, this is either an indication of scepticism regarding its potential success and concerns about the risks association with it, or a sign of the potential negative effect Libra could have on banking business and revenue,” it said.
Libra, as proposed, offers more than traditional cryptocurrencies because it will be a "stablecoin", backed by a reserve of assets such as bank deposits and short-term government securities intended to keep its value stable. In this way, it will be similar to pegged currencies.
“Given its backing by reserve assets, the Libra can become a credible means of transaction within its ecosystem,” the S&P report said. “It can be seen as more like a payment system, similar to PayPal or WeChat, but with a currency underpinned by blockchain [the digital ledger technology underpinning Bitcoin and others].”
However, Libra’s credibility is unlikely to deepen to the extent that it becomes a reserve currency, as it would not be a long-term store of value.
“For traders, it would not make sense to hold the Libra, as they would rather hold the underlying assets and it would be costly to swap out of the Libra into individual currencies.
“The Libra is unlikely to become a widely traded safe asset,” S&P concluded.