In its toughest intervention to date, the central bank’s financial policy committee (FPC) said digital currencies such as Libra would need to reach the same high standards as those of traditional payments.
Threadneedle Street said the cryptocurrency had potential to become “systemically important” to the financial system, and that all parts of the ecosystem around Libra that would be needed to buy, hold and exchange the internet currency must meet its standards.
Signalling its future treatment of Libra and other digital currencies that have the potential to become systemically important, it said the digital wallets used to hold them needed to be as resilient as traditional bank accounts. Facebook plans to launch its own digital wallet for holding Libra, known as Calibra.
In practice, that would mean digital wallets enabled to hold Libra hitting standards that other cryptocurrencies have so far avoided. These include being part of the UK’s financial services deposit protection scheme, holding capital to protect consumers and being subjected to central bank stress tests.
In a warning to Facebook, the Bank’s quarterly FPC assessment of emerging financial risks said: “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 Bank said “end-to-end operational and financial resilience” was required across a payment chain, in a reflection that money transfers are only as safe as the weakest link they might pass through.
“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 said.
The latest intervention came after PayPal became the first company to drop out of the Libra Association, the group of multinationals behind the digital currency, amid mounting regulatory concerns around the world.
The French government has said it would block the development of Libra in the EU, while US regulators have suggested its financial underpinnings – which will involve pegging the value of one Libra against a basket of currencies held in reserve – could bring the project under the auspices of securities regulators.
Dante Disparte, the head of policy and communications for the Libra Association, said it welcomed the Bank’s recommendations. He added: “We recognise that blockchain is an emerging technology and that policymakers must carefully consider how its applications fit into their financial system policies.
“The Libra Association and its members are committed to working with applicable regulatory authorities to achieve a safe, transparent and consumer-friendly implementation of the Libra project.”