Fabio Panetta of the ECB said that stablecoins could threaten financial stability © Remo Casilli/Reuters

When Facebook’s digital currency project was redesigned earlier this year, the aim was to overcome regulatory and political resistance. The scaled-back Libra 2.0 project is certainly far less ambitious. But worryingly for its backers, it still seems to be lacking official support.

In a speech last week, Fabio Panetta, a senior executive at the European Central Bank, spelt out why regulators are still unhappy with the idea of a big technology group such as Facebook moving into the world of payments by launching a new “stablecoin” system. 

Stablecoins are digital currencies designed to minimise the wild price swings that have plagued other cryptocurrencies such as bitcoin, by tethering themselves to reserves of fiat currency held at commercial banks against which they can be exchanged. 

Bitcoin itself has had a resurgence recently, with its price last week rising above $15,000 for the first time since 2017. But this rally has been driven by speculative bets rather than by any increased use of the cryptocurrency to make payments in the real economy.

Libra was initially designed to fill this gap by creating a hybrid between fiat currencies and cryptocurrencies that could provide an alternative to the US dollar, to be used by anyone to transfer money or buy products online without a bank account. 

These lofty ambitions were scaled back in April when, instead of creating a single new currency, Libra unveiled plans to launch a series of different digital coins, each backed by a different government currency. 

It also plans to build a Libra coin that is a “digital composite” of some of those coins, which will be available for cross-border transactions.

Yet the changes do not seem to have convinced Mr Panetta, the ECB executive board member responsible for payments, who warned of “the host of risks [stablecoins] can pose to our social and economic life”. He identified three core problems with stablecoins. 

Firstly, he said that Big Tech’s data-driven models “could pose a risk of misuse of personal information for commercial or other purposes, which could jeopardise privacy and competition and harm vulnerable groups”. 

By outsourcing part of the European payment system to a foreign company, he said a stablecoin “could raise potential issues of traceability in the fight against money laundering, terrorist financing and tax evasion.”

Secondly, he said that stablecoins could “threaten financial stability and monetary sovereignty”. This is based on the worry that a big shift of bank deposits into stablecoins could increase financial volatility, while monetary policy could be disrupted if the new currency’s issuers influenced interest rates when moving around their reserves.

Finally, because stablecoins lack the government guarantees that bank deposits enjoy, Mr Panetta said they would be “vulnerable to runs” if stabecoins’ holders feared a fall in value or an inability to absorb losses on the part of the issuer.

The coronavirus pandemic seems to have spurred central bankers to home in on digital currencies, after the virus caused cash usage to fall in many countries in favour of online payments. And the ECB has suggested it might prefer to launch its own digital currency, as it is considering now, than to see Big Tech or countries such as China create a popular payment system.

More than eight out of 10 central banks are examining the possibility of launching their own digital currencies, according to a recent study by the Bank for International Settlements. The ECB will decide whether to go ahead next year.

Until then, if Mr Panetta’s comments are anything to go by, there is little chance of Facebook, or any other Big Tech group, being allowed to make a grab for a dominant position in the world of payments by launching their own stablecoin.

Quick Fire Q&A

Company name: TransferGo

When founded: 2012

Where based: London

CEO: Daumantas Dvilinskas

What do you sell, and who do you sell it to: We help migrant workers send money home to their families and avoid the hefty fees that traditional financial services companies charge.

How did you get started: The idea for TransferGo was born after starting an import/export business and experiencing high money transfer fees and banking errors.

Amount of money raised so far: $64.4m

Valuation at latest fundraising: N/A

Major shareholders: Hard Yaka, Vostok Emerging Finance, Seventure Partners, Revo Capital

There are lots of fintechs out there — what makes you so special: TransferGo is built by migrants for migrants, we focus on providing the best in local customer service through simplicity, transparency and innovation.

Further fintech fascination

Stumbling blocks: The Chinese authorities’ last minute decision to block Ant Group’s IPO has caused shockwaves in the fintech world. Ant’s $37bn flotation would have been the biggest ever, but after “supervisory interviews” with founder Jack Ma, the Shanghai Stock Exchange postponed the listing. The Financial Times has full coverage of what happened, including analysis of why Beijing reined in Mr Ma and Ant, news of moves that could delay a fresh attempt to list, and commentary from the FT’s Patrick Jenkins on what Ant’s problems mean for other fintech companies.

Stumbling blocks (2): Sifted reports that Roberto Escobar, the brother of drug lord Pablo Escobar, is suing Sweden’s Klarna in the US. Escobar Inc claims that Klarna is withholding €400,000 of cash relating to Escobar-branded mobile phones, and says that legal action could delay the company’s IPO.

Wirecard fallout: The collapse of Wirecard continues to reverberate through the financial system. The Financial Times reports that the European Securities and Markets Authority has criticised the way that Germany’s BaFin handled the scandal. Meanwhile, the Financial Stability Board has warned of the dangers of banks relying on a small group of technology providers.

Trendwatch: A Financial Times special report looked at finance and banking in Africa, including pieces on the growth of Lagos as a fintech hub and problems with mobile banking licences in Nigeria.

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