Major US Banks Caution Federal Advisory Council Against Libra Becoming A ‘Shadow Banking’ System

Facebook's nascent crypto project Libra continues to run in trouble even before the actual launch.

The project has managed to enrage regulators, central banks and governments around the globe, who believed Facebook was merely using the name of blockchain to start a parallel monetary system, piggy riding the existing framework in which institutions pay billions in compliance.

The Federal Reserve recently asked major banks around the globe about their views on Facebook's digital currency, to which these banks unanimously cautioned about the threat that it might possess to the existing monetary system, reported Bloomberg. During September's Federal Advisory Council meeting, banks responded to the fed saying:

“Facebook is potentially creating a digital monetary ecosystem outside of sanctioned financial markets — or a ‘shadow banking’ system, ” As consumers adopt Libra, more deposits could migrate onto the platform, effectively reducing liquidity, and that disintermediation may further expand into loan and investment services.”

Libra continues to be controversy's favorite child

Right from Libra's announcement in June this year, financial experts and regulators had started to raise red flags, starting from its working model, where it claimed that its stable coin will be backed by a basket of fiat currencies.

Regulators warned that libra was trying to bypass the existing financial system by backing its stable coin by multiple fiats, that way it does not fall under the jurisdiction of any regulatory body. Facebook claimed that libra would be an independent entity and in no way, it would be connected to Facebook.

They also formed a Libra association comprising of several companies, to take important decisions in decision making, claiming it to be a democratic method. However, it failed to convince the congressman when enquired whether these Libra associates were democratically chosen.

France finance minister has already declared that they would not allow any progress of libra in their nation as it threatens their financial sovereignty. The German finance minister also talked in the same tune claiming only the state must have the power to issue currency, and they would not let a private firm have that sovereignty.

US Bank executives list several risks if libra is given a nod for its launch

The US Bank executives who advisors to the Fed listed several risks involved with allowing a private firm to launch a digital currency that is backed by fiat. They said that allowing libra to operate would create a decline in demand for national bank services, and:

“possible challenge to the bank business model built on privacy.”

The banks further detailed that a project like libra could potentially “reduce the ability of states to monitor, manage and influence local economies,” the bankers said.

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