Tiny Switzerland thought it hit the jackpot when Facebook opted to based its planned cryptocurrency, Libra, in Geneva. Are Swiss regulators and policymakers in for more than they bargained for?
When Facebook settled Geneva for planned cryptocurrency Libra, Swiss financial regulator Finma became the supervisor to both the token as well as the Swiss association overseeing it, think-tank Avenir Suisse said in a study on Wednesday. The move poses tricky regulatory and legal questions for Switzerland, the study said.
Policymakers including Fed boss Jerome Powell, Bank of England head Mark Carney, French finance minister Bruno Le Maire, and European Central Bank official Benoit Cœuré have been critical of Libra. In Switzerland, the project appears not to have laid groundwork very carefully: The U.S. tech giant's speed has taken Swiss officials, which are going to oversee Libra, by surprise.
Pay Coin vs Derivative
Since Libra represents a currency without a peg to established legal tender, Finma would likely classify it as a payment coin. But because Libra is backed by a basket of currencies, it could be deemed a foreign exchange derivative.
The more interesting question is when Libra is sold by third-party sellers – the only ones authorized to interact with the «Libra Reserve». While one Libra holds no enforceable rights for token-holders, the cryptocurrency represents an as-yet undecided right to a share of the Libra Reserve for the resellers, according to Avenir Suisse.
Loose Legal Structure
Bern-based Finma is expected to pore over the legal intricacies of setting up a «reserve» bank to govern a coin backed by legal tender, held together by a loosely-regulated Swiss association. The legal structure, which is non-profit, has drawn controversy in the past: sports bodies like FIFA, which generated $6.4 billion in revenue last year, pay a far lower tax bill than private-sector corporations by setting up as associations.
For Switzerland's central bank, Libra will be a major challenge should the project succeed, the think-tank argued. The Swiss National Bank, or SNB, will face a major new player in currency markets if the Libra «reserve» decides it should also hold Swiss francs.
Pressure on Swiss Franc
If the Libra Reserve succeeds, it could quickly become worth several hundred million dollars, Avenir Suisse said. Depending on the make-up of its currency basket, the franc could be digitized through Libra, and internationalized. This could lead to the more widespread use of the franc, and thus to higher profits from money creation.
At the same time, Avenir Suisse said pressure will rise on the Swiss central bank: Libra's digital nature could simplify investor flight into the franc – something the SNB frequently fights. It could also spark much more demand for the already red-hot Swiss currency.
Deepening of Negative Rates?
The SNB's challenges will grow exponentially in case other companies follow suit – speculation has Google, Microsoft, Apple, or Amazon involved in similar projects to Facebook's Libra. For new players on foreign exchange markets, the franc will be a natural backing currency.
Since Libra and any other projects would mainly be purchased with foreign currency, the franc would continue to feel pressure and appreciate. The SNB would be forced to counter by intervening in forex markets, which it frequently does to keep the Swiss currency at what it feels is an acceptable level, or to deepen negative interest rates, according to Avenir Suisse. Both measures would have massive implications for the Swiss economy.
