Is Libra e-money or rather a virtual currency? Since Libra is based on blockchain technology, it would stand to reason that Libra is a cryptocurrency. However, the underlying technology is not relevant for the regulatory classification. From a European point of view, there are two possible categories for Libra: e-money (as defined in EMD2) or virtual currency (as defined in AMLD5). Since the legislator has designed the definition of a virtual currency as a catch-all provision and can therefore be applied very widely, it can be assumed that if Libra does not fulfil the e-money criteria, it will be classed as a virtual currency. For this reason, we must first examine the question as to whether Libra would fulfil the criteria for e-money on the basis of the information available in the white paper. So is Libra e-money – yes or no? Obviously, it’s not an easy question to answer. As you’re about to find out, our team of blog authors is divided on the issue.
Is Libra e-money? Answer: YES (Hugo Godschalk)
In my opinion, this question has to be a resounding YES (with no ifs and buts). With most conventional cryptocurrencies, such as Bitcoin & co., there is no tangible body that issues the value units. Just like when a gold prospector finds a gold nugget, a miner “finds“ the digital value unit that he offers for sale on the market through lengthy calculations. In the Libra system, however, there is an issuer. The Libra Association is the only creator and issuer of Libra:
The association is the only party able to create (mint) and destroy (burn) Libra. (p. 8, Libra white paper).
The issuance of Libra takes place against payment of a monetary value in fiat money by an authorised reseller (e.g. Calibra Wallet provider Facebook). The resale to the end customer takes place via the respective resellers. The amount of money accepted by the issuer is intended to correspond with the current value of the basket currency. For the redemption of Libra into fiat money, the acquisition is also carried out by the issuer,
at a price equal to the value of the basket (see above).
The issuer undertakes vis-à-vis the reseller to redeem the Libra at any time at par value.
Libra therefore fulfils all the conditions for e-money as set out in Art. 2 No. 2 of the Second e-money Directive:
electronic money means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer.
This results in the following obligations for the e-money issuer Libra, pursuant to Art. 11:
Issuance of Libra at par value on the receipt of funds or redemption by the issuer at any moment of the monetary value of the electronic money held upon request by the electronic money holder, also at par value.
There is no obligation that the respective e-money is denominated in the currency of the deposited amount. For example, the value units may be nominated and stored in a fantasy currency (such as “ducats“ or “miles“). If an e-money nominated in euros is acquired with a foreign currency, the foreign currency first needs to be exchanged into euros, and then the e-money will be issued (in euros) against the amount of money received by the issuer at par value.
This process is comparable to opening a foreign currency account by depositing an amount in euros. One first buys the foreign currency (against the euro) and then pays the acquired foreign currency into the account. I have a claim to repayment of the money in the foreign currency. The exchange rate between the foreign currency and the euro may fluctuate between the time of payment and the time of repayment. At the time of redemption, one would then receive the foreign currency back exactly at its nominal value (less fees).
If, for example, the currency basket of one Libra consists of 0.5 USD and 0.5 EUR, the Libra purchaser first buys (e.g. with a third currency) the required fiat currencies in the respective basket composition and at the respective daily exchange rates. The payment is carried out in exactly this mixture of the monetary amounts (i.e. 50% USD, 50% EUR). Upon the redemption of one Libra, the e-money holder will again receive 0.5 USD and 0.5 EUR or their current equivalent in a desired third currency. The issuer is only obligated to return the monetary value of the e-money at the current par value of the deposited amount (Libra in euros). The fluctuation of the third currency against the Libra is irrelevant for the issuer. The issuer Libra Association therefore already fulfils the issuance and redemption obligations stipulated in Art. 11.
The Libra Association is planning to have its headquarters in Switzerland. However, unlike the EEA countries Norway, Iceland and Liechtenstein, Switzerland has not adopted EMD2. Under the following conditions, the issuance of e-money in Switzerland is not considered to constitute a deposit business which would be subject to licencing requirements:
- the funds received are intended to be transferred to a means of payment or a payment system,
- they may only be used to purchase goods or services,
- the e-money balance per customer is limited to a maximum of CHF 3,000,
- there is no interest.
Under these conditions, the Libra Association could avoid the requirement of a licence as a credit institution. In contrast to issuers in the rest of the EEA, however, e-money issuers in Switzerland do not have a European passport. This is likely to make the spreading of Libra within the EEA quite difficult.
Is Libra e-money? Answer: NO (Susanne Grohé)
In my opinion there is no central issuance of Libra Coins. Although the white paper states that only the Libra Association is entitled to create or destroy new Libra, this refers to the fact that the Libra Association determines the rules for the issuance and destruction, but not that the Libra Association carries this out itself. In contrast to Bitcoin, there is no mining involved with Libra, but the blockchain is based on the “proof of stake“ principle, i.e. the creator of the next coins (validator node) is selected in a predetermined way. This means that it is not the Libra Association, but – at least in the beginning, later the blockchain is intended to be permission less – the member creates Libra coins, who is selected at this moment to create the respective coins.
E-money also requires that the payment of a sum of money creates a claim against the issuer. It has already been established that the issuer of a Libra coin can be any of the members and the buyer of the Libra coin does not have to have a relationship with them, so it is questionable whether this can give rise to a claim. The Libra Association promises that it will be possible to exchange Libra into fiat currency again and again – but whether or not this constitutes a legal right against the Libra Association remains unclear in the white paper.
The exchange of e-money must also always take place at the par value of the amount of money received. For example: If someone buys e-money for 1 EUR, they can then exchange it for 1 EUR again. If, when exchanging the e-money, someone decides to have the amount paid out in another currency, e.g. USD, they will receive the equivalent of 1 EUR in USD (potentially less a currency exchange fee).
With Libra this has to be different, as Libra is not linked to a currency but to a currency basket. This means that the purchase of a Libra coin does not correspond to one EUR. If I buy Libra coins for 1 EUR, then I won‘t necessarily get 1 EUR back at the point of redemption, but as much EUR as they are worth against the Libra coin at the time of the redemption. Libra can fluctuate compared to the fiat currency with which the Libra coin was bought, so it could be that I buy for 1 EUR, but can later exchange it back for 2 EUR (if things go well). Libra also explicitly points this out in the white paper.
This is not possible with e-money as it only represents one currency. Although I think this argument is quite strong as to why Libra does not constitute e-money, there is a formal argument against it: the exchange of e-money at par value is not a criteria for e-money under EMD2 but a legal consequence of the classification. Nevertheless, I am of the opinion that it is precisely this exchange at par value which is a core criteria of e-money that cannot be ignored without losing its e-money character.
Why is this discussion even relevant?
If Libra were e-money, the Libra Association would need to apply for an e-money licence in the EU, for example in Ireland. Facebook has already held an e-money licence there since July 2018 and has gained its first experiences with European e-money regulation. This would enable it to issue e-money in the whole of the EU. It would be subject to the anti-money laundering obligations of the EU member state in which it holds its licence. It would probably not be able to invest the money worldwide, but would have to invest at least the money of EU Libra coin buyers in the EU. The investments would also be subject to supervision.
Wallet providers could probably be regarded as e-money agents who are subject to their own anti-money laundering obligations and who are also subject to supervision. Additionally, they would have to redeem Libra at the par value of the fiat currency in which it was issued.
This sounds like a lot of red tape that the Libra Association may well wish to avoid. On the other hand, it would also make it clear exactly where they stand.
The current conditions for e-money issuance and redemption into fiat currency can be interpreted in different ways (see our positions above). Perhaps it would be helpful if a regulator submitted this issue to the EBA for interpretation in order to achieve as uniform an assessment of the issue as possible within the EU. It would be a small step to create exegetical clarity on this aspect through the issuance of a “guidance“ and thereby domesticate Libra in the EU as e-money. This would also end the alleged sleepless nights of central bankers, supervisory authorities and banks as well as some parliamentarians.
Cover picture: Copyright © fotolia / Andrey Popov