DLT, Digital Assets and Facebook’s Proposed Libra - Policy and Regulatory Challenges in Asia

Ross Buckley, Douglas Arner and Dirk Zetzsche

-- Distributed ledger technology (DLT) creates new opportunities and challenges for the financial sector in Asia, with ICOs and cryptocurrencies being two applications of DLT of major interest. In a recent paper authored and published with the Asian Development Bank, we provided a rigorous conceptual analysis of DLT. A clearer conceptual understanding of DLT and its key terminology is essential for a comprehensive analysis of DLT’s existing and projected applications. There is much muddied thinking in much of the literature, and some regulatory agencies in some countries, about DLT and its applications.

Numerous policy implications arise from DLT’s applications. ICOs, as a fund-raising mechanism in which digital tokens are issued and managed on a blockchain, have triggered various regulatory actions across Asia. With cryptocurrencies, we found little linkage to the traditional financial system, and therefore minimal associated systemic risks, but that regulators, of course, remain responsible for market integrity and consumer protection concerns. The variety of regulatory responses from Asian jurisdictions to date, ranging from outright bans to more permissive approaches, reflect the complexity of the policy implications of this technology. We highlight the differences between the regulatory approaches adopted to date and suggest reasons behind these choices.

Applications of DLT vary widely and their specific features, particularly relating to governance, will influence whether, or to what extent, they ought to be regulated. We ultimately suggest that a functional proportional approach be adopted which balances risks with the significant opportunities for innovation this technology affords.

Our conceptual framework and analysis remains more important and relevant than ever, now that some of our conclusions have been upended by the announcement, last month, that Facebook intends to launch its own cryptocurrency, Libra, next year. Libra is likely to be a real game-changer, because of Facebook’s global reach with some 2.3 billion active monthly users. Libra has the potential to rapidly play a major role in remittances and become a systemically important cryptocurrency in some jurisdictions, especially as it will be a stablecoin, the value of which will be tied to a basket of major currencies.

Our latest paper explores Libra and its regulatory implications. Given Facebook’s massive trust problems at the moment, Libra may well not be the final winner in the contest to reimagine domestic and international payment systems, but right now is like when a credible bid is made in a hostile takeover. Once the target is in play, its ownership will almost certainly change, even though the identity of the eventually successful bidder remains uncertain.

We live in fascinating times. Libra is likely to promote a range of responses. China has already indicated that it it is likely to move ahead on its plans to authorise launch of the central bank digital currency upon which it has been working for some while. Other countries central banks may well follow suit, in which case Libra will almost overnight become far less significant. And, of course, there are likely to be responses from other Big Tech entities – Amazon coin, or Google coin, anyone?

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