The world’s finance ministers are getting nervous
The world’s leading finance ministers are getting nervous. And no - not about Brexit. What’s having them reaching for the smelling salts is the increasing growth in the popularity of cryptocurrencies. At a recent meeting, the G7* finance ministers warned about the severe threat that such currencies represent to the global economy.
Two of our most recent blogs have touched on the topic of cryptocurrencies. We looked specifically at Blockchain, the technology behind these currencies. Then, more recently we published a podcast, where we interviewed a leading researcher and discussed the scope and enormous social impact that blockchain technology will bring.
What is a ‘cryptocurrency’?
It’s a digital currency which is encrypted to regulate the generation of units of the currency and to verify the transfer of funds. This allows it to operate independently of a central bank. These currencies provide an outlet for personal wealth that can be neither restricted nor confiscated. A well-known example is the bitcoin currency. Next year will see the launch of Facebook’s very own cryptocurrency, named Libra.
So, what’s upsetting the experts?
Ministers and bankers from the G7 countries say that these new cryptocurrencies raise ‘serious regulatory and systemic concerns’. They name Facebook’s new Libra currency in particular, as raising ‘serious regulatory and systemic concerns’. Other financial products being developed by tech companies to work as global currencies are also a worry.
Their fear is that widespread use of these currencies could destabilise the entire international financial system.
In their communiqué, G7 ministers stated that these issues ‘need to be addressed before such projects can be implemented’.
French finance minister Bruno Le Maire also called for urgent action over Libra, warning that the ‘sovereignty of nations cannot be jeopardised’.
Data security - a big concern
Of particular concern is data security. Facebook’s recent record in this area isn’t great. The US Federal Trade Commission recently fined them £4 billion for data security failures relating to the Cambridge Analytica scandal.
The G7 countries stated that, at every stage, cryptocurrency operators would need to ‘meet the highest standards of financial regulation, especially with regards to AML/CFT [anti-money laundering/counter-terrorism financing]’. Otherwise, the stability of the international financial system, as well as consumer protection would be under threat.
How do cryptocurrencies benefit people?
Facebook’s Libra is due to be launched in 2020. 2.2bn people currently use Facebook and its communication apps, Messenger, WhatsApp and Instagram. Facebook explains that anyone with a smartphone will be able to send and receive Libra. They declare that Libra will be a tremendous benefit to people and businesses around the world who don’t have bank accounts.
A Facebook spokesperson said, ‘Almost 50% of the world’s adults don’t have an active bank account. Those numbers are worse in developing countries and even worse for women. The cost of that exclusion is phenomenal – approximately 70% of small businesses in developing countries have no access to credit.’
G7 finance ministers have admitted that current cross-border payment systems need to be ‘significantly improved and less costly for consumers’. However, they’re concerned that Libra and similar schemes might impact on monetary sovereignty and the functioning of the international monetary system.
However, not all international bodies share these concerns about cryptocurrencies. For example, the Financial Stability Board (FSB) has said that they do not pose any significant material risk to global financial stability. However, they have warned that not all countries’ authorities are taking a consistent approach to regulation.
The G7 has set up a working group on digital currency. This presented its preliminary report to the meeting in July. It is working with the G20, the Financial Stability Board and other standard-setting bodies. Between them, they plan to produce a detailed report on cryptocurrencies in time for October’s IMF-World Bank annual meetings.
Here to help
How will cryptocurrencies impact on my life. Today, this week or this year, probably very little. But there’s no doubt that, in the not-too-distant future, they will have a significant part play in international finance. They will bring opportunities and maybe difficulties too. Find out more. We’re always exploring new developments. Call us – 020 3008 7820. Remember – we’re here to help.
* The Group of Seven (G7) is a group of some of the world’s most economically influential countries – Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.