Finance department sees problems with Facebook’s digital currency, documents say

Internal Department of Finance documents show that officials are deeply concerned about the effect of Facebook’s planned digital currency on Canada’s financial stability.

Officials wrote in last summer’s briefing note that they believe the social media company has yet to address multiple concerns and risks its digital currency poses to the financial system.

The July briefing, obtained by The Canadian Press under the Access to Information Act, also said the government was working on options to mitigate the risks.

Officials seemed less concerned about rivals like Bitcoin — which the briefing note hasn’t played a significant role in day-to-day transactions in Canada for a variety of reasons.

Unlike Bitcoin, Facebook’s offering would be a “stablecoin” whose value would be less volatile and could easily be used by hundreds of millions of the social media giant’s users upon release.

Ease of use and stability of value are among the reasons that governments and central banks like the Bank of Canada have shown strong interest in the currency.

The underlying concern of policymakers is related to the loss of control in the event that a private digital currency is accepted globally and used without a bank as an intermediary, said Moon Jerin, CEO of Doctrina, which provides advice to financial and insurance companies on blockchain technology. .

The association behind Facebook’s digital currency – first named Libra and now Diem – backed it with cash and government securities to stabilize its value, tied it to various digital platforms to that it can quickly and easily increase its reach, and designed it to have a low transfer cost.

The association has also said it wants to follow a regulated path in countries. Facebook’s stablecoin has undergone changes during its two years of development; the officials who drafted the briefing said they believe the changes have begun to address government concerns, but have not completely assuaged them.

Among their concerns were “money laundering and terrorist financing, good governance, reserve stability and transmission of monetary policy for reserve currencies,” reads the briefing note to the Minister of Finance at the time, Bill Morneau.

Jerin said concerns from multiple jurisdictions also revolve around how to manage inflationary risks with the stablecoin, given how quickly Bitcoin’s price has been rising recently.

BoC is working on a digital currency

The Bank of Canada is working on what it calls a “digital loonie”. The bank only has the legislative power of parliament to design, issue and distribute printed bills – not to offer digital currency

The central bank has accelerated work on its own digital currency, but Jerin said she expects the country to watch what other countries are doing before making big decisions.

“Canada, being already a bit conservative, is going to take a lot longer than other countries. I think they’re really trying to see what’s happening in the world first,” she said.

A group of federal departments and agencies have been scrutinizing stablecoins as officials consider how to address their concerns through existing or new regulations or laws.

Addison Cameron-Huff, an attorney specializing in blockchain and digital currencies, said domestic stablecoins already face multiple levels of regulation.

He noted that hundreds of virtual currency merchants must register at the federal level. They may fall under provincial consumer protection laws if they sell digital currencies to the public. Business-to-business transactions would fall under federal anti-money laundering laws.

“Often, companies in this industry have to deal with several different laws that overlap and create different obligations for them, and then there are also laws that affect their uses,” Cameron-Huff said.

The stablecoin industry is relatively small, he said. The companies have thin margins and high legal fees, and the industry’s overall revenue is only several hundred million dollars a year, Cameron-Huff said.

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