The Legal and Regulatory Implications of Libra 2.0

 The Legal and Regulatory Implications of Libra 2.0 

Image source: Financial Times

By Ashita Jain and Karina Sibilska | July 2, 2020


The current global health and economic crisis have reinvigorated the discussion around normalising digital currencies. The crisis accentuates the need for safe, low-cost and speedy international monetary transactions. The ambitious launch of Facebook’s cryptocurrency, Libra, in June 2019, came with the promise of revolutionising cross-border payments by creating a new international currency. Following the concerns expressed by various regulators and central banks over its first white paper, the Libra Association, in April 2020, released an updated white paper characterising the revised Libra model (“Libra 2.0”). Libra 2.0 adopts individual currency stablecoins backed by fiat currencies, instead of a new international currency. The multi-currency Libra coin is an index comprising certain national currencies in its basket. Libra 2.0 is a centralised system with no self-sovereign identity. Therefore, it significantly alters the original vision of the Libra Association. It is advertised as a new global payment system that provides a financial infrastructure supporting low costs and fostering financial inclusion.  This article aims to analyse the key elements of the Libra payment system and addressing their implications, with a focus on legal concerns.

The Libra Stablecoins

The most important change incorporated into Libra 2.0 is the inclusion of individual currency stablecoins on its network. In the world of programmable money, the concept of “stablecoins” is a relatively new entrant. A stablecoin is a cryptographically signed digital asset recorded on a blockchain, usually backed by some fiat currency or commodity.[1] Unlike crypto-assets, they provide price-stability because their value is linked to reserve assets; however, they remain largely untested.[2] Moreover, they are known to tremendously reduce transaction costs and waiting period for cross-border payments.

The revised Libra model includes Single-Currency Stablecoins (LBR SCS) in its network that are backed by fiat currencies, such as the US dollar, the Pound sterling and the Euro. Therefore, a digital form of the fiat currencies of participating countries will travel on the Libra Blockchain trails. The Libra Reserve (“the Reserve”) backs each LBR SCS by holding cash or cash equivalents of the corresponding local currency and very short-term government securities issued by the domestic government. Through this model, the Libra payment system seeks to become an integral part of the domestic market by enabling people and businesses to undertake monetary transactions denominated in their currency. As more and more central banks turn towards developing their Central Bank Digital Currency (CBDC), the Libra will be well-positioned to absorb CBDCs into its protocol, as opposed to other competitors, such as Ethereum, IBM Fabric and R3 Corda. Until then, with fiat-backed LBR SCS, Libra 2.0 can be easily perceived as a quasi-CBDC that can potentially foster financial inclusion, especially in emerging economies.

In addition, the Libra introduces the Libra Multi-Currency Coins (LBR MCC), which will be a digital composite of certain single-currency stablecoins on its network. The LBR MCC will be defined in terms of fixed nominal weights of the selected fiat currencies on its network, set under the supervision of the Swiss Financial Market Supervisory Authority (FINMA). Therefore, the Reserve assets automatically back the LBR MCC. This approach hedges against the fluctuations of national currencies, thereby ensuring low volatility in cross-border transactions. The conceptualisation is similar to Special Drawing Rights in the International Monetary Fund.[3] Notably, the LBR MCC can be functional even in economies that do not have their currency in the Libra network as a foreign transaction settlement coin. Businesses and people will be able to convert the LBR MCC they receive into their domestic money via local third-party service providers that have addresses on the Libra blockchain. Thus, the LBR MCC effectively extends the functionality of physical currencies by making cross-border payments more accessible and efficient, and less volatile.

Although Libra stablecoins will not be legal tender, the extensive customer base of Facebook, large institutional support backing Libra and the sheer efficiency of stablecoins could propel widespread adoption of the Libra payment system. Besides this being a potential threat for payment service providers such as credit card companies,[4] there are legitimate macro-financial and systemic risks linked to the use of the LBR MCC, particularly in countries whose local currencies do not feature on the Libra network. For example, during economically stressful periods, households may consider the LBR MCC as a safer and more desirable store of value than the local currency, especially in economies with volatile currencies. This can potentially destabilise capital flows and exchange rates in the country. On the other hand, increased trust in and use of the LBR MCC will ensure capital inflows into countries whose currencies form the reserve assets backing the coin.[5] Another concern is the capacity of the existing infrastructure to sustain the large-scale flow of funds and a high volume of transactions that will follow upon the widespread adoption of cross-border digital payment systems. Therefore, capacity-building and infrastructure development in a country will also be crucial in determining the success of Libra 2.0.

Regulatory and Legal Intervention

In order to ensure the security and integrity of the payment process and build public trust in the system, Libra 2.0 incorporates a framework for financial compliance and network-wide risk management, along with high standards for Anti-Money Laundering (AML) and Combatting Terrorist-Financing (CFT), sanctions compliance and prevention of illicit activities. A specialised “Compliance Program” is set to monitor the compliance obligations. Despite these provisions, it remains challenging to ease the complexity of regulating private stablecoins meant for cross-border payments only through strict compliance with existing laws and standards. In the largely unchartered waters of stablecoin regulation, applicable laws in countries are either unclear or rapidly evolving. For example, in the EU, there is no existing legislative framework dedicated to crypto-assets or stablecoins. Intuitively, the Directive on electronic money may apply to the activity of issuing stablecoins, provided that stablecoins qualify as “electronic money” pursuant to Article 2(2) of the Directive.[6] This qualification will be contingent upon how the stablecoins are issued in the market. Accordingly, the Payment Services Directive may also apply to the execution of the payment transactions under the Libra Payment System.[7] Nevertheless, a legislative proposal that specifically deals with the regulation of crypto-assets[8] has been introduced in the EU, which is expected to bring legal certainty in the area.

Moreover, given the novelty of the use of stablecoins for regular payments, consumers may not fully comprehend the risks involved in the process. The Libra 2.0 model does not establish a direct contractual relationship between the Libra network and the consumers, save for certain contingent contractual rights that may arise under exceptional situations. The end-users will interact with “Designated Dealers” that are likely to be “well-capitalised financial institutions”. It is crucial that countries evaluate the fairness of the existing consumer protection regime in this context, and ensure that all consumers and investors are guaranteed basic rights.[9] 

Besides, as the level of adoption of stablecoins across countries increases, the need for global cooperation and/or harmonisation of rules governing stablecoins is on the horizon. In this context, international financial dialogues between countries, along with the participation of emerging economies in these dialogues, must be encouraged. For example, the United Kingdom has five “Fintech Bridges” i.e. bilateral agreements with countries that commit both parties to share financial policy experience and expertise, with Hong Kong, Australia, Singapore, China and South Korea.[10]

Libra 2.0 as a permissioned Distributed Ledger Technology (DLT) Network

Unlike the Association’s original conceptualisation, the updated Libra Blockchain will be a permissioned system, which means that the Association will have more control over the membership of the network. Although a permissionless blockchain encourages large-scale participation in the network, it is not conducive to maintaining high CFT and AML compliance standards. The centralised nature of the permissioned system suggests that the Libra blockchain will be a single data structure that contains the history of transactions, instead of a collection of blocks of transactional information.  This subdues the principal benefits of blockchain technology – security and openness. Besides, the centralised nature of issuance and operation of stablecoins makes the system more vulnerable to cyber-attacks. It also raises privacy concerns because a single private entity handles a large amount of participant data in the network. These concerns are heightened in the present context because Facebook has a history of misusing user data as revealed by the Cambridge Analytica scandal.[11] Therefore, the adoption of Libra 2.0 must be accompanied by improvement in the cyber infrastructure and adjustments in data privacy rules in countries.


Instead of transcending national currencies, Libra 2.0 has embraced them to become a global payment system with a centralised structure. The incorporation of the LBR SCS and the LBR MCC into the 2.0 model ensures the stability of the Libra currency and can deliver on the promise of financial inclusion, especially in emerging economies. However, there exist legitimate macro-prudential risks linked to the use of LBR MCC. They can be monitored through appropriate domestic regulations corresponding to the economic climate of each country. Moreover, there is a need for domestic authorities to bring about certainty with respect to laws applicable to stablecoin operation, including the consumer protection and data privacy regimes. A robust cyber infrastructure, along with a responsive legal and regulatory environment, are key determinants of the success of Libra 2.0.


[1] John Liu & Peter Lyons, ‘This digital currency could build a more sustainable global economy’ (November 2019) World Economic Forum,

[2] G7 Working Group on Stablecoins, ‘Investigating the Impact of Global Stablecoins’ (October 2019) 1,

[3] International Monetary Fund, IMF Financial Operations (4th ed., International Monetary Fund 2018) 85-88,

[4] This could possibly explain the departure of companies like PayPal, Visa and Mastercard from the Libra Association in October 2019; Erin Griffith & Nathaniel Popper, ‘Facebook’s Libra Cryptocurrency Faces Exodus of Partners’ The New York Times (New York, 11 October 2019)

[5] G7 Working Group on Stablecoins (n 2) 16

[6] Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC

[7] Articles 1(b) and 2(1), Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC

[8] European Commission, “Directive/regulation establishing a European framework for markets in crypto assets” Ref. Ares(2019)7834655;

[9] G7 Working Group on Stable coins (n 2) 10

[10] HM Treasury, Financial Conduct Authority and Bank of England, “Cryptoassets Taskforce: Final Report” (October 2018) 45;

[11] Julia Carrie Wong, ‘The Cambridge Analytica Scandal changed the world – but it didn’t change Facebook’ The Guardian (San Francisco, 18 March 2019)

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