Facebook Will Create ‘Shadow Banking’ System, Major U.S. Banks Warn

Facebook’s crypto project Libra will potentially create a “shadow banking” system, according to the banks at the Federal Advisory Council (FAC).

U.S. banks fear Libra will reduce payment volumes

After the United States Federal Reserve asked some of the nation’s largest banks about Libra, the banks expressed their negative stance towards the project, outlining the risks of potential decline in demand-deposit accounts and bank payment volumes, Bloomberg reports Sept. 30.

Libra and similar stablecoin projects, where a digital coin is pegged to an underlying value consisting of one or more fiat currencies, also pose a possible challenge to the bank business model built on privacy, the banks reportedly said during a quarterly meeting of the FAC earlier in September.

Noting that about 52% of the U.S. population, or 170 million people, were considered active Facebook users in 2018, the banks suggested that Facebook is potentially creating a digital monetary ecosystem outside of sanctioned financial markets, or a “shadow banking” system.

The banks argued:

“As consumers adopt Libra, more deposits could migrate onto the platform, effectively reducing liquidity, and that disintermediation may further expand into loan and investment services.”

Banks want to keep managing local economies

Additionally, the banks warned that Facebook’s Libra could impact national monetary policy, citing the “potential to reduce the ability of states to monitor, manage and influence local economies.”

The FAC, which includes 12 representatives of the U.S. banking industry, consults with and advises the Fed Board on economic and financial issues within the Board's jurisdiction.

On Sept. 26, Bloomberg reported on Facebook planning to get its chief operating officer Sheryl Sandberg in front of the House Financial Services Committee in October to testify on Libra and its plans to launch the stablecoin in 2020.