Powell on Libra
Fed Chair Powell’s testimony to Congress concluded yesterday. During his testimony, Powell said that Libra, Facebook’s (FB) cryptocurrency project, raises “serious concerns.” He also added that the process of dealing with these concerns will “have to patient and thorough.” He disclosed that a team of Facebook executives had a meeting with Fed officials a couple of months before the launch of the cryptocurrency last month. While answering one of the questions, he said that the Libra project can’t go forward if the Libra Association can’t satisfy the regulator completely.
Powell joins a long list of global central bank officials and politicians in raising questions about Libra. Earlier, the Bank of England governor Mark Carney said that the regulator will approach Libra “with an open mind but not an open door.” French Finance Minister Bruno Le Maire has said that Libra should and could not be a sovereign currency due to issues related to privacy, money laundering, and terrorism financing. In fact, last week, American lawmakers sent a letter to Facebook asking it to stop the Libra project.
Powell sounds dovish
In his testimony, Powell accepted that uncertainties about the economic outlook have increased lately. Particularly, he talked about the unresolved policy issues such as the US-China trade deal, the debt ceiling, and Brexit. He also raised concerns about inflation undershooting the Fed’s target.
He admitted that the global uncertainties have increased since the Fed met the last time in June. The Federal Open Markets Committee (or FOMC) is scheduled to meet at the end of this month to decide on the course of interest rates. However, he said that the Fed’s outlook for growth remains solid with an expectation of the labor market to remain healthy and inflation to pick up. President Trump is not happy with Powell and wants the Fed to cut rates.
Investors shrug off the warning
In spite of Powell raising concerns and indicating a thorough approach in regulating cryptocurrency, the stocks of the key members of the Libra Association rose yesterday. Facebook (FB) gained 1.77% yesterday. The stock was up 0.52% in pre-market today at 5:12 AM ET. PayPal (PYPL), another member of the Libra association, jumped 1.07% yesterday and was up 0.44% in pre-market today at 5:08 AM ET. PayPal expected a pre-tax gain of $218 million in the second quarter from its investment in MercadoLibre (MELI), a Latin American e-commerce giant. MercadoLibre is also a member of the Libra Association.
Visa (V) gained 0.89% yesterday and was up 0.37% today in the pre-market at 4:17 AM ET. Visa (V) invested in cryptocurrency custody services firm, Anchorage, to flex its arms in the crypto ecosystem. Mastercard (MA) surged 0.75% yesterday and was trading higher in pre-market today. Mastercard completed the acquisition of Transfast to improve its cross-border transaction presence.
The broader S&P 500 jumped on the expectation for rapid rate cuts on the back of Powell’s perceived dovish tone. The S&P 500 gained 0.45%, crossing 3,000 for the first time in early trade but retreating marginally after that. The S&P 500 futures were up 0.28% today at 5:53 AM ET. Last week’s job report had dampened the mood of the market as the US economy added more jobs than expected, weakening the case for rapid rate cuts. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, gained 0.48% yesterday and was up 0.32% in pre-market today at 5:56 AM ET.
Bitcoin and other cryptocurrencies are down
Powell’s indication that the regulator will follow a slow and thorough approach in regulating Libra and other cryptocurrencies dampened the mood on the crypto sector. Bitcoin, the flagbearer of cryptocurrencies, lost over $1,500, or 11.8%, in the last 24 hours at 6:00 AM ET. Ethereum lost 12% in the same period. Most of this loss came after Powell’s testimony. Bitcoin rallied on the weekend before Libra was launched on speculation and has remained above that price since then.
Is Facebook just testing the regulatory waters?
While each member is paying $10 million to be a part of the Libra Association, Facebook hasn’t invested much in the Libra project yet. Expecting a backlash from regulators, Facebook may have consciously chosen the whitepaper route to unveil Libra in a low-key manner. The whitepaper was merely a conceptual document, lacking details about how Facebook is planning to scale it up. Keeping it light means Facebook can shelve the project if regulators don’t seem excited.
It makes sense for Facebook, as the company is already battling a poor reputation among regulators and policymakers. Facebook may have to pay $5 billion in fines for the Cambridge Analytica Scandal, where the personal data of millions of Facebook users was compromised.
Facebook may have chosen not to go solo with its cryptocurrency project to avoid its reputation casting doubts on the project dear to Zuckerberg. The Libra Association has 28 members including PayPal (PYPL), Visa (V), Mastercard (MA), and Uber (UBER). Check out Market Realist’s Libra 101 for everything you need to know about Libra.