The finance ministers of the European Union intend to inform the participants in the approaching G20 meeting in mid-October 2019 about the need for a global regulatory response towards stable coins. Stable coins are cryptocurrencies that minimize the volatility of their exchange rates by being pegged to other assets, such as fiat money and exchange-traded commodities (e.g., industrial metals and precious metals). Thus, stable coins become subject to the same volatility as the backing assets.

The EU finance ministers are particularly concerned regarding Libra, a new stable coin that is planned to be launched by Facebook in 2020. It will be backed by a variety of conventional currencies and other stable assets. It will become the basis of new payment features for two messaging applications owned by Facebook, namely, WhatsApp and Facebook Messenger.

Libra faced severe criticism from regulators from all over the world as the Libra Association, the organization responsible for overseeing the new cryptocurrency, had not explained clearly its approach towards ensuring compliance with the applicable financial regulations. It is not a coincidence that the French Finance Minister Bruno Le Maire stated: “I, therefore, want to say with plenty of clarity: in these conditions we cannot authorise the development of Libra on European soil.” eBay, Stripe, Mastercard, and Visa were initially participating in the Libra project, but later withdrew their participation.

Libra poses tax risks to the EU countries because its use may lead to capital gains and losses which will often be taxable. The reason is that Libra will be backed by a basket of currencies, not by users’ domestic currencies. As global exchange rates change, the domestic value of Libra will change accordingly, thus creating capital gains and losses. Hence, it will unlikely to become a popular cryptocurrency even if it complies with all applicable regulations. This is because, in the countries where capital gains are taxable, users of Libra will need to file detailed tax returns indicating all transactions with Libra and pay any tax due. Such a high administrative burden will dissuade many people from using Libra.

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