Libra, the cryptocurrency of Facebook
Finance is a key sector for the economy. Therefore, any significant innovation in this field deserves to be considered with caution and its implications well understood. This is what we seek to do in this article with the Libra project.
Also Read Article – Token Vs Coin vs Altcoins the Core Differences
- A brief history of cryptocurrencies from Bitcoin to Libra
- The facebook crypto coin Libra project
- Implications for financial stability
A brief history of cryptocurrencies – from Bitcoin to Facebook coin Libra
Until now, cryptocurrencies have been viewed more as speculative assets than money itself. The main reason is that their value has tended to be unstable and they have not demonstrated a clear advantage over existing alternatives. For all these reasons, they have not reached a critical mass of users.
This is largely because Bitcoin and other cryptocurrencies that have followed it are not backed by a government, meaning that its value as a means of payment lies in the expectation that other people will accept it as such. Also, these cryptocurrencies do not adjust their supply based on their demand, causing even more volatility.
All of this limits its role as a store of value and unit of account. In this context, stablecoins seek to minimize the volatility of cryptocurrencies. To do this, the issuer of the stablecoin links its value to that of another more stable asset, such as fiat currencies (for example, the dollar) or products (precious metals). However, to date, stablecoin initiatives have had a limited user base, as they are promoted by companies that are new entrants facing high costs to promote the adoption of their product (Tether) or targeting retail sales. wholesale (JPM Coin). In addition, there are doubts about its scalability because, for now, it seems unlikely that the projects presented to date can process the number of transactions that are processed per second through conventional electronic means of payment.
The Facebook Cryptocurrency Libra Project
Libra is presented as a private, digital and global currency, and as an alternative means of payment based on blockchain technology. In fact, Facebook has written its own blockchain code and has announced that transactions will be verified between servers of the members of the Association (authorized network) in order to speed up transaction processing times and serve millions of accounts, although the objective is that eventually it does it in a decentralized way.
Libra has a high adoption potential as its promoters have a large user base. Specifically, Facebook has the largest social network in the world, with more than 2.4 billion active users. Also, the other members of the Libra initiative are big players who are well established in the mobile app and payments markets. In short, Libra has a potential scale that other initiatives lack.
Libra is a stablecoin: its value will be linked to a selection of international currencies. To support its value, the Association aims to maintain, in the form of reserves, deposits and investments denominated in the main international currencies, such as the dollar and the euro, for an amount equivalent to the pounds it issues. The evolution of the value of Libra, therefore, should go hand in hand with the currencies that make up the selection. Those who wish to buy Pounds will have to do so through authorized dealers (exchange houses and banks), who will be able to buy Pounds from the Association in exchange for the main currencies mentioned above and sell them to users in exchange for their local currency.
The Association will invest its reserves in liquid and low-risk assets, such as bank deposits (denominated in stable currencies) and short-term public debt securities of countries with good credit ratings. It is anticipated that the performance of such assets will serve to cover operating costs and pay dividends to the founding members.
Libra aims to be an alternative payment vehicle and reduce friction in international transactions. A global stablecoin like Libra, intended for retail use, can make cross-border payments and transfers cheaper and easier to perform by reducing transaction costs.
In addition, it can reach users who currently do not have access to the financial system, allowing them to store their money and carry out transactions through their mobile phone. In fact, the project is also presented as a tool to promote financial inclusion for more than 1.5 billion people around the world who do not have access to a bank account.
Doubts over Facebook Crypto Coin Libra
Several regulators and supervisors have expressed certain reservations that could hinder, or at least slow down, Libra’s rollout:
Data management. Potentially, the Association could have access to large amounts of personal and financial data of its users. So far, the Association has not specified how it will store and manage this information, or what measures it will implement to ensure that they remain properly protected.
Fight against illegal activities. The traditional digital payment system is not anonymous, as transactions are processed and recorded by third parties (the buyer’s and seller’s bank, and the card company). All of this helps ensure compliance with regulatory requirements (such as customer registration) to prevent money laundering and other illegal activities. In the case of Libra, on the other hand, being a cryptocurrency, the exchange of money could presumably take place in a decentralized and anonymous way. Therefore, it is unclear how compliance with these regulations will be ensured.
Risks of abuse of dominant position. There is a fear that Libra promoters may use their current position, which is dominant in some cases, to incentivize the use of Libra over other alternatives, which would represent a restriction on innovation.
Implications for financial stability
In addition to the above considerations, the size and reach of Facebook imply that Libra has the potential to go systemic. The widespread use of Libra could have important implications for financial stability, some of which are summarized below:
The stability of Libra is not guaranteed, but depends on the stability of the assets that back it and the commitment of the Association to keep the value of Libra stable. However, if Libra becomes systemic in its proportions, this commitment should be reinforced through proper regulation and supervision.
Libra could contribute to the generation of global episodes of financial instability.7 The Association plans to invest the currencies obtained from the sale of Libras in low-risk assets (bank deposits or sovereign bonds). Should doubts arise about the cryptocurrency, for example for security reasons, and there was a sell-off, it is unclear whether the Association could meet this demand if a part of the reserves is invested in assets that are subject to some liquidity. risk. Furthermore, the pressure on the balance sheets of the banks in which the Association is a depositor would inevitably increase.
Libra could increase the sensitivity of economies to changes in investor sentiment. Libra can facilitate international capital flows by substantially reducing the transaction costs associated with cross-border transfers. This offers clear benefits, but could also have significant implications for the financial stability of many emerging economies because, by boosting and facilitating capital flows, it could amplify capital outflows in the event of changes in investor sentiment and aversion to capital. risk.
The widespread adoption of Libra in economies with less stablecoins (libraization) could influence the monetary policy of their central banks.
Like the dollar today, Libra is a good candidate to replace the local currency as a store of value in economies with less stablecoins (where high inflation makes this function difficult). However, if residents can easily exchange their local currency for a set of stablecoins via Libra, they will take refuge in this asset at the slightest hint of trouble in their economy. This could lead to major bouts of local currency depreciation and make it difficult to maintain price stability.
Also Read Article – What Are Crypto assets (Cryptocurrencies)?