Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

17 July 2019

Bruegel: Libra: possible risks in Facebook’s pursuit of a ‘stablecoin’


Facebook’s new cryptocurrency has the potential to be both widely accessible and attractive to those countries that do not have strong sovereign currencies. So far regulators have treated such currencies as a minor risk to national economics, but the Libra could change everything.

Facebook recently unveiled its plan (white paper) to launch a new digital currency, called Libra, in the first half of 2020. The company’s scale as the largest social media service in the world coupled with its failure to appreciate its influence over modern democracies, led to more fears of global dominance following the announcement.

The project is powered by the Libra Association, composed of 28 founding members, including large corporations active in payment systems aiming to reach 100 members by the date of the launch. The white paper also discusses the creation of Calibra, the digital wallet on which Libra will operate.

The Libra Association is set up as a non-profit Swiss-based foundation and is in charge of the management and policy of the whole infrastructure. Businesses can become members, insofar as they meet specific criteria and contribute with an initial investment of at least $10 million. In return, members are entitled to voting rights in the Libra Association Council (one vote each $10 million investment, up to a limit) and run a validator node of the permissioned blockchain. While the white paper discusses the broad philosophy of the new product, it is not a detailed description of how it will operate, leaving therefor a lot still quite open.

One important point revealed, however, is that the Libra aims to be a stablecoin. This is one of the most important problems of other cryptocurrencies like bitcoin. The value of the Libra will be based on a basket of stable assets. The composition of such a basket could vary over time in response to “significant changes in market conditions”. Libra creation should work as follows. Initial investors will create a pool of assets, the reserves. The Association then decides on the composition of the basket and pegs the Libra to it. For any Libra created (minted), there needs to be a unit of the corresponding basket of assets. Authorised resellers purchase Libra coins from the Association by providing in exchange fiat assets to fully back such coins that are added to reserves. Users then can request Libras from the authorised resellers.

Reserves will then be fully invested in low-risk short-dated interest-bearing assets, the revenues of which will serve to cover operating costs and pay out dividends to founding members. The reserves and the promise to have a stable and thus well sought out currency is at the heart of Libra’s business model.

But can Libra really be a stable coin?  If the underlying assets are stable, the Libra will also tend to be stable. And yet, the price of the Libra will also depend on the commitment to supply coins at the speed demanded. This is not a trivial matter as the Association will have to back new coins with the underlying assets. Consider an occasion in which a Libra hype leads to a very high demand for coins (not unlike what we have seen for bitcoins). To preserve the value of one Libra, the Association will have to mint new coins at the rate demanded and back them up by buying the assets in the underlying composition.

Full article

White paper



© Bruegel


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment