What’s not to like about Libra? Quite a lot, if you are a regulatorby Paul Wallace / June 22, 2019 / Leave a comment
First the pound and then the dollar: global currencies are usually centuries in the making and reflect the clout of the nation state underpinning them. Now Facebook plans to short-circuit that historical and economic process and to create from scratch an instant world currency. Its Latin-based name, libra, from which the £ symbol is derived, hints at the vaulting ambition of the project. Mark Zuckerberg, the founder and driving force of Facebook, looks set on trying to create a new monetary domain to rival the Roman empire.
Libra is not the first attempt to create a new digital currency based on the “blockchain” technology to secure and validate transactions through a common digital ledger. That honour goes to bitcoin, launched a decade ago. The first cryptocurrency’s rollercoaster ride showed that it failed to satisfy the three crucial functions of any money, namely providing a stable store of value, an effective means of exchange and a unit of account. Bitcoin is in effect a speculative asset rather than a meaningful currency.
Unlike bitcoin and other wannabe cryptocurrencies created in its wake, libra does have a realistic chance to become a new money that is widely used. For one thing, it will use an initially centralised version of the blockchain technology (which for some subverts its very point, which is to distribute authority). Unlike bitcoin it will not require massive computational power and use of electricity to validate transactions.
As important, libra will be backed by assets in the shape of bank deposits and short-term government securities. That reserve held in a basket of national currencies will come mainly from the users of libra through the money they pay to purchase it. This should provide ballast for the value of libra, avoiding the wild lurches of bitcoin, though it will still fluctuate against the dollar and other national currencies.
As well as offering a relatively stable digital currency, libra will have the backing of a wide range of stakeholders other than Facebook. An independent not-for-profit body will govern and manage the new currency. Based in Geneva, the Libra Association will draw its members from non-profit organisations as well as global businesses.
Twenty-eight outfits including Facebook have already pledged to become founder members, each making an investment of at least $10m. These include financial firms such…