Fiat money is in flux. Question is: what’s next?
A few months ago, I wrote a long article to analyze Facebook's Libra announcement. In that article, I put the announcement into context and went on to make a few predictions. The main prediction was that Libra would trigger a lot of scrutiny but that it would also speed up the adoption of blockchains by others.
Now a few months in, there indeed has been some backlash against Libra. US and EU officials have indicated that they don't like Libra and plan to ban it. How or what that means is not really clear. But at least the Libra currency seems to be controversial enough for politicians to make statements about it. The second part of my prediction also seems to be materializing and it appears that discussions around regulating and using stable coins in central banks is becoming a topic.
The backlash against Libra
Several of the Libra launch partners are getting cold feet. Mastercard and Visa have indicated that they may not join the Libra Association. According to the Financial Times, Paypal is pulling out as well. None of the partners have actually committed to much more than being named as a partner. And given the political controversy and the threat of regulatory involvement, it is understandable that they do not want to get exposed to that.
This does not mean that this is game over for Libra. As I argued in my earlier article, Libra is more than just the Libra coin. It is also an OSS blockchain platform similar to Ripple, Ethereum, Stellar and other platforms. It has some technical merit and seems like it improves over other platforms in terms of scale and safety. Vitalik Buterin, the development lead for Ethereum, actually called out the technical similarity of Libra recently.
Additionally, the Libra Association is an independent legal entity based in Switzerland with more members than just Facebook. This means that what Facebook gets exposed to legally and what this entity gets exposed to are different things. However, as Wired notes, it appears that the remaining association members have lots of connections to Facebook investors, partners, and former executives. Additionally, the listed partners have committed little more beyond a letter of intent so far.
The Libra Stable Coin
The issue governments appear to be having is mainly with Facebook's intention to create a new type of stable coin. A stable coin is a coin that mirrors some existing currency with a stable value. Essentially, it is an I Owe You (IOU) that may be used in place of real money.
Stable coins for Dollars, Euros, Yen, etc. already exist on several blockchains and are used by fin-tech companies and exchanges. Most of these companies are under regulatory control in the EU and US. Additionally, stable coins are also used for inter blockchain value transfers. For example there are Bitcoin and Eth coins on the Stellar blockchain that you can swap at the exchanges that issued them for the real thing.
However, Facebook's Libra stable coin is different in the sense that they are creating a new coin pegged to a basket of several currencies (Euros, Dollars, etc.) and other assets instead of just representing a single currency.
Libra and Central Banks
To keep the value of Libra stable, somebody would have to act to guard the stable value of the coin. The Libra Association is intended to play that role. Guarding the stability of a currency is usually the exclusive job of central banks. The way this works is that they hold reserves, control liquidity requirements for banks, set interest rates, and translate monetary policy into action using those tools. By doing this they act to keep inflation at a stable level and prevent wild fluctuations of their currency.
So, the Libra Association would end up being a central bank for Libra. By holding a reserve and by buying and selling other currencies, they would be able to control the exchange rate. Additionally this would include minting and destroying of Libra coins. These are the same kind of tools a central bank would use, contrary to the claims on the Libra website about the Libra Reserve.
This is of course super controversial and it triggered a lot of angry responses from countries who consider this as violating their sovereignty and claim the exclusive right to control monetary policy in their country.
Interestingly, Libra seems to have provoked some people at the IMF. They are recommending central banks to get involved with regulating blockchain currencies. Additionally, they are recommending central banks to start issuing their own crypto currencies. This might have happened without Libra but Facebook probably sped up the thinking on this with their Libra announcement.
In my opinion, the Libra coin is actually not essential for Facebook's main goal to inject themselves into the online payments market and tap into revenue related to that. They could simply do what others are doing and create multiple stable coins for Dollars, Euros, etc.
This would allow them to compete with payment products like Android Pay, Apple Pay, Paypal, or Stripe. for doing payments and implement something similar to WeChat Pay in China. This would make them harder to block but easier to regulate. It also would make several of the Libra Association members less eager to be a part of this as this would compete directly with their own products.
Any regulatory activity is unlikely to materialize on short notice. Regulators are constrained by existing laws, existing interpretation of these laws, and the snail's pace with which new laws are created and introduced. In the past years, legislators created a complicated reality where they've issued rulings, engaged with companies that are now running businesses. While they might like to change their mind, they'd have to do so in a way that does not contradict what they've ruled already or they would risk court cases and extended legal battles over this.
The recent announcement by France and Germany to block Libra (the coin) seems to lack a concrete plan as to how they plan to do that. It signals their discontent but does not provide a clear path forward beyond a vague "we don't like this". It's enough to give Libra Association members some second thoughts but not enough to prevent Facebook from moving forward with Libra.
Given the lukewarm reception of Libra and the fact that the Libra Association seems to be losing key members, I'm now a little less optimistic whether they will launch at all. In my view they might end up deciding that they have enough legal challenges as it is on the privacy and tax front that pouring more fuel on the flames by also pushing this through. Even in a weakened form, this may not be worth it. On the other hand, this represents a big enough opportunity that they might be willing to push this through and take the risk.
Update: Since writing this article, there was some more news around Libra. Two more payment solutions (Stripe and eBay) also announced that they are leaving the Libra Association membership. This leaves Libra without most of the payment solutions that initially joined and significantly weakens consortium