Decentralizing Libra is not in the US nor Facebook’s interests. Libra may be currently offside with the regulators but the greater plan will be to provide the US government what it needs to compete with China and other superpowers moving to extraordinary monetary policy — data and influence over consumer spending habits, once the government figures out how to work with it.
After Bretton Woods and the de facto adoption of the USD as global reserve currency under the gold standard, the USD was convertible to gold to underlie trust in the system. The international currencies weren’t hard pegged 1:1 to the dollar but kept stable in a tight volatility band to gold, and if a currency declined too much in relation to it the IMF would step in by buying/selling currencies to offset the balance.
In the lead up to Bretton Woods, John Kenynes proposed the Bancor, a multi-asset basket unit of exchange, as an alternative to the USD as the unit for international trade settlement — the Libra follows a very similar model and may follow a similar use case for e-commerce and trade.
Digital currencies stabilized by multi-asset backing will be the next form of common currency, supplanting fiat.
Libra: The digital Bancor for international trade
The US knows that China, Russia and Europe are all working on alternatives to US reserve status for international trade settlement and alternative to the SWIFT system and the Libra could provide an alternative to SWIFT, whether for better or worse. As such, the US sees it as a threat to USD global reserve status with Fed Chairman Jerome Powell saying it poses “many serious concerns” and even President Trump denouncing it.
Libra addresses the growing international demand for a non-US global reserve currency and alternative to SWIFT network, it may even herald a new form of improved fiat currency, being fully backed and diversified. For nations and corporations it holds the potential of John M Keynes’ Bancor for international trade settlement, and for the underbanked in emerging economies it will have function similar to Chile’s inflation-indexed unit of account, the Unidad de Fomento (UF), but with improvements.
An ongoing torment for Trump is how to increase national debt and devalue the USD to remain competitive with other lower yielding currencies — there are even reports he is close to currency intervention — while retaining faith in the USD as the reserve global currency.
Triffin’s Paradox: A currency typically loses its global reserve status when debt becomes unsustainable and undermines its trust. US debt now at $22tr may hit that tipping point.
Indeed, USD reserve status may well be subverted by FB’s Libra if it follows its roadmap to decentralization; however this is highly unlikely as it would undermine Facebook’s domiciled economy and a large swathe of its customer base. What the company wants is to keep the system going the way it is but with a new revenue stream and regain trust in its brand. Given Facebook is now the biggest blockchain company in the US what bigger customer to have than the US government?
The government’s concern of Libra is not in the interests of the people but in the preservance of the USD system. The concern is that Facebook and Libra would become more effectual than the Fed at its own job. Digital currency is the intersection of data and money, creating trillions of new data points that will be a hugely important input to the development of AI, the new arms race between superpowers, and a new lever for monetary policy.
The pseudonymous and anonymous transactions of many decentralized cryptocurrencies are intended to obfuscate transactional data but if Libra doesn’t stick to its decentralization roadmap and retains its permissioned network — perhaps due to regulatory hurdles — Facebook by extension could become the most coveted company in the US. With Alipay and WeChat onside with the People’s Bank of China (PBoC), their data goes towards creating social credit scores, civilian and capital surveillance.
With Libra, Facebook is signalling that the US government and Fed need to catch up with China and it could serve as the de facto digital dollar until the US finally develops one.
The Chinese are already reported to be concerned and Libra has only expedited their development of a digital Yuan. Mu Changchun, deputy director of the PBOC’s payments department said the PBOC had tested Libra’s code and that it isn’t “stable.”
Libra: Emerging market inflation-indexed debt?
With a history of runaway inflation Chile in the 60s introduced a unit of account called the Unidad de Fomento which was indexed to consumer price inflation (CPI) in which to price goods. This served as a stable price unit for goods and a gauge of inflation as it was adjusted daily against the currency of exchange (Pesos/escudos) and in turn prevented people from spending their cash as soon as they got it in case prices increased. Starting with a base value of 100 Peso:UF The price of the UF was adjusted daily relative to the Peso based on a basket of consumer goods.
The UF survives as a unit of account in Chile today and although it is a stark metric for the rampant inflation that has debased the national currency, it provides a useful pricing signal/point/ for consumer goods although not a medium of exchange as the UF is non-convertible. The Libra will also provide a proxy for inflation in emerging currencies relative to an ideal ‘stable’ currency (not CPI) and provide a safe haven asset gauge. However, it will be convertible from local currency, and provide a medium of exchange online and e-commerce.
The Libra may act as an automated market maker between people in emerging market countries who have never before had access to FX markets, allowing them to exchange with no fees and little time between the world’s currencies, with the Libra providing liquidity and acting as the de facto reserve currency. Governments and regulators are concerned this could raise the prospect of a run on some undesirable emerging market currencies.
At a national level, rather than create more US-denominated debt emerging market corporations and even governments may potentially issue new debt in Libra, using the stable asset-backed currency as an alternative to their own high yielding debt or being at the whim of US monetary vagaries.
It will make US gov realize importance of crypto, money as data — Libra will be US’ Alipay/WeChat. In China, Alibaba’s financial arm Ant Financial is now one of the biggest lenders in the country and lends on fractional reserve — it is valued at almost double Goldman Sachs.
In the year ahead we can expect to see more multi-currency backed stablecoins. Terra, the multi-currency stablecoin for e-commerce in Asia recently launched its main-net.
Rather than undermine the US government and USD and economy Facebook will in future use Libra to ingratiate itself to the US government.
To keep the USD reserve system going the US government will continue to expand its debt through new monetary policies such as MMT (monetizing government debt) or another bout of quantitative easing and lowering interest rates — whether that happens under Trump or a new president in 2020.
Strong Anti-money laundering laws are coming into effect in hotpsots notorious for offshore Chinese investors in the property markets of Australia, Canada and New Zealand. This AML crackdown is a growing trend worldwide and can be monitored by using a central bank digital currency (CBDC). Until then, however, money issued by a nation’s corporations might be the next best thing.
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