An Insight Into Libra (A 3-part Blog Series): A Deeper Analysis

The Bigger Picture

 

While the idea of having a stable global currency is appealing, the concept of backing this currency by government assets, including fiat currencies, has very dangerous implications.

 

The idea of backing the Libra by a reserve means that the association has to buy from the market as much assets as the blockchain issues in Libra. 

 

How are those assets chosen? From which government? 

 

Whoever is chosen to be the reserve will have huge advantage over other economies because their bonds and fiats are being held to back the Libra, which is a global currency being used in many economies and transactions that are not related to the government(s) providing the reserve assets, but still that government(s) is taking advantage of those global users. This means practically that Libra is dragging the global population to use that one or few fiat currencies that are backing the Libra and that makes a fake demand on those backing currencies. 

 

Does that sound familiar? Think petrodollar. Over the last approx 50 years, USA forced the world to trade the oil in USD, generating a fake demand for USD to run tradings that are not related to the US economy. If Australia wanted to buy oil from Saudi Arabia, Australia has to buy USD first, and then pay Saudi Arabia with USD to get that oil. It is said that for the last 50 years, the main export of USA was the dollar. Now Libra, if you want to buy libra to use it for easy payments and transactions, the association has to buy USD for reserve, and then issue you the libra (through an algorithm of course, but it is the same concept).

 

Things get even more intricate when we understand that once the Libra is backed by the reserve, it is not anymore an independent global currency, but an extension of the value of the underlying fiat and assets (and since government and even non-government assets are all valued in terms of fiat currency in the first place, the entire reserve is in fact a reflection of the fiat currencies). This means that if the value of the underlying fiat currency increases, Libra’s purchasing power increases, and vice versa. This means that Libra will allow the underlying fiat currencies to deflate their currencies, i.e. print money, and make the entire world pay for it. It is again the same idea of USD: because everyone has to hold USD in their accounts to run necessary transactions like buying oil, USA could print unimaginable amounts of dollars without having hyperinflation because the inflation is distributed globally on everyone who holds USD (the rate was commonly 4% global annual inflation). Now with Libra, the underlying fiat issuers can print money and make every Libra user pay for it unwillingly and unintentionally by losing purchasing power gradually (for comparison: the USD lost more than 90% of its value since the USA removed the gold standard in the 1970s and activated the petrodollar). So again, who will be the lucky ones providing the government assets and fiat for the Libra?

 

So, what has happened?

 

The Libra Association

In June 2019, it was announced that the Libra Association will have 28 members, which may potentially grow to 100 members in the first half of 2020; however, this was misleading as confirmed by Visa and others. Visa confirmed that they have signed a nonbinding letter of intent to join, which the other 27 organisations have also signed before the release of the white paper, meaning no organisations have actually officially joined during that time (source1, source2). 

 

In October 2019, the Association had their inaugural meeting to establish the 21 members and officialise the commitment to the project by signing the Libra Charter. Some of the organisations who have signed the Charter are Uber, Spotify, Vodafone and PayU, however, none of them have financially committed as yet (i.e., inject $10 million into the project). The seven organisations which have departed the Association in advance are Visa, Mastercard, PayPal, Stripe, Mercado Pago, Booking Holdings and Ebay; this meant that every major payment processors have left except for PayU. This may be a major hole in Libra Association as anti-money laundering schemes and know-your-customer requirements are more rigorous than ever. Despite these exits, the Association claims that they have received more than 1,500 expression of interests from other organisations (source1, source2, source3, source4, source5).

The House of Financial Services Committee Hearings

 

Libra has faced backlashes since the project’s announcement with the US Financial Services Chairwoman, Maxine Waters, requesting for the project’s moratorium. The potential bypass of anti-money laundering laws and a lack of regulatory framework being implemented are the driving concerns for the Libra project. Since then, two major hearings have been held (one with David Marcus and another with Mark Zuckerberg). In July 2019, Waters and the committee were unconvinced with Marcus’ commitment to ‘refraining from moving forward with Libra until policymakers put appropriate regulations in place’ (source1, source2).

 

Three months later, Zuckerberg testifies before the Committee on Facebook’s functions (the appropriation of users’ data) and the Libra project. Zuckerberg made it clear that he cannot speak for the Association as it is an independent organisation and emphasised that he is only committed to Facebook’s involvement. Zuckerberg has also put forward that Libra will enhance the US economy and international financial leadership since the USD is part of the Libra reserve. At the conclusion of the six-hour hearing, Waters and the Committee is still unsure about Libra and the goals, hence cannot support the plan. Waters commented that the committee needs to ‘review what happened [at the hearing] and make some decisions about how [to] go forward with the strategy’ (source1, source2).

 

Conclusion

 

Libra has many intricate implications with some positives and negatives. Although Libra shares the benefits that many existing popular cryptocurrencies possess, it still has problematic and pressing issues that need to be addressed due to the lack of regulation and Libra’s non-decentralised model. It is up to Libra to comply with domestic and international regulators and collaborate with other diverse businesses and institutions in order to move forward and achieve the goal of building a global currency...but yet again, this leads on to more pressing issues with which government assets should be part of the Reserve. Ideally (and if possible), the reserve should consist of every country’s government assets and fiat currencies in order to diversify and reflect a ‘true’ global currency. 

 

On the other hand, Libra could be the much-needed push to drive mass adoption for existing cryptocurrencies which the crypto space has been waiting for.

 

This is the 3rd and final part of the Hatch Quarter’s Libra blog series. Read Part 1 here, and Part 2 here.

By Husam Wafai - husam@hatchquarter.com.au and Vivienca Luong - vivienca@hatchquarter.com.au