“Libra” seeks to change the world

Is Facebook trying to achieve world domination with its planned cryptocurrency Libra? If the corresponding White Paper – which was published recently and summarizes the underlying ideas, concepts and objectives – is to be believed, precisely the opposite is the case. According to the initiators of this project, which currently comprise 28 companies and organizations (with no banks involved so far), the overriding goal is to provide all people and companies with “fair, cost-effective and immediate access to their money” and financial services by means of a stable global currency. Put simply, every human being around the world should be able to manage and send money simply with Libra, just as they might send an SMS or a photo. Such a scenario sounds more like world peace than world domination. However, there are good reasons for questioning whether (or how much of) this is actually feasible.

Libra – a threat to financial stability?

Libra is conceived as a cryptocurrency, based on a decentralized blockchain. In order to avoid excessive volatility, the exchange rate is to be pegged to a basket of traditional currencies and stable assets, including government bonds with short-dated maturities. Moreover, the aim is for every Libra token issued to be covered by a reserve of real assets. This structuring of Libra as a stablecoin is designed to build trust among users.

Libra is to be officially launched in the first half of 2020. In the medium to long term, the initiators – led by Facebook – are aiming to achieve the highest possible degree of acceptance (with the White Paper referring to Libra’s ability “to scale to billions of accounts”). Corporate giant Facebook has some 2.7 billion users of its applications worldwide. In other words, Libra has at least the theoretical potential to compete with the leading traditional global currencies such as the US dollar.

Central banks and supervisory authorities have already made it clear that they would like a say in Libra’s development. Two issues in particular are the focus of attention here. On the one hand, it is important to ensure that Libra is not used for money laundering and financing terrorism, while on the other there is a widespread desire to avoid risks to financial stability. The idea that Libra really could achieve systemic relevance in the international financial system was made clear recently by a member of the Executive Board of the German Bundesbank, Joachim Wuermeling, who came up with a simple calculation: In the event of just 100 million of Facebook’s 2.7 billion users signing up to Libra, this cryptocurrency would already have more customers than the entire German banking market.

Summary

The plan to launch Libra in the first half of 2020 might look highly ambitious, given the resistance that the supporting consortium can expect from supervisory authorities and central banks. But bearing in mind the targets that Facebook & Co. have set themselves, a delay of several months would hardly make that much difference.  If this project does succeed, a central entity with huge significance for the entire global financial system would emerge. The key question here is whether the Facebook-led consortium can succeed in gaining popular trust and broad acceptance of this cryptocurrency – a hurdle that has frequently proved insurmountable in the past. In this respect, it is hardly helpful that this powerful multinational has been confronted with a stream of negative newsflow in the recent past, in the form of scandals and security breaches. Libra can hardly expect to rely on the enthusiastic support of avid cryptocurrency supporters. In addition to the concentration of power in the hands of a centralized entity, these players are unlikely to be attracted to aspects such as the linking of the exchange rate to traditional assets and cooperation with supervisory bodies.

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