Libra: Will Facebook’s cryptocurrency challenge central banks in the long run?

The currency, called Libra, will be based on a reserve of safe assets. Major monetary institutions will be watching its developments closely.

Will Facebook attack national sovereignty by issuing its own currency after invading our private lives? Because at first glance, its currency project was launched in mid-2020, and the “Libra” based on foreign exchange reserves makes people mistaken for the operation of the central bank. “This global currency will mark the end of an already crumbling nation-state,” the liberal philosopher Gaspard Koenig warned in a recent op-ed. “If we add all other cryptocurrencies, such as Bitcoin, the central bank will soon cease to be the sole owner of the monetary system,” estimates economist Philip Herring, author of several books on the subject.

Not so easy. Because, for now, the first terms of Libra and the associated reserve will be announced on Tuesday, June 18, raising a lot of questions in the first place. According to available information, the Facebook currency will be based on blockchain technology, allowing fast and encrypted payments to be made online. Accessible on the social network, it will be piloted by the Swiss-based foundation of the same name, which has around 20 members including Facebook, Uber and Visa. Reserves will be built to stabilize prices to avoid the hyper-volatility that other cryptocurrencies, such as Bitcoin, suffer from. Is this enough for a possible speculative attack? How will these reserves be managed? Which financial regulator will they be regulated by? It’s all still vague.

For now, one thing seems certain: every time a user buys Libra with their euros, dollars, or pesos, an equal amount will be invested in a safe asset—probably government debt—in a reserve. “So this is not a pure money creation problem like a central bank, but a digitized form of existing money,” commented Martin Della Chiesa, a blockchain expert at consultancy Accuracy.

​Very different from bitcoin
Facebook commits to stablecoins: will its course be attached to a basket of major currencies, including the euro and dollar, the most likely option? In this case, it will continue to be influenced by the central banks that control a basket of currencies, which may include the European Central Bank (ECB) and the Federal Reserve (Fed). They steer the money supply through the interest rate channel and act on the economy through various instruments such as public debt repurchases. In this regard, Libya will thus be very different from Bitcoin, a direct competitor to the existing monetary system: driven by algorithms, its issuance is not controlled by the European Central Bank and the Federal Reserve, and completely disconnected from the real economy.

Leave a Reply

Your email address will not be published.