In his speech at the Central Banks economic symposium these days in Jackson Hole, the Governor of the Bank of England made some extremely curious statements.
Mark Carney said that dollar dominance in the global financial system increases the risks of the global liquidity trap, and that currencies like Libra will end dollar dominance. So what is the currency of the future Libra? And what is its threat to the modern financial system?
Such statements from the lips of the governor of one of the most respected central banks in the world, the closest ally of the United States, and even at the annual symposium organized by the Federal Reserve Bank of Kansas City, part of the US Federal Reserve, were extremely strange to hear. It is for this reason that this issue must be carefully examined.
Libra is a unit of a new cryptocurrency developed and managed by the Swiss fund and a consortium of companies led by Facebook.
The new global cryptocurrency is built on an open source blockchain called Libra Blockchain, with its own proof-of-stake protocol. If you are interested in the technical aspects of the blockchain, follow the Libra Blockchain link to the official page.
The Libra project was first announced by Facebook in early 2019 and officially unveiled on June 18, 2019.
After the launch of the project, Libra will be included in the Facebook ecosystem, primarily in the main products – FB Messenger, WhatsApp and facebook.com, which will have a Calibra crypto wallet.
The project is being implemented by the Libra Association. It is an independent non-profit organization with headquarters in Geneva, Switzerland. The purpose of the Association is to control and provide a framework for managing the network and reserves, as well as providing grants for social purposes in support of financial integration.
The association is currently led by Facebook. The main members of the association at the moment:
- Payment systems: Mastercard, Mercado Pago, PayPal, PayU, Stripe, Visa
- Technologies and marketplaces: Booking Holdings, eBay, Facebook / Calibra, Farfetch, Lyft, Spotify AB, Uber Technologies, Inc.
- Telecommunications: Iliad, Vodafone Group
- Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
- Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
- Non-profit and international organizations, as well as educational and scientific institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
A full launch of the Libra ecosystem is scheduled for the first half of 2020.
So what is the main difference between the Libra project and many other cryptocurrencies that already have circulation in reality?
Libra is a stable digital cryptocurrency that is fully secured by a reserve of real assets – the Libra reserve – and is supported by a network of competing exchanges that sell and buy it. Various assets with low volatility, such as bank deposits, cash and short-term government securities in different currencies from stable and reputable central banks, act as the guarantor of Libra. Assets of the Libra reserve will be stored in reliable depository organizations from different countries, which will ensure a high level of security and decentralization. Initially, Libra will be supported by assets denominated in four major currencies: USD, EUR, JPY and GBP.
The assets behind Libra are the main difference between it and many existing cryptocurrencies that do not have such intrinsic value. Interest on reserve assets will cover the costs of the system, provide low transaction fees, pay dividends to investors who invested in the launch of the ecosystem. The rules for the allocation of reserve interest will be determined in advance, and the Libra Association will monitor their compliance. Libra users will not receive reserve interest.
It is planned that the Libra Association will form a geographically distributed regulated group of institutional depository organizations from different countries, which will become the basis of the reserve. The Association will establish the interaction of the reserve with authorized sellers, provide high transparency and full control, as well as establish clear rules and procedures for changing the composition of the reserve basket.
Thus, we see a certain prototype of an independent global central bank that has its own reserves and imitates its own cryptocurrency. At the same time, this “central bank” will not be subject to regulation by any existing state or state body. Strong, right?
In the long term, the Libra project is able to make global changes to the payment industry. A new system is emerging that threatens the dominance of traditional banks as “payment intermediaries.” New financial services will be created that will be immediately available to all network users. It will be increasingly difficult for central banks to discourage cross-border capital flows and maintain tight monetary policies. If Libra gets worldwide distribution, a new settlement system for world trade will appear, therefore, the dependence on the single currency, the US dollar, will decrease. The result may be a global cryptocurrency system that combines the adoption of institutional players and the widest possible distribution among users.
Chris Hughes, one of the founders of the Facebook social network, believes that with the advent of the Libra cryptocurrency, control over monetary policy will pass from state central banks to private companies.
What will bring the Libra project to ordinary citizens? According to the creators of the project – “We are used to the fact that we can send a message to friends anywhere in the world from our phone at any time. Libra allows you to do the same with money – instantly, safely and inexpensively.” And I would add – anonymously.
The creators of the project do not hide their global plans.
“As a rule, the less money people have, the more they pay for financial services. The hard-earned money “eats” various fees – from interest on money transfers to commissions for exceeding the credit limit and withdrawing cash from an ATM. Short-term loans require 400% per annum or more. Sometimes a person has to pay $ 30 on top of a loan of $ 100. So why don’t people use modern financial technologies? Someone doesn’t have enough money for this, someone is frightened off by high and unpredictable fees, I do not like about that banks are too far away, and someone no documentation required.
Blockchain and cryptocurrency technologies have a number of unique advantages that will potentially make financial services more accessible and reliable. We are talking about distributed control, due to which the network is managed not by one node, but by many at once; open access, which allows everyone with access to the Internet to join the ecosystem; and cryptographic encryption that protects against fraud.”
In my opinion, this whole project looks quite promising and we have not to wait so long before its launch. Whether the Libra project is waiting for failure or worldwide success is still too early to judge. It is clear that the main stakeholder at the initial stage is Facebook, which will be able to provide its users with new services and services, and thereby strengthen its market position.
The first reaction to the plans to launch Libra from government was extremely negative and it is understandable why. Here are some opinions.
The day after the launch of the project, US congressmen called for Facebook to suspend its project. Senators referred to the past of Facebook and added that they cannot allow the launch of a new currency without control. US Federal Reserve Chairman Jerome Powell said the chamber is concerned about Facebook’s privacy, money laundering, consumer protection, and financial stability.
“The South Korean National Financial Services Commission (FSC) is considering what could happen if “2.4 billion Facebook users worldwide transfer one tenth of their bank deposits to Libra”. If this scenario is implemented, bank solvency will decrease, as will their credit reserves, and this will create a threat to emerging markets due to the movement of capital.
The FSC also expressed concern that deposit withdrawals may occur during financial or currency crises, as people will move their national fiat currency to Libra. It is also expected that simplification of exchange procedures and money transfers through Libra will limit the ability of central banks to control international capital flows. The effectiveness of monetary policy will also be limited if the Libra cryptocurrency is universally exchanged for central bank currencies.
The Commission also expressed concern that Libra would be widely used for money laundering without proper banking controls. As an argument, the regulator cited the fact that “large financial institutions such as Goldman Sachs or JPMorgan” refused to participate in the Facebook cryptocurrency project. The project poses a serious threat to the traditional banking industry. If Libra provides its customers with almost free cross-border payments, the income of South Korean banks from remittances will be significantly reduced.
The Korean regulator believes that the likelihood of a successful launch of Libra is higher than that of other cryptocurrencies. Offering financial services through its social networks such as Facebook, WhatsApp and Instagram, with billions of active users around the world, the company will be able to guarantee convenience and competitive prices. “
France has set up a G7 working group to explore how central banks can regulate cryptocurrencies like Libra. Francois Villeroi de Halo, head of the central bank of France, said: “We want to combine openness to innovation with a firmness in regulation.” France strongly opposes Libra becoming a sovereign currency. The authorities said that digital assets must comply with anti-money laundering laws, consumer protection rules, and other legal acts.
The Central Bank of Germany said that the potential benefits of Libra Facebook should be possible, despite the existing regulatory uncertainty and the associated risks. Global innovation projects such as Libra should not be impossible, as they aim to increase wealth and transaction costs. However, global regulators must ensure that a number of important standards, such as security, currency and financial stability, are not adversely affected and payment transactions are not at risk.
For me, as a potential user of Libra in the future, the main issues of using the new cryptocurrency are the security of storage and use of Libra, as well as the convenience and anonymity of operations to exchange existing currencies into cryptocurrency and vice versa. Let’s see what happens.
In any case, Libra is taking a major step forward compared to existing cryptocurrencies. And we will continue to monitor the implementation of this unusual project. You can find more detailed information about this project on the official website of the project – libra.org.