6 - Global stablecoins: Libra

Summary

In this chapter, we shall examine in detail the initial launch of Facebook's Libra on the world. It illustrates all the issues involved in attempting to provide an alternative to a fiat currency and the need for safeguards.

In June 2019, Mark Zuckerberg's White Paper introduced Libra to the world. The original proposals have subsequently been watered down considerably and this chapter will explore the reasons for that.1 Libra was intended to be a global stablecoin, tied to a basket of currencies, instead of being tied to just one fiat currency or asset. The plan was to back Libra with a collection of low volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks. For each Libra issued an equal value of such currency, or highly liquid government bonds would be placed on deposit with a reliable repository. But given the basket of currencies approach, it is inevitable that the value of the basket would fluctuate over time in response to developments in trade and their economies. Although Libra acknowledges that the value of the stablecoin fluctuates with the value of domestic or international trade currencies, it did not explain how the exchange rate would be calculated and made transparent to Libra holders. This is especially important for local currencies, where an increasing use of Libra could lead to another kind of “dollarization” of the currency, which in turn could lead to a depreciation of the local currency.

The governance of the Libra blockchain and Libra reserve is in the hands of the Libra Association, an independent, not-for-profit membership organization based in Geneva. The Association itself would include any entity that operates a validator node and holds a sufficient stake in Libra, the minimum being $10 million, which provides the investment entity with one vote but the same entity cannot present itself twice. Some of the founder members included Visa, Mastercard, Spotify, Paypal, Uber, Lyft and Vodafone, but Visa, Mastercard, Strip, eBay and Paypal since pulled out.