JOHANNESBURG - The Facebook-backed Libra Association plans to introduce its libra digital currency into financial markets during the first half of 2020.
Underlying libra is the notion that “moving money around globally should be as easy and cost-effective as (and even more safe and secure than) sending a text message or sharing a photo”.
Facebook hopes that the financial network will follow the social network model and that the two networks will eventually merge into a single seamless network.
Libras will be obtained by handing over national currency to the Libra Reserve, which will be used to buy other currencies and low-risk government bonds. Libras can be converted back into national currency if needed.
Libra could significantly reduce the fees related to international money transfers. Possibly the greatest benefit of libra will be in emerging markets. It is likely to provide a more reliable store of value than many emerging market currencies due to the libra’s higher price stability.
It is ironic that the planned launch of libra has been fuelling bitcoin’s recent rally. Libra is quite different from bitcoin. There is no bitcoin reserve. No corporation, government or organisation runs it. If you want to exchange your bitcoin for dollars, you need to find a willing buyer. If buyers decide bitcoins are worth nothing, then no one will buy them. This is why bitcoin is so volatile. Libras, on the other hand, will have actual measurable worth.
Although libra will be decentralised because it is based on blockchain technology, it is also centralised by the creation of a supposedly independent non-profit governing body. That body is the Libra Association, to be located in Switzerland. It currently has 28 members, with that number expected to rise to 100 prior to the launch of libra.
Initially, the members will place funds in the Libra Reserve, which will enable the creation and circulation of libras. Major policy decisions will be made by a two-thirds vote. The overwhelming majority of members are large profit-seeking corporations, including PayPal, Facebook, Uber, Visa, Mastercard, Vodafone, eBay and various venture capital firms.
It is unclear how the Libra Association will use its power. The structure of the organisation lends itself to direct financial interest in the management of libra. When libra is purchased, a portion of the funds will pay for a government bond. The interest accrues to the Libra Association. This will prove lucrative for the association if millions of people end up using libra.
A policy shift to increase returns could be made by a two-thirds vote. All they need to do is alter the asset class composition and exchange some low-risk debt for higher-risk debt by extending loans.
This course of action could lead to an enormous Libra Reserve and its policies will have significant macro-economic impacts. Facebook promises that the Libra Reserve will not exercise monetary policy. Facebook also promised to never share personal information of its social network users, but did so for its own gain anyway.
Regulators need to approach libra with caution. There is a good reason banking is one of the most regulated industries in the world.
A global bank-like organisation with potentially trillions of dollars in assets and ties to billions of users will have tremendous influence over economic and political affairs. It is unlikely to be effectively regulated by governments, much like Facebook’s social network.
Frants Preis, CFA, is a portfolio manager at Vega Asset Management based in Pretoria.