The biggest news in cryptocurrencies lately has been the announcement by Facebook of a new cryptocurrency called libra. With billions of Facebook users worldwide and established communications channels, Fakebook’s libra seems well positioned to succeed where other cryptocurrencies have failed.
Libra is envisioned as a “stable coin,” which means that the value of one libra is pegged to a stable store of value such as a reserve currency or the IMF’s special drawing rights (SDR). That value is maintained by placing funds that users pay to acquire libra in liquid instruments such as Treasury bills, bank deposits or other cash equivalents. Sounds good. But is it?
Libra may be too good to be true. Regulators in Europe, China and the U.S. are already raising objections. As this article reports, Federal Reserve Chair Jay Powell is already cautioning about libra. According to Powell, “I just think it cannot go forward without there being broad satisfaction with the way the company has addressed money laundering…data protection, [and] consumer privacy– all of those things will need to be addressed very thoroughly and carefully, and again, in a deliberate process that will not be a sprint to implementation.”
Most of the concerns raised publicly involve matters such as anti-money laundering (AML) rules and “know your customer” (KYC) rules. Cryptocurrency systems also typically require a money transfer license. Most of these objections are easily met and established cryptocurrencies and exchanges have satisfied the rules. But the real objections to libra are much more serious.
By maintaining a pool of liquid assets to meet redemption requests from libra, Facebook will be operating a money market fund. Those funds require registration with the SEC and much more extensive regulation than the AML and KYC rules. Even more troubling is the fact that libra may be viewed as a bank and not very different from a central bank.
Facebook will pay libra holders nothing in interest, but will collect interest payments on their liquid fund assets. That’s essentially what banks do in a zero interest rate environment.
Also, in a financial panic, Facebook may not be able to sell its “liquid” assets fast enough to meet redemption requests by holders. That’s exactly what happened to money market funds in the 2008 panic. The result was a blanket guarantee by the Fed.
Facebook could face the same panic conditions and require a Fed bailout to save the financial system. Rather than walk into another trap that will enrich Mark Zuckerberg, it’s more likely the Fed will just say no to libra.
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