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Facebook’s announcement speaks to progress about private measures used to facilitate exchange, along with acknowledgement that money is best and most circulated when its value is broadly agreed to thanks to stability of the value. The Libra has the potential to mark the start of something because if widely used, it will open the eyes of the global population to a truth about money: it works best when its value is stable, plus it needn’t be a government creation.
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The job description gives some specifics on Facebook’s ambitions regarding the future developments of Calibra, including expanding to online and offline commerce and eventually lending and personal financial management.
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The BIS has cautioned that Libra’s misuse of that data could have “adverse economic and welfare effects”. Companies could, for example, exclude high-risk groups from socially desirable insurance markets, or price discriminate by working out the maximum rate a borrower would be willing to pay for a loan.
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It is easy to imagine a scenario in which rescuing Libra could require more liquidity than any one state could provide. Recall Ireland after the 2008 financial crisis. When the government announced that it would assume the private banking sector’s liabilities, the country plunged into a sovereign debt crisis. Next to a behemoth like Facebook, many nation-states could end up looking a lot like Ireland.
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The reserve isn’t quite as great as it seems, though. Like a money-market fund Libra has no capital and no deposit insurance, so any drop in the value of the reserves should mean the value of Libra falls. Losses from fraud, mismanagement or default within the reserve fall on Libra holders, unlike with a normal bank account or bank note.
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While the initial design calls for 100% reserves in developed country currencies and government debt, that’s illusory, since Libra’s controllers can change the investments at any time. Any country that allows inflation or issues dubious debt can find its currency and debt dropped from reserves. Moreover, a successful Libra would likely switch to a fractional reserve system, with only enough national currency reserves for liquidity purposes, and currency backed either by loans and other risky assets, or nothing at all.
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To understand how early investors in Facebook’s new Libra blockchain will make money over time, it helps to dig into a new lossless lottery called PoolTogether. Its similarity to Libra is not a completely one-to-one, but the key insight of both is the same: Earning interest on your own money is good, but it’s better to also earn interest on other people’s money.
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The BIS report’s key point is that the entrance of big tech into finance promises all sorts of efficiency and financial inclusion gains — which is a good thing — but those gains mustn’t come at the cost of other things like privacy, financial stability and market competition.
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SWIFT will allow blockchain firms to make use of its Global Payments Innovation (GPI) platform for near real-time payments, following a successful proof-of-concept with R3’s Corda platform. https://www.swift.com/future-of-payments
Kiffmeister’s Fintech Daily Digest 06/24/2019
