The Libra Association

With the risk of the rapidity with which things change these days I will give my opinion on the Libra Association, which will be established in Switzerland by the Libra digital currency promoter group. The Association is the supreme governing body of new currency.

I will do it from two perspectives: the role of the Association mirroring part of the functions of the central bank of a country that issues its own currency, and I will complement it with an article on the relations between the members of the Association in the context of networks and hierarchies. The Association is an entity in formation and not yet consolidated, and in this context we must understand the recent resignations of several of its initial members.

The Libra Association is the legal structure that will underpin the relations between the members in the context of the design, launch and management of the Libra digital currency project. There are two fundamental elements: first, it is a consortia of companies that do not constitute a joint stock company but an entity of social-collaborative nature, possibly a sign of new associative forms that will be increasingly used. Second and derived from the above, it is an initiative of the private sector breaking into a field so far exclusive of the states and their institutions. Libra has the peculiarity of being a digital currency issued by the private sector.

In an intelligent way, the promoters of Libra have declared that they do not intend to replace national currencies, but that through the Libra Reserve they will invest in the chosen currencies and assets of the countries whose currencies are part of the Reserve (dollar, euro, pound sterling, and Japanese yen as stated), which would then continue to issue their national currencies through their central banks. But Libra would compete with them because citizens would have the option of using one or the other.

Central banks have several functions. Among them the issuance of currency and the setting of the reference interest rates for its currency, as well as the control of the money supply in circulation, control of the wholesale payment infrastructure and supervision of the financial system especially to the banks, since these have customer deposits and create bank money through lending. Central banks are also lenders of last resort (“backstop”) in critical situations of financial crisis, as the US Federal Reserve or the European Central Bank among others have shown since 2008.

If the function of the Libra Association is fundamentally to become an intermediary between the users of the Libra currency and the underlying currencies of the Reserve, then it would be necessary to consider to what extent the central banks can continue to effectively perform that function of last resort with a new intermediary (the Association) who supplies the new Libra currency (more so, if this Libra is used massively). It would also be necessary to ask how the Association responds in crisis situations (“stress test”) since the Association is essentially a portfolio manager in its Reserve management and investment activity. What are the investment criteria, how are the weights established, will there be changes in the Reserve and what effects will it have on the economic policies of each country if the weights are changed as a result of crisis episodes in specific countries?

The inclusion of the Association maintaining the role of central banks undoubtedly complicates the crisis management framework, although that may be unnoticed by Libra users until such crisis occurs.

The Libra Association is in crisis even before it is constituted and several members (key in my opinion such as the payment companies Stripe, Paypal, Payment Market, Visa, Mastercard and the eBay marketplace) have decided that they will not continue at least for now as initial promoters. This cannot be a surprise for Facebook, unless they have underestimated the response of regulators and politicians (openly and understandably against it), which would be quite disappointing. Libra can not be a prototype of the likes launched by the big techs which is quickly cancelled if it does not work. If Libra has decided to announce itself, the different scenarios and the responses have to be analyzed in advance in order to move forward. If the Association for the Libra project is so central, there must clearly be a number of members and also qualified for the project to have credibility, to avoid being seen as “the Facebook project” with a facade without more.

The Libra Association as explained seems to be the product of a network of contacts with few key nodes that bring together a lot of “centrality”. Here I refer to the article in Wired magazine where the relationships between the different members of the Association are analyzed. What can be said based on what we see is that it is a network with many affinities, in what is good and bad.

One of the arguments of currencies such as Libra, or cryptocurrencies, is the relative or total decentralization in the way in which the coins are “manufactured” and eventually distributed to perform their functions as an account unit, payment mechanism or deposit of value.

Libra intent to comply with all three attributes and the Association is key in the entire process to build a new financial infrastructure. Currencies like Bitcoin will hardly be a deposit of value if they are not widely used as payment mechanisms first, but their volatility and the unpredictability of their value does not help. Bitcoin does not have a structure like the Association and its promotion is an almost artisan process of pure market creation.

The Libra Association is structured similarly to the underlying technology of its currency. The blockchain proposed for Libra for its launch will be permissioned with a limited number of validator nodes, but they have promised that the blockchain will be fully decentralized in 5 years). The Association itself is presented as a limited group of promoters. What is the future of the Association when in theory the blockchain is fully decentralized in 5 years? It would be good to know how fundamental milestones like this may affect the Association and its governance. Will the Association become a distributed network?

This leads me to connect with the importance of the battle in between hierarchies and networks. Although there are clearly network elements in each hierarchy and there are de facto hierarchical structures in the networks, Libra’s proposal with the Association as a central element of government poses a model of complex coexistence with the hierarchies that control money today: countries and their institutions, and from there down the different actors of the financial system. I think it is worth paying close attention to network sciences because on this basis today there are companies such as Facebook, Amazon, Google, Apple or Netflix. On this basis, companies such as Baidu, Tencent or Alibaba in China are building the digital life of almost 1.5 billion people. On this basis, governments must increasingly understand the field of relationships between countries.

On this subject I will write next week in the blog The Alcazar of Ideas on the book of Niall Ferguson “The square and the tower.” Its reading provides a wonderful framework for what is happening in the struggle for power in an increasingly technological world.