Former IMF Economist: Libra Has Weak Crisis Protection Model

US economist Barry Eichengreen, who was an adviser on the International Monetary Fund policy (IMF) at the end of the 1990s, in collaboration with his colleague, Academician Ganesh Viswanath-Natraj published an article, in which he noted that the emergency measures for the protection of the reserves contained in the updated whitepaper Libra, similar to the clearing certificates that the United States used before the creation of the Federal Reserve in 1913.

Starting in the 1850s, the United States relied on a network of private clearing houses that issued credit certificates. The idea was that they would act as a form of quasi-currency, which could become a means of payment when the level of market confidence in banknotes issued by one bank reaches zero.

But, according to Eichengreen and Viswanath-Natraj, this private clearing system created a situation where not every dollar was as good as any other dollar. It is precisely this unsatisfactory state of affairs that led to the creation of the Federal Reserve System in 1913.

Eichengreen and Viswanath-Natraj believe that Libra emergency protocols can be just a temporary solution until a more clear relationship with the Fed is defined. They refer to parts of the whitepaper that state that an unidentified “third-party administrator” can be involved to provide emergency liquidity in times of crisis.

But it all depends on whether the Fed decides to support Libra. Eichengreen and Viswanath-Natraj argue that the whitepaper authors have doubts as to whether the Fed will be the lender of last resort in the LibraUSD market.

In an updated whitepaper released earlier this month, Libra abandoned the initial plan to launch one digital asset that would be tied to a basket of fiat currencies, in favor of issuing several stablecoins, each of which would be tied to a specific fiat currency.

Eichengreen and Viswanath-Natraj also note that the question of how Libra can affect monetary sovereignty remains unanswered.

“If residents of another country shift into LibraUSD, that country’s central bank will lose the ability to earn seigniorage. It will lose control of monetary conditions. It will lose the ability to backstop local financial markets,” the article says.

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