Libra: How Successful Can It Be And Why No Banks Have Joined
By Matheus Tavares on ALTCOIN MAGAZINE
The announcement of the creation of Libra has sparked a worldwide debate around regulation from central banks and politicians. Within the past weeks, many people asked me questions about the effect the Libra has on banks and how banks see it. To clarify these questions I decided to write this article to explain the bank’s strategy as well as understand the potential impact that Libra can have in its most successful case.
But before diving into the bank’s view, it is better to first understand the three core pillars of the Libra.
1. Libra is Backed by a Reserve of Monetary Assets — Like Central Bank Reserves — Which Supports its Value
This is probably the main feature of the Libra that distinguishes it from any main cryptocurrency out there. The Libra will be fully backed by assets, such as bank deposits and short-term government securities named in a basket of different currencies.
The main cryptocurrency attempts until now were not backed by any monetary asset, only the technology, and the network itself. Bitcoins and Ethereum, for example, are valuable for their transactional and technological value, but there is no reserve of physical assets backing, guaranteeing or supporting its existence.
On the contrary, for every Libra in the market, there will be a foreign-currency-reserve held by a network of custodians worldwide backing the issuance of every Libra; and the institution that will control its creation and destruction is the Libra Association.
2. Libra Association: The Libra “Central Bank”
Members of the administrative body can be Companies, Educational Institutions and “Social Impact” institutions. So far, there are 28 founding members on the board and most of the companies. The goal of the association is to have exactly 100 members, each with a 1% share and voting power; including Facebook, through its subsidiary Calibra.
The association will be responsible for taking decisions regarding the technological and developmental aspect of Libra as well as its monetary policy — issuance or destruction of currency and its reserve-ratio.
3. Libra is an Open Source Blockchain-Based Currency
As highlighted in the White Paper Libra is “unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra blockchain is a single data structure that records the history of transactions over time”. By doing that, Libra expects to be more secure and to facilitate the development of the platform a new programming language was created for its development, the “Move”.
When it comes to customers’ impact, users are still going to be allowed to have more than one address in the network, and these will not be linked to their real-world identities.
Banks and Financial Institutions View on Facebook`s Libra
It is impossible to generalize. Some banks are open and tracking every single move while others are extremely skeptical and against the initiative. The only fact is that no bank has joined yet, and here is why:
(1) Regulatory Concerns
For banks, it is still early to support because there is a very high likelihood that there will be a lot of regulation coming towards it. In addition, banks being one the most regulated industries out there will prefer to not to be exposed to such a volatile regulatory environment that might even affect their core business.
(2) Avoid Polemic Topics
Financial institutions most valuable asset is their brand reputation. Avoiding situations that might cause polemic or criticism is still more important to banks than almost anything else.
It does not mean banks don’t care either that we are not looking, it just doesn’t make sense for banks to get into a fight with regulators while banks themselves are the most regulated institutions.
The Potential Impact of Libra in the Most Extreme — and Unlikely — Scenario
In a sentence, Libra is a stable coin, with real assets backing its value like a country-issued currency, but running on a blockchain ledger. Instead of having the central banks issuing it, the new sponsors will be private entities. It is the first proposal to issue privately owned asset-backed stable currency. Renowned economist Nouriel Roubini would agree with that.
Given Facebook’s distribution power through Whatsapp, Instagram and Messenger as well as, eventually, its founding members (Visa, Mastercard, Stripe, Uber, Spotify, etc) the coin can easily become widely used and accepted by payment gateways. Once the coin becomes widespread then there will be less and less need for it to be backed by assets because of its transactional value — like what happened with the U.S. dollar. In Libra’s most successful case, it will lead to the creation of the first worldwide borderless currency or what Bloomberg described as “a global operating system for moving fiat money around”.
