INCEPTION OF STABLECOINS LIKE LIBRA AND ITS IMPACT ON WORLD ECONOMY
This article was co-authored by Nakul Shah
As a medium of trading, the form of currency has seen a number of transitions, owing to the development of society, from barter trading to coinage, paper money and now electronic cash (i.e. Bitcoin) [1]. From enabling crowdsource ideas and solutions (e.g. Innocentive, TopCoder), to source talent (e.g, Upwork), services (e.g. Uber, Lyft, AirBnb), and capital (e.g. Kickstarter, AngelList), the influence of technology is spreading to every sector, including economic [2]. A major milestone in this space comes with the announcement of Facebook, a non-government organization, which plans to issue Libra as a type of super-sovereign stablecoins in incoming 2020. Facebook decided to apply blockchain principles to the new upcoming cryptocurrency — Libra. Libra coins can neither be mined nor do they provide any incentives.
Though Libra comes with a number of uncertainties associated with it, a global stablecoin could certainly provide the much-needed digitalization and a viable long-term perspective to currencies like Euro [3]. Thus, Euro would probably be a good candidate for being turned into a cryptocurrency by securely depositing and consolidating euro on ECB’s balance sheet and setting it up as a digital central bank with peer-to-peer transfer capability using Distributed Ledger (blockchain) technology [4]. This is also evident by the attitude of some countries like China, France, India, Japan, South Korea, Russia, Singapore, Thailand, UK, and USA [5] to block Libra along with a statement by Facebook, who said: “Libra is not our first attempt, but also not the last one.” Whether it’s a successful attempt or not, Libra is still a topic worth discussing and it’s still interesting to imagine a future of cryptocurrency.
The form of money is always changing with the development of the times. In this post, we provide a preliminary analysis of the growth and strengths of stablecoins in today’s era, for the global economy.
BIRTH OF STABLECOINS
Though Bitcoin has been around for over a decade, it hasn’t yet become a simple global cryptocurrency. This could be because of its high volatility or the question that Bitcoin is an investment rather than a pure currency [6], which deters people from using it as a mode of exchange. Another issue with Bitcoin is its “unbacked” nature and predetermined supply of 21 million units, which cannot be adjusted automatically to match the variation in aggregated demand [7].
Following the birth of bitcoin in 2009, over 2300 cryptocurrencies have been created in a decade. Since the first stablecoins appeared in 2014, the market value of all stablecoins is approximately $ 2.7 billion till early 2019. In recent years, there have been some attempts on stablecoin projects, one of which was called “Basis”, which is already shut down [8] [9]. Most other stablecoins have been algorithm based without collateral. The issuer increases or decreases the total supply by issuing more stablecoins or issuing a second asset (e.g. bonds). From the market reaction, algorithm-based stablecoins don’t seem to be quite convincing.
LIBRA — A NEW OUTLOOK ON STABLECOINS
Libra is fully backed by a basket of bank deposits, numerous national currencies, and short-term government securities. The idea of diversifying the asset base aims to enhance Libra’s independence and stability at the same time. The Libra Association would maintain and update this basket of assets in relation to major price fluctuations in a foreign currency to ensure that the value of a Libra coin stays consistent. However, it’s still worth pointing out that entails severe costs owing to audits and bank services. On the contrary, online stablecoins such as DAI could have more benefits over Libra, as an off-chain collateral stablecoin [8].
Furthermore, due to Libra’s consensus algorithm, once the transaction has reached a two-thirds approval, the distributed ledger will automatically get updated. Being built on a more scalable programming language, Libra aims to handle about 1,000 payments per second. This is unlike Bitcoin, which currently has a capacity to process only four transactions per second. Catering to Bitcoin’s main issues — transaction time, volatility, and absence of assets backing its value, Facebook’s Libra seems to possess all necessary elements to become a viable global stablecoin provided it receives permission from major central banks and governments.
Comparing to Bitcoin, which is a completely open-source cryptocurrency, Libra’s architecture is not completely open and transparent owing to the existence of Libra association [10]. Libra is validated by these validators (members in Libra Association) and is essentially centralized. Libra’s benefits in cross-border transfers, convenient payments, and short transaction times are tangible. But the problems of privacy and exploitation of users’ data that Facebook faces might make it more difficult for it to be accepted. However, Libra’s acceptance or rejection does not undermine a potential future where stablecoins could become the main source of trade.
LIBRA AND EXISTING ORDER IN THE FINANCIAL SECTOR
Essentially, what Facebook is facing now is the confrontation between the huge ambition of a new super-sovereign currency and the existing order. It’s worth looking through the history of money. The 1900s saw two revolutions — collapse of communism and the economic development in the form of sovereign monetary policies [11]. These policies have faced a lot of failures and rejections since it was about to become the medium for the trade of goods [12]. In 1944, the BrettonWoods system decided that all sovereign currencies will be pegged to the US dollar, and the US dollar will be pegged to gold [13]. After the collapse of the BrettonWoods system in 1971, the US dollar took the lead in decoupling gold and became a pure sovereign currency banknote based entirely on state credit. Subsequently, the unprecedented liberation of sovereign currency was realized worldwide, and currency completely realized nationalization. Since then, the government has obtained an absolute monopoly position on the manufacture, distribution, and circulation of sovereign currency. As a result, the current consensus is that monetary power belongs to national sovereignty and should not be controlled by private entities.
Thus, Libra’s inception as a new super-sovereign currency, due to its broad platform and the global user base is potentially a major revolution to the economic and political consistency of sovereign monetary systems across the globe.
Drawing an analogy with the existing super-sovereign currency like Euro — which is a currency limited to the Eurozone and can’t be issued independently by any country itself — its success is contingent on the mutually aligned economic interests of the European Community [14]. Under the same pretense, in addition to the existence of the Libra association, Libra also needs to attract a big community of interested parties to achieve its international goals of becoming a super-sovereign currency. The form of currency is developing all the time and it’s difficult to distinguish if it’s the form of currency that pushes the society to develop, or the society encourages the change to the form of currency. Nevertheless, the development of science and technology has completely changed the way of life and it’s possible to say that technology could take over the economy [15].
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