15 Nov 2019
Welles Partners thinks Facebook’s Libra is a game changer in the cryptocurrency world. This is the third article of a series which explains why.
Why does the Libra project of Facebook stir more resistance than adoption?
In the second article of this series, we mentioned the privacy risks that users face when using Libra with the Calibra wallet that Facebook developed.
In his praise of the safety of Libra for the existing financial world as we know it, Bertrand Perez, General Director of the Libra Association, which is headquartered in Geneva, Switzerland, said that Libra is not going to create an explosion of the underlying money supply, since a LIbra will always have 100% convertibility to dollars or euros or yen or British pounds in the Association’s reserve basket.
But there is more than meets the eyes.
In simple terms, the sheer dimension of the basket, up to 200 billion dollars, is an issue regulators and central banks cannot let go with.
Central banks may lose their ability to intervene
On one hand, if Facebook is successful with Libra for a certain period of time and a country decides to ban it, users will seek to change their Libras into traditional fiat currencies. Yet, if the Libra Association does not have enough reserves in these currencies, the sellers would outnumber the buyers, bringing down the value of the Libra, but the central banks, as lenders of last resort, will not be able to inject liquidity in the system, of which they are not members.
Additionally, if the Libra is very successful in a pair of countries and is used as much as their respective currencies, the exchange rate between these currencies becomes fixed, because the exchange rate of the Libra with each individual currency is fixed. This fact reduces the autonomy of the central banks to adjust to adverse economic conditions, like a currency which is overvalued and lowers the competitiveness of a country.
Interest rates take a nosedive
After a decade of “quantitative easing” from the US Federal Reserve and the European Central Bank, the world is flush with liquidity looking for safe havens, that has pushed interest rates down, eventually in the negative realm as in the case of Switzerland.
The Libra Association with its trove of 200 billion dollars is likely to invest it into safe vehicles like US, Germand or Swiss government bonds. The more successful Libra is, the more demand for these bonds, the lower the interest they will pay.
Many reasons why Libra is seen by regulators and central banks more a headache than an opportunity.
A world of mistrust
In India, where the majority of the “unbanked” live, Facebook has 300 million users, yet cryptocurrencies are still banned by law. A major hurdle Facebook has to overcome if it wants to reach the 2 billion users mark. On top of that, three quarters of these potential users have no access to the Internet, according to statistics of the World Bank.
In France, the Finance Minister has immediately warned that the issuance of money is still a matter of national sovereignty and a prerogative of states.
In the United States, a Senate Committee has called for a moratorium of the project altogether, echoing the request of the Women Voters Association which was voiced its concern only hours after the Libra announcement.
In Great Britain, The Governor of the Bank of England said he welcomes the project with an open mind, but not with open doors.
Facebook has itself to blame for the situation. People are less vocal when they imagine a stablecoin coming from Amazon or Apple. The English paper “The Guardian” eventually coined the word “Librafication” to designate the surveillance power that would reside in Facebook’s hands, meaning that every corner of our lives would be known to Facebook. Notwithstanding its argument that it owns only 1% of the decision power, we are all aware of how Facebook cannot resist the appeal of making money on users data.
While in the United States, any issue of a security must be submitted to the Securities and Exchange Commission, the market supervisor, the concept of security, that includes cryptocurrencies and digital tokens, is viewed differently in Switzerland. For the Swiss Financial Market Supervisory Authority FINMA, a company can issue shares or digital tokens, and sell them to the public, without the need of FINMA’s approval. The company must simply comply with the prospectus rules.
With its well known pragmatism, Switzerland has earned the residency of the Libra Association.
Why is Libra a game changer for Welles™?
In the next article, we will try to explain why Libra is a game changer for this particular segment of the financial market, the so called “tracking services”, where Welles Partners is active with its offer Welles™.
Stay tuned !