15
Nov 2019
-
Introduction
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.
Swiss
haven
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 !
Thang DAO
