Will Libra Live Up To Its Initial Ambitions?
Will Libra Live Up To Its Initial Ambitions?
An Update on Libra: A Global Payment System and Financial Infrastructure.
KEY TAKEAWAYS
- Targeting global financial inclusion, Libra is a project aiming to “enable a simple global payment system and financial infrastructure that empowers billions of people”.
- As per their latest whitepaper, Libra lists three core pillars thereof:
- A distributed ledger (i.e., a blockchain) referred to as the Libra Blockchain.
- A set of stablecoins (Libra Coins) which are backed by collateral held in the Libra Reserve. It consists of traditional assets: cash, cash equivalents, and short-term government debt securities.
- A governance system by a Switzerland-based independent organization (Libra Association) and its subsidiary (Libra Networks) who develop and operate the network.
- Differences with the first version of Libra include a different mission statement and overall narrative, a clear attempt to comply with applicable regulation, a better description of the various parties in the Libra universe, and the set of currencies (multiple single-currency and a multi-currency pegged stablecoins). Conversely, the technological system (e.g., the Libra Blockchain, LibraBFT) remains consistent with the original design from the technical papers from 2019.
- Libra’s envisioned global payment system could do to the payment industry what SpaceX did to the space industry: shake the foundations of a well-established sector with high entry barriers. The mere advantage of issuing widely-available programmable money would already initiate manifold efficiency gains1.
- Libra and its stablecoins would not compete with the use-cases of existing stablecoins as it did not compromise on its long-term goal of financial inclusion. Instead, the Libra team made short-term trade-offs that will starkly decrease its initial impact, as open access to Libra (via “Unhosted Wallets”) has been postponed due to regulatory concerns.
- If Libra manages to both open access to third parties and maintain a user-friendly interface, benefits to financial inclusion could be significant, and ultimately reshape the global payment industry.
- Libra is unlikely to impact the monetary stability of developed countries, but could lead to currency substitution from local currency to ≋LBR whenever Libra’s stated collateral requirements would exclude a dedicated fiat currency. Libra did, however, mention to open a dialogue with respective central banks under these circumstances.
- Libra’s currency pegging system is unique, with collaterals being subject to sovereign risk and redemption risk. Despite the system being overcollateralized, it would mostly be backed by short-term fixed-income instruments denominated in fiat currencies, which may raise questions regarding money creation.
Created by a consortium led by Facebook, Libra’s proclaimed mission has been to enhance financial inclusion across the globe.
Following its release in June 2019, the Libra project seems to be evolving from a network centered around one unique multi-currency stablecoin (“libra” or “≋LBR”) into a new global payment system and financial infrastructure.
In the following analysis, the respective changes of Libra’s core features are discussed. These are contrasted with the original features from the first whitepaper (June 2019) and complemented with an in-depth analysis of the potential rationale behind some of the design changes.
Finally, we shine some light on questions surrounding (i) whether this proposal would impact global monetary stability, (ii) regulations and the stablecoin ecosystem, (iii) financial inclusion, and (iv) the pegging mechanism with the Libra Reserve.
