Libra`s Potential Impact on the Global Economy

Updated: Jun 18, 2020

Enzo Mesanovic - Faculty of Business and Economics, University of Basel

-- In early 2019, Facebook unveiled plans for the Libra project, a new global "cryptocurrency" supported by heavyweights from all industries, called Libra Association, all based on the Libra blockchain (Association, L. et al. 2019). More specifically, throughout the initial investment of the association's members, Libra should have an intrinsic value that is secured by the collateralization of real-world assets that enter the Libra Reserve in order to ensure fluctuations in the price of Libra, also known as stable coins.

However, when looking at the official Libra documents, as I discuss in my recent article, "The Digital Transformation of Payment Systems - Libra`s Impact on the Global Economy," several distinctions can be highlighted, both in technical and economic terms.

Firstly, the Libra Blockchain will not contain any blocks or chains, but will be based on a single-versioned database updated by the members, also referred to as validators in the documents, which is more akin to book-keeping than a cryptographically secured blockchain (Amsden, Z. et al. 2019) . In this case, Libra will neither be decentralized, as claimed, nor permissionsless, like common blockchain and crypto-asset platforms such as Bitcoin and Ethereum, but rather rely on a centralized and permissioned network with the Libra Association as gatekeeper, whereby users have no decision-making or voting rights in the network . The collateral in the Libra Reserve consists of assets such as the initial investments of members and the deposits of users, which are invested in short-term securities and long-term government bonds of various countries (Catalani, C. et al. 2019). Also, any increase in the value of the collateral and the interest earned on the deposits belong exclusively to the members. In this respect, the Libra Association may also apply monetary policy measures, as it is entitled to mint and burn coins according to supply and demand, which is similar to the activities of central banks (Association, L. et al. 2019).

Secondly, new technologies and currency-based projects raise concerns related to Know-your-customer (KYC), Anti-Money Laundering (AML) and Financing Terrorism (CTF) standards in order to prevent various problems for governments, such as tax evasion, fraud and illegal activities by unauthorized persons that can be carried out through these networks, which has been critical since the introduction of Bitcoin and many subsequent projects (Mesanovic, Enzo 2020). Therefore, questions arise from the user's perspective, as Libra will be under close scrutiny by various authorities and regulators to meet the regulatory requirements, and therefore the digital wallet, Calibra, which is Facebook`s subsidiary, will most likely be required with KYC authentication requirements for users, which in combination with the centralized network indicates the lack of anonymity that will be achieved in this network, and also offers the ability for the members of the association to monitor and track sensitive data and financial information from users (Mesanovic, Enzo 2020).

With regard to the Libra network, international agreements between several entities such as governments, regulators, legislators and central banks are necessary to ensure financial stability, as the potential risks from externalities threaten government sovereignty and national security, but may also destabilize financial markets during the monetary shift in the economy associated with the enormous inflow of liquidity to the Libra Network (FINMA 2019). In conclusion, while the Libra network would possibly facilitate money transfer, potential shortcomings should also be taken into account, as the network would create a borderless monetary system - a digital central bank - operated by private companies outside national borders. It is therefore necessary to focus on several factors, on the one hand the companies that come into a systemically relevant position, on the other hand the dependence of the users and, lastly, the overall benefits that the network will bring.

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