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Facebook Libra's future up in the air

A small figurine stands on the representations of virtual currency in front of the Libra logo / Korea Times file

New digital currency to challenge central banks

By Lee Kyung-min

Facebook's plan to launch the digital currency Libra in 2020 was up in the air Wednesday, after the alliance of key global corporate backers to manage it showed signs of fraying amid growing scrutiny from regulators across the world, mostly over potential money laundering and tax evasion.

PayPal, one among the big name members that signed on for the project, withdrew Oct. 4 from the 28-member Switzerland-based association set up to govern Libra, a move that the Wall Street Journal reported was also being considered by Visa, Mastercard and other financial partners.

The temporarily frustrated digital project comes amid growing expectation that the digital currency would significantly undermine the authority of central banks, as fiat currencies in each country would be no match for the tech giant's easy-to-use alternative backed by its 2.7 billion users, over 84 percent of 3.2 billion internet users worldwide.

Facebook said Sept. 12 (local time) that it would develop Libra and Calibra, the default software for using it, to "allow people to send money around the globe with the same ease as sending a photo or text."

Calibra is a digital wallet that handles crypto dealings and protects user privacy.

Once Facebook sets up e-commerce and various other services payable with Libra, central banks will have no intermediary role to play, as users will not need to go through the "hassle" of exchanging or wiring currencies only valid in certain jurisdictions, according to an expert.

"Libra can and will become limitless and boundless," Choi Hwoa-in, a blockchain adviser to the Financial Supervisory Service said.

"Given the future of currencies will be determined by end users, a digital currency guaranteed to ensure far easier and more convenient customer experience will become the currency of choice among people around the world," the expert said.

While the tech giant said Libra will only be used for cross-border payments or in settlement services concerning very small sums, it did little to defuse concerns from the financial authorities, mostly over its potential to destabilize or interfere with sovereign monetary policy.

Choi Hwoa-in, an adviser to Financial Supervisory Service
"Their concerns are not only legitimate but also understandable," Choi added.

"While Facebook claims the digital currency would not influence interest rates or yields, the authorities cannot disregard possible currency values plummeting, not to mention the potential loss of control over the monetary supply and ability to impose capital controls among many other concerns."

Also significant, according to Choi, was Facebook's announcement that Libra was backed by a 1:1 basket of currencies held in a reserve, 50 percent of which would be in U.S. dollars.

The remaining portion would consist of euros, yen, the British pounds and Singapore dollars, but not include the Chinese yuan.

This means that for any unit of Libra to exist, there must be the equivalent value in its reserve.

"Half the reserve being held with the U.S. dollar and excluding the Chinese currency amid the ongoing trade dispute signals the tech giant's effort to calm down the U.S. government by offering a safe haven of sorts. This means the firm will do nothing to disorganize the status quo where the dollar remains the world's reserve currency," she said.

Concerns about price volatility, long raised as a major shortcoming of cryptocurrencies, would be dispelled as Libra alongside "stable coins" would have its total amount pegged to other fiat currencies, mostly the U.S. dollar.

Stable coins, which work as a bridge between the cryptocurrencies and fiat currencies, can be backed by companies using them with a one-to-one equivalent in U.S. dollars, or euros.

Examples include Tether coin (USDT), Gemini Dollar, USD Coin (USDC) and Paxos Standard (PAX).
Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School

Unlike other stable coins, pegged to fiat currencies, Libra can be pegged at a one-to-one equivalent to a basket of currencies in its reserves.

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, said that Facebook's initiative is unique because of its sheer size and the large number of companies that have signed up as partners.


"If they can create a trustworthy and convenient to use currency, it could become a significant player. I think it is also yet another step at experimentation and at testing things out with regulators to see how they react. It's too early to tell," the Wharton School professor said.

Another key difference is scaleability. Bitcoin can process only seven transactions per second, while Libra is expected to deal with 1,000 transaction per second.

Libra, knowing full well it falls far behind compared to the Visa network which can authorize up to 65,000 transactions per second, said the per-second performance will be gradually improved.

Natural course of development


Antonio Fatas, an economics professor at INSEAD, said Libra comes as a natural course of technological development, led by agility of fintechs while their competitors ― central and commercial banks ― are left behind, dragged down by "traditional and conventional norms."
Antonio Fatas, economics professor at INSEAD
"Libra, like many of the other innovations in payments coming from fintechs of just tech companies, is trying to make the payments system faster and cheaper," he said.

Fatas said it bears closer monitoring on how the central banks' attempt to control the digital currency, staring with the Chinese People's Bank of China.

"As payment technologies change fast, central banks are wondering whether they should take control of the innovations by offering a payments system that runs directly through access of individuals to central bank accounts ― basically how Central Bank Digital Currency works," he said.

In his view, given banks today remain intermediaries of payments, they will not play a rolein this potential new scenario.

"Several central banks are discussing this, and the Chinese central bank seems to ready to launch it soon. Although details are not clear, we will need to see what happens."



A small figurine stands on the representations of virtual currency in front of the Libra logo / Korea Times file

New digital currency to challenge central banks

By Lee Kyung-min

Facebook's plan to launch the digital currency Libra in 2020 was up in the air Wednesday, after the alliance of key global corporate backers to manage it showed signs of fraying amid growing scrutiny from regulators across the world, mostly over potential money laundering and tax evasion.

PayPal, one among the big name members that signed on for the project, withdrew Oct. 4 from the 28-member Switzerland-based association set up to govern Libra, a move that the Wall Street Journal reported was also being considered by Visa, Mastercard and other financial partners.

The temporarily frustrated digital project comes amid growing expectation that the digital currency would significantly undermine the authority of central banks, as fiat currencies in each country would be no match for the tech giant's easy-to-use alternative backed by its 2.7 billion users, over 84 percent of 3.2 billion internet users worldwide.

Facebook said Sept. 12 (local time) that it would develop Libra and Calibra, the default software for using it, to "allow people to send money around the globe with the same ease as sending a photo or text."

Calibra is a digital wallet that handles crypto dealings and protects user privacy.

Once Facebook sets up e-commerce and various other services payable with Libra, central banks will have no intermediary role to play, as users will not need to go through the "hassle" of exchanging or wiring currencies only valid in certain jurisdictions, according to an expert.

"Libra can and will become limitless and boundless," Choi Hwoa-in, a blockchain adviser to the Financial Supervisory Service said.

"Given the future of currencies will be determined by end users, a digital currency guaranteed to ensure far easier and more convenient customer experience will become the currency of choice among people around the world," the expert said.

While the tech giant said Libra will only be used for cross-border payments or in settlement services concerning very small sums, it did little to defuse concerns from the financial authorities, mostly over its potential to destabilize or interfere with sovereign monetary policy.

Choi Hwoa-in, an adviser to Financial Supervisory Service
"Their concerns are not only legitimate but also understandable," Choi added.

"While Facebook claims the digital currency would not influence interest rates or yields, the authorities cannot disregard possible currency values plummeting, not to mention the potential loss of control over the monetary supply and ability to impose capital controls among many other concerns."

Also significant, according to Choi, was Facebook's announcement that Libra was backed by a 1:1 basket of currencies held in a reserve, 50 percent of which would be in U.S. dollars.

The remaining portion would consist of euros, yen, the British pounds and Singapore dollars, but not include the Chinese yuan.

This means that for any unit of Libra to exist, there must be the equivalent value in its reserve.

"Half the reserve being held with the U.S. dollar and excluding the Chinese currency amid the ongoing trade dispute signals the tech giant's effort to calm down the U.S. government by offering a safe haven of sorts. This means the firm will do nothing to disorganize the status quo where the dollar remains the world's reserve currency," she said.

Concerns about price volatility, long raised as a major shortcoming of cryptocurrencies, would be dispelled as Libra alongside "stable coins" would have its total amount pegged to other fiat currencies, mostly the U.S. dollar.

Stable coins, which work as a bridge between the cryptocurrencies and fiat currencies, can be backed by companies using them with a one-to-one equivalent in U.S. dollars, or euros.

Examples include Tether coin (USDT), Gemini Dollar, USD Coin (USDC) and Paxos Standard (PAX).
Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School

Unlike other stable coins, pegged to fiat currencies, Libra can be pegged at a one-to-one equivalent to a basket of currencies in its reserves.

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, said that Facebook's initiative is unique because of its sheer size and the large number of companies that have signed up as partners.


"If they can create a trustworthy and convenient to use currency, it could become a significant player. I think it is also yet another step at experimentation and at testing things out with regulators to see how they react. It's too early to tell," the Wharton School professor said.

Another key difference is scaleability. Bitcoin can process only seven transactions per second, while Libra is expected to deal with 1,000 transaction per second.

Libra, knowing full well it falls far behind compared to the Visa network which can authorize up to 65,000 transactions per second, said the per-second performance will be gradually improved.

Natural course of development


Antonio Fatas, an economics professor at INSEAD, said Libra comes as a natural course of technological development, led by agility of fintechs while their competitors ― central and commercial banks ― are left behind, dragged down by "traditional and conventional norms."
Antonio Fatas, economics professor at INSEAD
"Libra, like many of the other innovations in payments coming from fintechs of just tech companies, is trying to make the payments system faster and cheaper," he said.

Fatas said it bears closer monitoring on how the central banks' attempt to control the digital currency, staring with the Chinese People's Bank of China.

"As payment technologies change fast, central banks are wondering whether they should take control of the innovations by offering a payments system that runs directly through access of individuals to central bank accounts ― basically how Central Bank Digital Currency works," he said.

In his view, given banks today remain intermediaries of payments, they will not play a rolein this potential new scenario.

"Several central banks are discussing this, and the Chinese central bank seems to ready to launch it soon. Although details are not clear, we will need to see what happens."



Lee Kyung-min lkm@koreatimes.co.kr


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