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CRS Highlights Benefits and Concerns about Libra

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

In an Insight Report, prepared for Congress Members and Committees, the Congressional Research Service ("CRS") highlighted possible benefits and risks concerning Facebook's proposed virtual currency, Libra.

As previously covered, Facebook stated that the goal behind Libra is to create a virtual currency that is stable, built on an open-source blockchain, supported by a reserve of financial assets (fiat currency and government securities) and overseen by a group of entities who will become members of the Libra Association.

In its review of a Libra Association white paper, CRS provided several benefits that could come from the new initiative, including:

  • making payments cheaper and faster by replacing the private ledgers of intermediaries (i.e., banks) with public ledgers sustained through a decentralized network of users;

  • providing price stability through a reserve of assets with stable values (a/k/a "stablecoin"); and

  • serving populations, which currently are without access to financial services from traditional resources.

CRS also outlined several aspects of Libra that raise concerns for policymakers, such as:

  • a lack of information on how Libra will achieve anti-money laundering compliance and simultaneously keep users' identities confidential;

  • uncertain protection for consumers, such as Libra users (i) not being able to earn interest, (ii) having to assume foreign exchange risk, and (iii) having to accept the chance that Libra holdings could alter in value relative to the domestic fiat currency;

  • Libra potentially being used by "billions" of people, which could (i) be subject to bank-like runs, if Libra's value against a government currency declines, or (ii) create runs on traditional institutions, if assets are moved by people "en masse" to Libra and away from a traditional system;

  • less control by central banks over inflation and the monitoring of economic activity; and

  • privacy issues regarding the protection of user's data during financial transactions, and the potential for an unauthorized merger with other Facebook platforms.

Commentary

As previously considered, Libra is an asset-backed coin (an "ABCoin"), not a stablecoin. It is neither fixed in value as against the local fiat currency (meaning the dollar in the United States) nor fixed in value against a determinate basket of currencies (as Libra reserves the right to change the relevant basket). This distinction, or the failure to make this distinction, is very important because genuine stablecoins can provide all of the benefits that the CRS study posits could be provided by Libra, but can do so without at least some of the material problems created by Libra.

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