Libra as a medium of exchange

I’ve already outlined the case for how Libra might be able to significantly lower the 7-8% costs and commissions currently charged for making remittances.  That would make Libra a widely used means of payment.  I am less optimistic, however, about Libra being widely used as a medium of exchange.

Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

If an unbanked farmer is in debt, I would think the velocity of currency would be well over 4x a year (consider monthly microcredit borrowings and repayments), although certainly some MR readers can enlighten us here.

A few decades ago, when inflation was much more common, it was generally believed that people were not very interested in switching monies until inflation rates hit about forty percent.  I am not sure if that same number would hold today, but of course that is pretty high.  Furthermore, the countries with the highest inflation rates, such as Venezuela, can be impossible to do business in.

Don’t forget that Libras are specified as paying zero nominal interest throughout.

You might think that Libras have some advantages over current e-monies and smart phone banking systems.  It is hard to make that judgment for a product which does not exist yet, but it is unlikely those advantages will run close to the range of seven to eight percent.

For those reasons I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange.

Comments

Has BTC not been adopted for remittances? If not, what would give Libra the advantage? Ease of use? Higher throughput?

Convenience, network effect, limited gobbledygook, stability of value, and Zuck's desire to create a new world order come to mind.

If means of payment/remittances are the only real advantage of Libra, wouldn't the big banks lower their fees (and improve efficiency) in order to keep the business? I made the point yesterday that there are no big banks participating in Libra, but payment systems (PayPal, Visa, MasterCard, etc.) are among the companies participating. One could argue that big banks are not participating due to their close relationship with the Fed (central banks), on which they rely during periods of financial stress. One doesn't bite the hand that feeds one.

Our host believes "disruption" is healthy for the economy. Well, we are definitely experiencing a period of heightened disruption. A problem with disruption is that existing ways of conducting business, even ways that are highly beneficial, can forever be destroyed: it's not easy to rebuild once the foundation is gone. Just to give one example, the U.S. computer chip making industry may well be permanently damaged by Trump's trade war as customers in China and elsewhere seek to establish relationships with more reliable suppliers. https://www.nytimes.com/2019/06/27/technology/trade-war-chipmakers.html Or consider Libra's creator, Facebook, which has caused all kinds of disruption in media, in particular news media, by siphoning away media's primary source of revenues, advertising, damaging not only media's profitability but their most important asset, credibility: thanks to Facebook, who believes what media produces now. Credibility, like the foundation for any industry, once damaged is very hard if not impossible to rebuild. What if Libra damages the credibility of every medium of exchange, including that of central banks? Barter, anyone?

If inflation in developing countries consistently runs in the 8% range relative to Libra, there is an arbitrage opportunity for companies to offer accounts denominated in local currency but backed by Libra. Nothing prevents existing e-money/smartphone payments firms from switching to Libra internally while continuing to offer local currency interfaces to their users. Think of Libra as a platform.

Do I have this right? Libra is not compelling as a medium of exchange for the unbanked farmer facing somewhat high inflation where there is a good amount of currency turnover who would prefer to keep his savings in the form of farm animals? To me that is a rather specific case. I imagine Facebook going after the cities of developing countries first as the low hanging fruit then perhaps make a move to the countryside after the network effects take effect. Of course all this comes after getting the even lower hanging fruit of rich countries who prize convenience above all. Facebook makes a lot of things easy and if China's WeChat is any indication, there is global demand for this type of service. As a medium of exchange Libra isn't much different from any other form of electronic payment. When I make a purchase at the local Walmart using my Visa, the actual medium being exchanged are the bits and bytes that go from my issuing bank to Walmart's acquiring bank. So it seems to me Libra can function capably as a medium of exchange but the poor unbanked farmer in the example would equally have no use for a Visa credit card as Libra.

WeChat/China is a bad comp. Credit card usage in China historically was very low so switching from cash to mobile e-money was far more convenient. The rest of the developed world presents a far higher hurdle of convenience due to prevalence of credit cards. See Ben Thompson and probably anyone else who has looked into that.

Actually that market (unbanked -- farmer or otherwise) does have an interest. Long before FB was working on this companies like Fundamo (South Africa I believe) were doing this. http://www.ijemr.net/DOC/FundamoAPioneerInMobilePaymentsService.pdf

Net 1 UEPS Technologies Inc would be another working in this area.

Fundamo was bough by Visa and does leverage the who "Visa credit card" processing model -- though with a bit of a twist.

The big different here is that all these solutions used the existing, generally domestic, currency and not some new currency like Libra. It's not clear (which I think is the message in the blog post) that this market gains anything by switching to Libra unless costs are driven significantly lower than existing platforms offer.

Hi,

Increased velocity reduces the currency holdings, but it does not change the inflation tax expressed as a percentage of money holdings: still 8% in Burma.

Stéphane

I don’t know where the 7% remittance cost comes from. I use TransferWise to send money to Europe or Asia. For $300, the fee is less than 2%.
You need a bank account at the other end but there are certainly already fairly low cost options.

Likely, it comes from people that have no connection to the real World or liars. Stupidity isn't a sin. It's not a virtue, either.

+1 I pay Xoom a flat fee of 4.99 to transfer to a bank account in South America. They make a 2% on the exchange rate, currently offering 3.7558 reis to the dollar versus the google posted rate of 3.83.

That is the listed fee, right -- no adjustment for currency exchange rate offered? Just asking, I have looked at TW and know they tend to offer good exchange rates but don't recall if they take a smaller cut or no cut.

for Euros which is a well traded currency , their exchange rate is inside the bid/offer quoted by Reuters which has only a 0.3% spread. So it's very good. If i take an Asian example (Thai baht) it's less than 0.5%.

> Don’t forget that Libras are specified as paying zero nominal interest throughout

This doesn't seem relevant. Cash doesn't pay interest either and holding Libra is equivalent to holding physical cash.

If you want interest on your Libra wouldn't you just put it into a Libra denominated savings account?

The white paper talks about the interest payments from the backing for this currency but doesn't specify the interest rate for normal deposits. How could it?

If Libra becomes popular, I think rather than Libra itself becoming a medium of exchange, it seems more likely that stablecoins will be built on top of Libra, and those will be used as a medium of exchange. (A stablecoin is a coin whose value is tied somehow to the value of an existing currency.)

Currently the technology exists to build a stablecoin for one asset based on another but it has some flaws. DAI, built on Ethereum, is the best example. Basically you have tranches of Ethereum deposits locked up to keep the coin's value stable. The risk is that a crash in Ethereum's value relative to the dollar can cause the whole thing to stop working and everyone's stablecoins get cashed out into Ethereum at some slightly old exchange rate.

With Libra, since the value is tied to a basket of currencies, it should be impossible for its value to crash below a certain fraction of one of those currencies. I.e. if a Libra is 1/3 dollars, 1/3 euros, 1/3 yen, then it should be impossible for a Libra to ever be worth less than $0.33. This means it is much easier to build a stablecoin based on Libra than it is to build a stablecoin based on Ethereum.

Basically this means that the Libra infrastructure should be just as good for storing dollars, sending dollars around, and for sending Libra around. You shouldn't have to pay a Libra dollars fee and store your money in Libras. It seems a bit harder to handle currencies that aren't in the Libra basket, but probably easier than doing it on Ethereum.

I found this post confusing. Money is typically defined as having three functions: 1) medium of exchange, 2) unit of account, 3) store of value.

You say "I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange."

You are contrasting payment versus exchange. But of course payments are a subset of exchange. Which is fine! Except then you talk about Libra and inflation, velocity, which is about using Libra as #3 as a store of value. I guess your point here is that if you use Libra as a general medium of exchange, you have to also use it as a store of value just because you'll hold it for some period of time. Anyway, that's how I'd reconcile what you're saying, but it came across (to me at least) as unclear.

Last point, FWIW, agree you are correct (if my interpretation is right). In fact bitcoin is also something I think best thought of as a useful medium of exchange, where you want to get out of it as soon as your payment/exchange is done. Of course Bitcoin by design also behaves price-wise as a commodity, like gold. Whereas Libra is supposed to be less volatile. Plus also transact more quickly and cheaply. But that doesn't change what their both good for, except Libra should in practice be better for payments/exchange given it's easier and cheaper to transfer and will be more stable.

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