Libra’s unresolved puzzles

That is a long blog post from my colleague Lawrence H. White, who has thought about these matters for many years.  Here is one excerpt:

If we take the white papers’ talk of “backing” seriously, it suggests that the value of Libra coins in circulation is matched by the value of assets held in the Reserve, ready to buy back or redeem the coins. The papers say that Libra will be backed by a portfolio of $-denominated, €-denominated, and other fiat-denominated securities. But is a coin in the hands of a Reseller a debt claim or an equity claim on the Reserve? In particular, when a Reseller bring Libra 1 to the Reserve, she might either have an IOU, entitling her to a specified medium of redemption, like a Paypal account balance or a Hong Kong Dollar note redeemable in US Dollars. Or she might have a share claim on the Libra Reserve portfolio, like a mutual fund share. For the Reserve portfolio to provide full backing, the share claim will have to be redeemable in a bundle of currencies whose composition mirrors the composition of the portfolio.

The official papers ambiguously suggest both debt and equity characteristics. in places, they liken the Libra Reserve to a currency board. An orthodox currency board note issues debt claims (local currency notes), each redeemable for a fixed amount of the anchor currency (HK$7.8 = US$1), and holds at least 100 per cent reserves in the anchor currency. If that is the Libra arrangement, then there is a fixed exchange rate between Libra and a pre-specified fiat currency basket. The proportions of fiat currencies in the medium-of-redemption basket would be pre-specified. To provide full backing the proportions would have to correspond exactly to the proportions of currency-denominated assets in the Reserve’s portfolio. Otherwise adverse exchange rate movements could reduce the portfolio value below 100 percent of the par value of Libra in circulation.

On the other hand, the Resellers are not described as redeeming Libra at the Reserve. A different backing arrangement would provide that returning Libra 1 always gives the Reseller a fixed-proportions fiat currency basket equal in value to 1/N, where the portfolio’s market value is Libra N. The Reserve is then a kind of mutual fund, and Libra 1 in the hands of a Reseller is a mutual fund share (a possibility Williamson identifies). This would be novel arrangement – a mutual fund redeemable in a multi-fiat medium of redemption, with shares used as a medium of exchange. The value of the Libra 1 share would not be perfectly steady in terms of the defined currency basket, but would be as steady as the nominal net asset value of the portfolio in currency baskets.

There is much more detail at the link.

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Why would anyone question the good B-B is bringing to everyone?

What would we do without guys like Zuckerberg, Cook, Bezos, and Ed Lowe?

Born this date in 1920, in 1947, Mr. Lowe ran up hundreds of millions in personal net worth with his "better mouse trap" - cat litter.

Prior to him, people used free cat dirt or sand. Who would pay for that? Mr. Lowe found (family business sold sand and clay) that Fuller's earth, an absorbent clay, was better than the free stuff. The rest is history.

How ever did they exist without cat litter?

How can we function without Libra?

This must be what it was like in 1928 or early 1929. Totally unaware of how these economic thingys can bite you in the ass.

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Tether, another stablecoin, got busted by the NYAG for misusing its reserves to cover a loss. Without good controls, any "stable" coin can fraudulently claim to be fully backed. This is a problem that Bitcoin or Ethereum don't have.

https://news.yahoo.com/tether-loaned-usdt-investors-illegally-104034530.html

I suspect the endgame re: Libra is to slowly and quietly phase out the backing over time, leaving it in a position similar to an ordinary fiat currency. Zuck has the potential demand in Facebook's user base to make that feasible. It would then feature all of the purchase tracking with none of the investment.

This quote from Zuckerberg remains applicable a decade on - 'They "trust me" Dumb fucks '

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Plus, Z and FB are so successful at keeping your personal info "personal." I wouldn't trust them.

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With the dollar's days as the world's currency soon coming to an end, Libra is being positioned as an alternative. Ridiculous? I suspect that many thought Zuckerberg's idea of social media as a money-making (and global politically-shaping) juggernaut was ridiculous. Larry White, who has an unusual writing style (which is appropriate for the subject), points out that the "official papers ambiguously suggest both debt and equity characteristics" for Libra. If I am correct (that Libra is being positioned to function as the successor to the dollar as the world's currency), then the ambiguity makes perfect sense: how would an "anchor currency" such as the dollar serve as "backing" for Libra? Paranoids (the subject of Cowen's next blog post) have an exaggerated fear of globalists. Are they crazy or prescient?

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This is looking at Libra as a store of value which is a fair question to ask but one that most users won't care too deeply about. It is enough to say that there is money in a bank somewhere so this cryptocurrency will be reasonably behaved like the dollar or euro as they will somewhat carry the same central bank policies over to the digital world, in particular, price stability. Libra doesn't want speculators, there's Bitcoin for that. It wants commerce. Therefore I have to believe that Libra will not let their currency be convertible nor will it act as claims to the reserve as those things introduce volatility and attracts the wrong crowd (arbitrageurs, speculators). As Tyler has mentioned, Libra is best seen as a means of payment.

There will always be over the counter markets to convert Libra to fiat. I doubt Zuck intends to prohibit that by individual contract. Already I can think a a few ways to side step any prohibition.

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It’s Facebook Bucks, a privately issued fiat currency backed by less than the full faith and credit of Facebook.

That might be fine as a low friction micropayments mechanism, although the advantages over a USD denominated mechanism are unclear (buy $10 of Libra for micropayments of $10 of cents) but there is a reason privately issued currency isn’t around anymore.

The temptation for Facebook to issue lots of fiat currency is eventually going to be overwhelming.

After President Jackson vetoed the renewal of the Second National Bank charter, aside from gold and silver coinage, all the US had were privately issued banknotes, often not fully backed by money/gold.

Unless one can pay their taxes with it, it has no value.

Unless I miss my guess, Libra will not be "legal tender for all debts, public and private."

All that being said, the "full faith and credit" of Facebook may be equivalent to that of the USA.

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From a reseller perspective, accepting a major credit card payment comes with a 3% fee within the US banking system, 5% to 8% elsewhere. If Libra can deliver payment with fees of 1% base and +/- 2% for risk of fluctuations against its currency basket, many merchants will prefer it instead.

Why are credit card companies backers of Libra? The big banks aren't because they would lose a highly profitable segment (international transfers). As would the credit card companies as a means of payment.

Libra net offers a closed deposit and lending platform for credit card companies. They can be bankers unto themselves.

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Why choose a weighting scheme up front? It just begs to be adjusted as liquidity of different currencies changes. Why not trust in Sharpe's arithmetic - float-weighted sovereign government debt ETF.

In each currency region, you could also have a fund that only owns the Libra ETF. This wrapper fund could use splits/reverse splits/distributions to bring its price = 1 in local currency at the end of each business day.

Yes, ETF is the right analogy. Perhaps not by accident
https://www.etf.com/sections/blog/most-interesting-etf-filing-ever-libra

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Why not put an FX exchange machine, like Coinbase, into the back end of facebook, then let Libra be a multi-currency protocol rather than a coin. That allows Facebook clients to immediately swap from a foreign currency to a local currency.

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