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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