As the majority of the Crypto world already know, last Tuesday, Facebook’s Libra project was announced. Its White paper describes the plans for the delivery of a new decentralised blockchain, a “low-volatility cryptocurrency” and a smart-contract platform by mid-2020 to create a new global financial services structure “that empowers billions of people”.
The Libra’s Intrinsic value
Libra’s white paper mentions high volatility and lack of scalability as the main reasons for existent blockchain projects not to reach mainstream usage. They, also, points to the lack of intrinsic value of these cryptocurrencies as the main factor of their volatility.
“Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.” (source: Libra White Paper)
Do these features make Libra a Stablecoin?
It seems they could make it quite stable, but it is not in the way other stable coins such as Tether, USD Coin, TrueUSD, or STASIS EURS are. All current Stablecoins are pegged to a single currency, most to the US Dollar.
Libra’s white paper describes the Libra Reserve as “a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”
That, according to them, makes Libra stand above all other current cryptos because it is backed by “intrinsic value”.
Independently of our opinion about the definition of “intrinsic value”, the aim of the Libra Association is that every new Libra coin must be backed by its corresponding share of the assets present in the Libra Reserve.
in an article about this subject, a Facebook spokeswoman is said to state “Technically Libra is not a stablecoin” in the same way as the US Dollar is not, since its price fluctuates against other currencies.
“unlike existing stablecoins, Libra is not ‘pegged’ to a single currency and does not have a fixed value in any real-world currency.”
A Money Market Fund
The use of multiple low-volatility assets such as bank notes and government bonds in the Libra Reserve makes it more close to a Money Market Mutual Fund.
A Money Market Mutual Fund or Money Market Fund is a low-risk investment whose goal is earning interest and provide liquidity. According to Forbes.com, these mutual funds were developed in the 70ies and typically invested in short-term, high-quality debt products.
There are three types of money market funds: Prime, Government and Tax-free. Prime funds usually invest in short-term corporate debt, Government funds invest in government-backed securities, and Tax-free funds invest primarily in municipality-issued debt obligations and others with tax exemptions.
Currently, the mix of assets the Libra Reserve will choose is unknown. What they clearly assert is that the interest generated by the reserve will be dedicated to paying the Libra network expenses, future developments, and returns for the founders and investors of the Libra project. Therefore, they should look to balance stability with returns.
If the Libra Project succeeds and becomes a global digital currency for billions of persons all the question of the stability of this cryptocurrency will become a curiosity from the early stages, because Libra will be the currency against the rest will be measured. Prices will be expressed in Libras and people’s concepts of cheap and expensive will be thought in Libras as well.
That’s the reason why The chair of the U.S. House Financial Services Committee said: “We just can’t allow them to go to Switzerland with all of its associates and begin to compete with the dollar.” (source: Coindesk)