Students who are keen on reading currency reform articles may have a feeling of deja vu when they look at Facebook's Libra white paper.
The global cryptocurrency project advertised by the social networking company is strikingly similar to the ideas presented in a paper published last year in the Open Society of the Royal Society.
For example, the Libra white paper proposes a digital currency whose value is stable because it has a basket of fiat currencies and short-term debt as a backing. This is similar to the paper published by Alex Lipton, Thomas Hardjono and Alex "Sandy" Pentland of the Massachusetts Institute of Technology (MIT) in July 2018, which describes an asset-backed super national digital token, Tradecoin. (Of course, the assets they propose are commodities such as oil or crops).
The Libra Association is a consortium of 27 financial, technology and venture capital firms dedicated to the development of the Facebook project, similar to the alliance mentioned in the above paper for managing Tradecoin. Both of these tokens are designed to simplify domestic and cross-border payments, and at a higher level, to extend financial services to areas of the world where banks are under-represented. Of course, both Libra and Tradecoin use distributed ledgers.
Is it coincidence? Lipton doesn't think so.
The MIT Connection Science scholar said:
“The actual structure of Libra almost completely copied the papers I published with Sandy Pentland and Thomas Hardjono last year.”
Lipton sounds a bit angry. He said that Libra's related documents did not mention the contributions of these scholars at all, but what is even more injurious is that this paper is part of the Royal Society's scientific research and is completely free. (Unlike most social magazines, this publication can be read without a subscription.)
Lipton was the head of the global quantitative business of Bank of America, and he has several roles. He suggested that the FinTech project work with the central bank, including Clearmatics, a technology provider of Utility Settlement Coin. He is also the chief technology officer of Sila, a platform designed to help fintech companies interact with the dollar-linked stable currency and financial systems.
Lipton pointed out that his paper with Pentland is also the cover article of Scientific American on the future of money.
"The Libra team can't say that they haven't read the book. Or, if they haven't read the article, they probably shouldn't do what they're doing right from the start."
Facebook declined to comment on the matter.
Lipton mad spit Libra
To be fair, Libra's economic design, as described in its white paper, is designed to complement existing infrastructure; as the Libra Association says, they don't want to infringe on the central bank's mandate.
In contrast, Tradecoin can be seen as a real-world challenger, allowing “small countries, sovereign wealth funds and pension funds to be treated fairly in the world's financial system, rather than being ignored or exploited by large central banks,” as the author As pointed out in a recent paper.
Lipton also pointed out that since Tradecoin will be supported by hard assets such as oil or commercial crops, this will determine the identity of the alliance members to a certain extent.
“We are considering raw material producers, multinational organizations, and perhaps a few large payment providers, but certainly not a company like Uber.”
In any case, Lipton's key design issue is that the token will be issued in a “non-immune way for financial instruments”.
Lipton explained that Libra needs to buy government bonds and other high-end notes as an additional currency guarantee because it is difficult to get interest on cash. As a result, bondholders will benefit from Libra (consumers will pay for Libra) and these funds will begin to circulate in the system.
In addition, Libra will continue to issue tokens, and if it works as expected, it will work like a currency. In this way, he said, the size of the funds in the system will be twice that of the present, which will bring all the negative consequences.
"In developing countries, this will lead to huge inflation, because the amount of money will at least double… I am not a champion of the theory of money quantity, but I am absolutely certain that with the surge in the amount of money, prices will rise. ”
But this does not match the description in the Libra white paper. The white paper describes a stable mechanism whereby authorized dealers will purchase the token on demand. Conversely, when people want to sell Libra, they will receive the corresponding amount of legal currency.
But Lipton claims that regardless of its design goals, money will be created invisibly. He said:
“This is different from the situation when you buy bonds – we pay in the currency of circulation, and bonds don’t do this – so the funds don’t grow exponentially.”
Lipton admits that although Libra faces considerable regulatory resistance, the risks it poses will be enormous if it solves this problem.
Lipton said that if the dollar and euro single-day foreign exchange transactions are 3 trillion US dollars, and Libra accounts for 10% of them, its member nodes receive 10 basis points as transaction costs (Visa and MasterCard charge 2%-3% service charge) This has generated a revenue of 300 million US dollars. In addition, Lipton estimates that mortgage loans can generate about $10 billion to $20 billion in interest income each year, and members of the Libra Association will earn a lot of money.