Three serious naive myths of Facebook coins

The term "innocent myth" means that some popular prevailing views are wrong and more out of reality.

Here are three serious naive myths about Facebook coins, including misunderstandings from the media, analysts' analysis, and the Libra white paper itself.

❌Libra is a stable currency anchoring a basket of currencies

❌Facebook will become the global digital currency central bank

❌Libra will replace the IMF's Special Drawing Rights (SDR)

Myth: Libra is a stable coin that anchors a basket of currencies

Reality: Libra is a price fluctuation currency under floating exchange rates

In many reports, Libra is classified as a stable currency.

In fact, this is not a misreading. In the white paper, Libra's positioning is indeed a low-fluctuation digital cryptocurrency.

Libra's goal is to be a stable digital cryptocurrency that will be backed by a full use of real asset reserves (called “Libra Reserves”) and supported by a network of trading platforms that buy and sell Libra and compete. — Libra White Paper

However, compared to the stable currency anchor (peg) to a major international currency (usually the US dollar), that is, the fixed exchange rate system. Libra's price is not tied to any national currency .

Even though the white paper mentions that Libra's value will be effectively linked to a basket of fiat currencies, it contradicts itself that as the value of reserve assets fluctuates , Libra's value, denominated in any local currency, may fluctuate . It can only be considered as a floating exchange rate with reference to the value of a basket of currencies.

"Libra is not always able to convert to an equivalent local currency (ie Libra is not "linked" to a single currency). Conversely, as the value of the underlying asset fluctuates, Libra's value in any local currency may also follow. Fluctuations…. Any appreciation or depreciation of Libra depends only on fluctuations in the foreign exchange market." – Libra White Paper

It should be noted that Libra's reserve assets are not a basket of currencies themselves, but rather the investment of local currency exchanged into low-risk assets. This means that Libra holders need to bear foreign exchange risk and asset risk, which is difficult to say .

Myth: Facebook will become the global digital currency central bank

Reality: Facebook is only a monetary fund that relies on traditional banking systems and legal currency assets.

Many analysts believe that Facebook will create a global digital currency central bank, or that Libra will consolidate dollar hegemony.

Libra is not anchoring the dollar, not the proxy and clone of the dollar, so the dollar hegemony can't be talked about.

Does Libra have the potential to realize the global digital currency central bank?

Mentioned in the white paper:

“The association does not develop its own monetary policy, but “manufactures” and “destroys” Libra coins only on demand. The association will automatically create new coins as demand increases and destroy them as demand shrinks… Our approach It is very similar to the operation of the currency board (such as the Hong Kong Monetary Authority). Unlike the central bank's discretion to print money, the currency board usually prints the local currency only when it has sufficient foreign exchange assets to fully support the new banknotes and coins. Currency." – Libra White Paper

It seems that Libra is like a USDT with a full reserve. But in fact, it is not correct to classify Libra with the currency board .

Currency Board = Fixed Exchange Rate = Clone Currency

Under the orthodox currency board system, the currency issuer needs to fix the exchange rate between the local currency and the anchor currency (usually a currency) and guarantee 100% or more of the anchor currency reserve.

The author confuses the concept here, and Libra's fully backed by a reserve of real assets — the Libra Reserve, is not a 100% reserve in the general sense, but a short-term security that includes national bonds and price risks with corresponding sovereign risks.

From a design perspective, Libra does not have the status of an independent global central bank, but only a monetary fund that relies on traditional banking systems and legal currency assets.

Myth: Libra will replace the IMF's Special Drawing Rights (SDR)

Reality: Libra is still alive in the SDR

 

The SDR is the Special Drawing Rights of the International Monetary Fund (IMF), which anchors/pegs a specified basket of currencies (US Dollar, Japanese Yen, Euro, British Pound and Renminbi).

Different from Libra's arbitrary issuance, the total amount of IMF fixed SDRs is divided according to the initial contributions of member countries (currently 189 countries) and GDP, trade exports and other factors. SDR can be used for mutual transfer between member states. To purchase foreign exchange to pay for the country's deficit.

Unlike Libra's floating price, the price of SDR is the weighted average of five currencies, USD (41.73%), Euro (30.93%), RMB (10.92%), JPY (8.33%) and GBP (8.09%). ).

Unlike Libra's asset reserves, SDR's reserves are mainly composed of national currency. See the IMF's annual financial statements:

Quotas is the SDR share allocated to countries

For SDR member countries, if the accumulated SDR holdings exceed the allocation amount, the IMF will pay interest (expressed in SDR) for the excess, and if the current holding amount is lower than the allocated amount, the IMF will use the partial interest. The role of interest is to balance the balance of payments.

Major national SDR quotas for 2018

In the Libra design, reserve assets are invested in “a series of low-volatility assets, including reputable government currency securities”. The holder will not receive a return from the reserve assets, and the interest will be used to pay for the system's costs, dividends to early investors, and so on.

“The interest on reserve assets will be used to pay for the cost of the system, to ensure low transaction costs, dividends to investors in the early stages of ecosystem start-up, and to support further growth and diffusion. Interest distribution on reserve assets will be set in advance and will be accepted Libra Association oversees. Libra users will not receive returns from reserve assets…. Any appreciation or depreciation of Libra depends only on fluctuations in the foreign exchange market.” – Libra White Paper

Not to mention that the reputable major government bonds are close to the actual zero interest rate level, and choosing higher risk assets will ensure that real-time acceptance will have a large net value risk. This risk is intentionally or unintentionally blurred by the White Paper. Among the foreign exchange risks. Libra users take risks, but not having the right to earn is a very shady thing.

In 1971, the Bretton Woods system collapsed and the currency lost gold as a natural anchor. In order to balance the discipline of liquidity growth and scarcity, SDR slowly became a balance between countries, acting as a “super owe” and “a piece of gold”. Libra , which is still in the fiat currency of Facebook, faces the burden of the global currency, and it is probably the people of the third world who bear the heavy weight.

After all, how does Libra, rooted in the legal currency system, open the flowers of independent cryptocurrencies?

Author is the head of MakerDAO China