The great challenge of Facebook with Libra is to make the cryptocurrency stable, and it will not have anything easy
The announcement of the creation of the Libra project by Facebook is revolutionizing the dormant world of cryptocurrencies. Finally, a project with powerful actors behind and with a clear idea comes up: to easily take the payment to the crypto world with a user experience similar to that of a modern bank.
However Facebook has had to spin very thin to avoid two of the major disadvantages of traditional cryptocurrencies. On the one hand, it has created a new transaction verification mechanism that facilitates the processing of the same, to overcome the slowness of blockchains such as Bitcoin, centralizing the processing network in a few actors. And on the other hand he wants Libra to be a stable currency, that does not change its value as crazy as we are accustomed with the Etherum and company and so it can be a means of payment and not just a shelter of value.
However it is easier said than done and although it is not the first stablecoin that exists, the truth is that it is going to have a backing of powerful companies behind that tries to ensure that volatility is minimal. Even so, experts predict that maintaining the stability of the currency is impossible in adverse scenarios (such as those experienced ten years ago at the international level, neither more nor less) and this surely means that Libra has a significant systemic risk.
What is the Libra reservation?
The way in which Facebook wants Libra to maintain its value is through the accumulation of the so-called "Libra reserve", that is, each Pound will be backed by quality assets. These assets will be bank deposits and government bonds of good reputation, based on a basket of fiat currencies, among which will be the euro and the dollar.
That is, just as currencies in the past were backed by gold, Libras will be supported by modern fiat currencies. The Libra Association will be in charge of carrying out coin sales operations to keep the value of Libra stable, just as in the past the Central Banks made similar operations to maintain the value of their currency against gold.
Central banks have already tried
The truth is that performing this operation is not as simple as Facebook paints it. The Central Banks have many years of experience and what Libra intends is not easy. In fact, if history has shown us anything, neither the main economy of the world can have its currency stuck to the value of another asset.
Before the Second World War the Central Banks tried to keep their change with gold in a fixed way. To prevent the currency from fluctuating they had to make operations in the market, issuing or withdrawing currency, buying or selling gold. In the end this led to very strong systemic crises. The economic crisis of 1929 was aggravated by the resistance of the Central Banks to abandon the gold standard, since when the market needed liquidity they were subtracting it, aggravating the depression. All modern states of the time ended up abandoning, in one way or another, the rigid gold standard.
After the Second World War, it was established, through the Bretton Woods agreements, that the only currency stuck to gold would be the US dollar, and the other currencies would fluctuate. However, although this agreement survived 30 years, in 1971 the USA abandoned it. Otherwise, the economic crisis they were experiencing would have worsened considerably.
More recently we have the case of the abandonment of the United Kingdom the European Monetary Union. And it is that the United Kingdom was in the group of countries that were going to form the Euro. Before the entry of the single currency the States that wanted to be in this monetary union had to avoid that their currencies fluctuated in excess compared to the rest. A speculative attack by George Soros in 1992 against the British pound made the United Kingdom have to choose between continuing to prioritize being in the Union and putting the country into a brutal economic crisis (in one day interest rates rose from 10% to 12% and they were about to raise them again to 15%). He decided to abandon the fixed exchange.
Therefore it is not so easy to maintain the value of a currency, even less as Facebook wants to do with Libra, with no real assets behind, having to be backed by a basket of fiat currencies in circulation.
Possible problems that lead to sinking and free float
There are many ways in which Libra could not maintain its stability, some more technical than others. The clearest is the cost of maintaining the system. If Libra is successful, many people want to have them and in a scenario of negative types, deposits cost money, they do not rent (something that Facebook does not contemplate, quite strange when we have been in this situation for years). The partners have to make regular contributions of money to maintain the value and this destabilizes the system. In addition, there are no, as they say, secure government securities. At any time they can depreciate (as has happened in the last 10 years), or the depositaries may break, and this would affect the currency.
The conclusion is that there may be situations in which the Libran Association can not maintain stability and would be forced to let the currency price float. It has already happened with the United Kingdom and Germany in the 30s, it has already happened with the USA in the 70s and with the United Kingdom again in the 90s. Why would Facebook be different?
And if Libra has just floated we have a new Bitcoin. That a currency floats in front of the rest is not a great inconvenience, in fact the euro, the dollar, the yuan and all the currencies of the world float. The problem is that if you do not get paid in that currency, if you can not pay in all the nearby places in that currency and if you can not pay taxes with it, then it is not a coin that works. If anything, like Bitcoin, it is a refuge of value. But it does not seem that this is the goal of Facebook.
Therefore Facebook has a problem on its way. Experts predict that it will not be able to create an effective stablecoin, and that any attempt would be impeded by the current monetary policies of the Central Banks (eye, in its day to day, not wanting to tear down the currency). Without a monetary policy of its own (as traditional cryptocurrencies do) it is not viable to have a currency. And this is the systemic error that Libra has.
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