Facebook's Proposed New Currency: Libra's promises and pitfalls.

AuthorBiancotti, Claudia

On June 18, 2019, plans for "a simple global currency" were unveiled by the Libra Association, a group of twenty-eight organizations led by Facebook and including, among others, Visa, Mastercard, and Vodafone. The project revolves around a digital token, the Libra, issued by the Association and offered to customers worldwide as a means for online payments.

The Libra tokens are likely to offer lower transaction fees than established payment instruments, such as credit cards and wires. The underlying technology, partly inspired by the Bitcoin protocol, has algorithms that permit cheaper decentralized clearing and settlement of transactions compared with existing systems operated by financial institutions.

The project has a chance of succeeding where previous experiments have failed. Contrary to other privately issued, retail digital payment tokens, Libra would not be plagued by extreme volatility because it would be pegged to a basket of major currencies and low-risk, low-yield government bonds. The Association would run a full-reserve scheme whereby whenever a new token is minted and sold to a consumer, all proceeds are invested in the assets that compose the basket. If the consumer sells tokens back to the Association in exchange for legal tender, the corresponding assets are divested. Creation and destruction of tokens would occur automatically to keep Libra's value equal to the market value of the underlying currency basket, much as exchange-traded funds automatically track the value of their underlying assets.

Libra could also capitalize on network externalities from the get-go, as Facebook alone would provide access to 2.4 billion potential users spread everywhere except for China, Iran, and North Korea. Involvement of key players in the card space would open the door to a vast network of merchants.

Should the project take off, it could bring some important benefits. As emphatically highlighted by the Association, it could be a vehicle for financial inclusion. In advanced and emerging economies alike, the poor are often on the fringe of the formal financial system. They are charged more than the wealthy for the few services that they can get and excluded from the rest. According to estimates by the World Bank, remittances by migrant workers today are burdened by an average fee of about 7 percent of the amount sent. Cutting the fees by, say, 5 percentage points would yield $16 billion per year in savings, mostly in favor of low-income...

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