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Will Libra be stillborn?

17 1 0

CHICAGO – Plans for Facebook’s proposed “stablecoin,” Libra, appear to be unraveling with the withdrawal of PayPal, Visa, Mastercard, Stripe, eBay and Mercado Pago as potential sponsors.

This is hardly surprising, given growing awareness of Libra’s potential adverse consequences. If it offers anonymity to its users, Libra will become a platform for tax evasion, money laundering and terrorist finance. If, on the other hand, its privacy protections are lax, Libra will give Facebook access to users’ most intimate financial details.

Then there are the dangers Libra poses to economic and financial stability. Although Facebook’s stablecoin will be backed by a portfolio of “low-volatility assets,” anyone who lived through the 2008 global financial crisis will know that low volatility is more a state of mind than an intrinsic attribute of an asset.

If the prices of the bonds in the reserve portfolio fall in response to an unexpected rise in interest rates, for example, those bonds may then be inadequate to redeem all the Libra in circulation. At this point, the reserve will be subject to the equivalent of a bank run. And because Libra operates like a currency board, there will be no lender of last resort.

Libra may also undercut the stabilizing capacity of monetary and regulatory policies. If the residents of a country shift out of its national currency, the central bank’s interest rate........

© The Japan Times