Three Seriously Naive Myths About Facebook Coin

Editor's Note: This article comes fromMoneyness InstituteMoneyness Institute

(ID: moneyness), author: Pan Chao, published by Odaily with authorization.

"image description"The author is the head of MakerDAO China

naive myth

The word means: Some generally popular views are wrong and even more divorced from reality.

The following are three seriously naive myths about Facebook coins, including misreading by the media, analysis by commentators, and flaws in the Libra white paper itself.

❌ Libra is a stable currency anchored to a basket of currencies

❌ Facebook will become the central bank of the global digital currency

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

Myth: Libra is a stablecoin anchored to a basket of currencies

Libra has been classified as a stablecoin in many reports.

Libra's goal is to become a stable digital cryptocurrency backed entirely by a reserve of real assets (called the "Libra Reserve") and backed by a network of competing exchange platforms that buy and sell Libra.

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

Libra's goal is to become a stable digital cryptocurrency backed entirely by a reserve of real assets (called the "Libra Reserve") and backed by a network of competing exchange platforms that buy and sell Libra.

Libra white paper

"It's just that, compared to stablecoins anchored (pegged) to an international mainstream currency (usually the US dollar), that is, a fixed exchange rate system. The price of Libra is not anchored to any national currency."

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

Libra is not always convertible into an equivalent locally designated currency (ie Libra is not "pegged" to a single currency). Conversely, as the value of the underlying asset fluctuates, so may the value of Libra denominated in any local currency. ... Any appreciation or depreciation of Libra depends solely on fluctuations in the foreign exchange market.

Libra white paper

It should be noted that Libra's reserve asset is not a basket of currencies itself, but the investment of fiat currency exchanged from various places into low-risk assets. This means that Libra holders need to bear foreign exchange risk and asset risk, which is hard to say is stable.

Myth: Facebook will be the global digital currency central bank

Reality: Facebook is only a money-like fund relying on the traditional banking system and legal currency assets

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

Libra is not anchored to the U.S. dollar, nor is it a proxy or clone of the U.S. dollar, so U.S. dollar hegemony is out of the question.

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

The white paper mentions:

"The Association will not set its own monetary policy, but will 'mint' and 'burn' Libra Coins based solely on demand. The Association will automatically mint new coins when demand increases and burn them when demand contracts... OUR APPROACH Much like how a currency board (e.g. the Hong Kong Monetary Authority) operates. Unlike central banks that print money at their discretion, currency boards typically only print local currency."

It looks like Libra is a lot like USDT with a full reserve. But in fact, it is not correct to classify Libra as a currency bureau.

Currency Board = Fixed Rate = Cloned 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 concepts 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 short-term securities that include national bonds and price risks of corresponding sovereign risks.

From a design point of view, Libra does not have the conditions to become an independent global central bank, but is only a money-like fund that relies on the traditional banking system and legal currency assets.

Myth: Libra Will Replace IMF’s Special Drawing Rights (SDR)

Reality: Libra is still alive in the SDR's infancy

SDR is the Special Drawing Rights (Special Drawing Rights) of the International Monetary Fund (IMF), and its price is anchored/pegged to a designated basket of currencies (USD, JPY, EUR, GBP and RMB).

Unlike Libra's floating price, the price of SDR is the weighted average of the anchored five currencies, the US dollar (41.73%), the euro (30.93%), the renminbi (10.92%), the Japanese yen (8.33%) and the British pound (8.09%) ).

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

Quotas is the SDR share allocated to each country

For SDR member countries, if the accumulated SDR holdings exceed the allocated amount, the IMF will pay interest on the excess (in terms of SDR), and if the current holdings are lower than the allocated amount, the IMF will charge interest on the used portion. The role of interest is to balance the balance of payments.

image description

SDR Quota of Major Countries in 2018

In Libra's design, reserve assets will be invested in "a range of low-volatility assets, including reputable government currency securities." Holders will not receive returns from reserve assets, and the interest will be used to pay for system costs, dividends to early investors, etc.

“Interest on reserve assets will be used to cover the cost of the system, ensure low transaction fees, distribute dividends to investors in the early stages of ecosystem startup, and provide support for further growth and adoption. Interest distributions on reserve assets will be set in advance and will accept Overseen by the Libra Association. Libra users will not receive returns from the reserve assets. ... Any appreciation or depreciation of Libra will depend only on fluctuations in the foreign exchange market.”

Libra white paper

Not to mention that the main government bonds with good reputation are close to the actual zero interest rate level. If you choose higher risk assets and guarantee immediate acceptance, you will have a great risk of falling below the net value. This risk is blurred intentionally or unintentionally by the white paper. included in the foreign exchange risk. It is a very shady thing for Libra users to take risks but not have the right to benefit.