The world of cryptocurrencies has been an exciting space after Facebook announced its new initiative: Libra. Libra is the newest addition to the list of cryptocurrencies. The main aim of Libra, according to the white paper released by Facebook, is to get the 1.7 billion people who are not a part of any traditional bank into the financial world. They also aim to provide the people with an alternative that will reduce their cost to transfer money.
Emerging economies of Asia and Africa is ripe for Libra. Most of the 1.7 billion people mentioned above reside in these two continents. But the initiative has invited a lot of criticism from experts and governments alike.
Russell Brandom of The Verge explains how Libra has a ?trust problem?. The US Senate Banking Committee has called for a hearing to examine the risks of the new cryptocurrency. The European governments have also exercised caution and are treading carefully.
This is an idea which has the potential to affect the world like no other cryptocurrency, not even Bitcoin. And if Libra is successful, then a bunch of private companies will have enormous amount of power over people?s finances. Thus, it is only fair to understand the ramifications of such an initiative.
Can we trust Libra
A currency is only as good as the trust people put in it. Cryptocurrencies like Bitcoin were the right alternative for the people who do not trust the government or the central banks with their money. It provided a completely decentralised system which ran on the blockchain technology, hence providing security and transparency. Libra is a similar kind of getaway for the people who believe in having a decentralised currency.
Libra as a currency will be managed by the Libra Association. The Libra Association is the governing body and currently consists of 28 companies ranging from academic institutions to tech companies. The currency will run on the permissioned blockchain technology, that means that only the companies in Libra Association can mine the currency. This means the Association will act as the de facto central bank. This will make sure that there is a more efficient way of conducting the transactions and will prevent lags during the process. A problem which Bitcoin users face a lot.
But this is in direct contradiction with the claim of having a decentralised currency. A decentralised currency means that there is no regulatory body for the currency. Bitcoin was also supposed to be a decentralised cryptocurrency, but as Eric Posner, a professor at University of Chicago Law School, in The Atlantic points out, there was the emergence of ?oligarchs? in the world of Bitcoin. Mining Bitcoin is a time consuming and expensive process, so there are some very rich entities that have taken upon themselves to mine Bitcoin, now they control a major share of production of Bitcoin, thus acting like ?oligarchs?. These ?oligarchs? wield a lot of influence and whenever the need arises to change the Bitcoin protocol to accommodate for some technical problems, they address it according to their convenience and keep their profits at the forefront.
As the author puts it, the Libra Association will not act any differently from the oligarchy that dominates the Bitcoin world. And this is exactly what the cryptocurrency proponents don?t like, a centralised system to manage their cryptocurrency.
On the other hand, Facebook has made it very difficult for people to trust them. Continuous data breach compromising the privacy of millions of its users has shown the social media giant in a very bad light. The Cambridge Analytica debacle last year has just compounded the problem.
The beatings that the image of Facebook took after all these setbacks will make it an uphill task for Facebook to get people to trust their new initiative and provide their financial record to a company which is associated with the phrase: move fast and break things.
Even if Facebook is able to gain people?s trust in their new venture, there is still the question of stability. Cryptocurrencies have been known to be notoriously volatile, but this is one aspect where Libra might be an improvement over the other cryptocurrencies.
Is Libra stable
A cryptocurrency which is backed by a fiat currency is called a stable coin. Libra fits into the criteria of being a stable coin as it is backed by the US Dollar, Euro and Yen. This will ensure that value of Libra does not change drastically. This kind of stability is not associated with Bitcoin as the value of bitcoin depends on the demand and supply by the investors. So, Bitcoin has always been a very volatile cryptocurrency.
Libra Association will also maintain a Libra Reserve. Whenever someone wants to buy Libra, that person has to deposit some currency in exchange for their Libra. Some part of the money they deposit will be kept as reserve, and the remaining part will be invested in safe government bonds. This is the Libra Reserve. Any revenue that the reserve earns in terms of dividend will go to the companies which constitute the Libra Association.
This means that the value of Libra is pegged to these safe fiat currencies and government bonds, this will ensure less volatility in the value of Libra. So, in the case of stability, Libra might be able to attract people.
But safety and stability are not the only questions people have raised. There have been many predictions that if Libra is successful, Libra Association might be in a position to control monetary policy. Some also say that it has the capability to disrupt emerging economies.
A threat to emerging economies
Whenever someone talks about Libra, one red signal has always been flashed by the experts. That is, Libra has the potential to destabilise the emerging economies, especially in Africa and Asia. Libra promised to get the 1.7 billion people without bank accounts into the ambit of the financial world. If Facebook is successful in achieving this, experts have flagged some apparent threats to the world economy.
Stephen Grenville, the former deputy governor of the Reserve Bank of Australia, wrote in Nikkei Asian Review that Libra is ?risk to developing Asia?s currencies?. The writer, by taking the example of Indonesian Rupiah, explains that if Facebook is able to convince the public that they can offer a more stable alternative in their Libra currency, there might be a mass exodus from the local currency to the Libra. This will depreciate the value of Indonesian Rupiah.
A similar kind of gloomy prediction is done for Africa also. Africa is ripe for Libra as it promises to reduce cost of transferring money. The remittances business is big in Africa, with people from around the world sending money to their families back home. So, if Libra promises an alternative with reduced costs, people might jump on the idea.
As Eric Posner points out, the real problem starts if Libra becomes successful. Facebook has near to 2.4 billion users, Visa has some 2 billion users, and other companies also have user numbers which run into millions. The Libra Association already has a ready customer base. All it needs to do is convince them that opting for Libra is cost effective for them.
Once the cryptocurrency starts gaining popularity and the number of users increases, the Association?s policy will have macroeconomic impacts. If so many people in Africa shift from their domestic currency to Libra, the central banks of African countries will not be in a position to change their monetary policy effectively as most of the people will be using Libra instead of the domestic currency.
The people need to ask themselves if they can give this much power to an irresponsible company like Facebook, with history of playing loose with the rules. Libra might actually do some good by reducing the costs associated with bank transactions and by carrying out financial inclusion, but this prize will be too small compared to the consequences if Libra actually threatens world economy.?
Dhairya Nagpal is a writing analyst at Qrius
