Working in the crypto and DLT space is like being on an emotional rollercoaster with feelings which range from curiosity, excitement, euphoria, revelation, shock, disappointment, hope, wonder and determination – did I miss any?
Libra is without a doubt the most recent exciting announcement in the crypto space which has prompted responses and opinions amongst every single player, observer and competitor in the market from lawyers, government authorities, merchants, banks, consumers and crypto exchanges, each perspective and opinion naturally being a product of its own self-projection in relation to the potential effect it will have on them.
Now that the level of panic behind banking scenes and government authorities has reached the level where EU institutions, such as ESMA, are publishing DLT reports and Advice reports about crypto assets and the US Senate and high level Committees are sending official letters to Facebook to halt operations, are we approaching a stage where Libra and other cryptos are a real threat to the traditional financial monetary system as we know it?
For this reason in this article I would like to communicate my thoughts in relation to four main aspects of Libra:
Firstly, what are the salient points about Libra?
So does Libra present a threat to the traditional monetary system?
As many of you may already know money is not a coin or card or note but is anything which to the people represents the value of other things and fits the purpose of exchange of goods and services. Money has actually become an illusion; because today much of people’s wealth is represented in electronically stored money of which only 10% of such electronically stored money is backed by their physical counterpart. For every 9 dollars there is 1 physical dollar held in the Federal Reserve.
What characteristics does money need to have in order to be able to survive as a currency?
The answer is these three things:
One reason that Bitcoin took off as a speculative asset and not as a means of exchange, which incidentally was the reason for which it was created after the financial crisis, is because it is not a good store of value. If today a pizza costs 1 bitcoin and tomorrow it costs 10, then it is not a good stable store of value so of course, as a rational human being, no matter how much of a crypto enthusiast you are, you would not go and convert all your fiat to bitcoin and start using it as your main means of exchange for this reason. Therefore, Bitcoin was adopted to some extent as a means of exchange, however, since until now it has not been a good store of value, adoption was limited to it being bought for trading and investment purposes.
One might now think, all right, fair enough, Bitcoin is not being used as a means of exchange since it is not a good store of value, however, there are stable coins such as USD which satisfy the characteristics of currency, but why did they not take off as a large scale accepted means of payment? The answer is because adoption is slow.
Which brings me to my next question, which is; besides these three characteristics of currency bulleted above, what are the two conditions needed for a currency to survive? They are:
From the information found in Libra’s Whitepaper it seems that Libra will indeed satisfy the three characteristics of a currency, and due to its large user base (large portion of the world’s population) mass adoption should come much easier than it would for any other private issuer issuing a new crypto asset on the market.
Of course, time will tell how well it will be received by the public and the extent of its use, however, due to its potential it has become the talk of every town.
Now moving on to my predictions.
My Libra predictions:
The million-dollar question: Did Facebook opt to peg Libra to a basket of fiat currencies to maintain stability?
The logical question many are asking is: Why did Facebook decide to peg Libra to Fiat currencies given that, if Libra is adopted, the long-term outcome could result in the value of Libra going down?
I think that Facebook’s team thought that they would be perceived as less of a threat to the financial monetary system and would be better off including all the major players and supporters of the main fiat currencies instead of leaving them out of the picture. Therefore, the outcome was that they chose to peg to Libra to fiat currencies instead of some other asset such as commodities, at least until they get their foot in the door and avoid being cut out at inception. This seems, however, to be backfiring due to the fact that many high level authorities, such as central banks and governments are far from experts in this new and upcoming field / market, their reactions have evolved from FOBA (fear of being left out) and creating Central Bank Digital Coins to ‘Stop right there- we’re not ready yet’!
Which brings me to my last part of the novel addressing my future predictions about the letter addressed to Zuckerberg from Washington US asking for ‘the Facebook Proposal to be put on hold’.
Some potential outcomes of the letter:
Concluding Remarks: What does the future hold?
Who will win in the battle between the Corporate Giants and the Big Brothers? Depending on which side of the fence one is sitting they could be feeling hopeful or worried, but in either case the future is uncertain. Is there a middle ground which could be found where both parties walk away happy? I doubt it. Unfortunately, just like everything else in life, if mutual agreement cannot be sought the battlefield is the only place of recourse. Could this also end in a battle of jurisdictions?
I will leave some time and await for both parties and additional key participants to get involved and then move to give my follow-up thoughts on this, so stay tuned!
Dr. Justine Scerri Herrera is a warranted Maltese Lawyer heading the Fintech & Virtual Financial Assets Department at Michael Kyprianou. If you would like to inquire about any Fintech or VFA Agent Services in relation to any Crypto & Blockchain related activities or licences from Malta please get in touch at email@example.com. Dr. Justine Scerri Herrera is also an active academic and thoroughly enjoys reading and writing about this space and regularly speaks at international Crypto & Blockchain related events and conferences.