EP 7: It's Not Cancer. The Libra Network
Written in the Stars? Or just wishful thinking
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The Libra 2.0 whitepaper wrote that their goal is not monetary sovereignty. That's honestly sweet on paper. But in our capitalistic reality, money is power.
It might not be FB's goal to replace fiat money, but this definitely increases FB's power and geopolitical stance with hoarding so much assets under their arms. In times of crisis and a country needs liquidity (i.e. now), FB can come in to buy their short-term gov bonds. This is a very powerful bargaining chip. Should regulators not abide by what FB wants, they can simply reduce the holding of that country's government assets and switch to somewhere more "friendly".
Why Facebook is in the Finance Space
Instead of investing their money into the financial markets, they use other people's money to invest, while using that money to create a digital representation of money in their ecosystem. They earn the returns on other people's money.
Extracting value from the digital space. Advertising and personal data has no limits there are more ways to extract value from the ecosystem.
Blurred Lines Between Government and Firms
As firms increase in their influence, they start to behave like government. They can set rules and control behaviours within their jurisdiction (or platforms).
Firms exist to maximise profits. Government exist to optimise social utility. Firms do not exist to make you the happiest person or to ensure social justice or equality. Government is not always about efficiency maximisation.
This difference in objective becomes a tough problem.
DeFi on Retail Users
3 ways Libracoin can impact retail users:
Risk associated to holding other currencies: Given a choice, would you rather hold Libra-USD or venezuelean pesos? The risks associated to holding some fiat currency is so high that it is better holding on to the pegged coins or LBR coin.
Relative benefit as a medium of exchange: One reason USD is the global currency is because it is highly available just about anywhere in the world.
Low transaction fees and 24/7 availability: Banks are not open all the time. And to execute foreign exchange, they charge an insane fee.
DeFi on Institutional Players
7 wonders (or disasters) Libra can bring to the global financial economy:
Demand for securities: Libra's reserve assets may also be very large, with significant implications for financial markets.
Priced in LBR: If LBR is successful enough that prices in LBR becomes sticky, that will affect trade. The terms of trade would depend on the value of LBR against the domestic currency instead of between trading partners,.
Displace local currency: If Facebook is successful at making LBR the main currency of the internet and people mainly spend in LBR, dollar will go up and down against LBR.
Impact on Fiat Money: Since holding LBR allows transactions beyond 1 jurisdiction, it's safer to hold LBR than a single national currency.
Impact on Macroeconomic Activities: If central banks are unable to monitor and impact consumer behaviours, it would be difficult to support macroeconomic activities.
Impact on Confidence: As more transactions exist on the crypto-platform or digital space, it reduces the demand even for short-term currencies.
Central Bank of the World: Technology makes it easier to coordinate interactions than international political bodies. The impact is also more direct, since everyone is involved in the governance and decision making.
There is no clear allocation of accountability. Who decides how decisions are made? How is accountability decentralised?
What about protocols in place for reserve management?
The whitepaper also did not mention about resolution mechanisms, should things go south or the world changes.
What about transparency? What is the degree of transparency we are talking about here? What Facebook captures now is the online behaviour of users. With data on expenditure, it captures our offline behaviours too. We can model individual behaviours more than ever now.
Ultimately, why do we need to care about all of these? because once in place, it is impossible to dismantle. think of how messed up the financial system is right now. But we can't dismantle it! We can't make the same mistake twice.
TLDR: Libra Network poses more challenges than what meets the eye. There are more (macroeconomic) issues to consider than just a simple solution to resolve daily day-to-day transactions.