Nathalie Janson, Economist and Associate Professor at Neoma Business School, discusses the future of cryptocurrency
In spite of the Cambridge Analytica scandal and all the controversies about Facebook, Mark Zuckerberg decided to announce last June its project of cryptocurrency – the LIBRA – targeting individuals left out of the traditional banking system.
The Libra is meant to be financially inclusive and eases transfers of payment across the world. It is designed as a stable coin to maximize its chance of adoption and will be backed by a basket of currencies: USD, Euro, GBP, Yen and Singapore Dollar (as described in the white paper). The Libra is managed by the Libra association hosted in Switzerland counting 21 members after the recent departure of PayPal, Visa, Mastercard, Stripe, Mercado Pago, eBay and Booking.com. It is built on a permissioned blockchain where members of the association are nodes’ validator. Given the size of Facebook’s network with more than 2 billion users, Libra project can challenge the position of weak currencies, but potentially also established ones as well. Indeed, Mark Zuckerberg has largely under estimated the reaction of States feeling threatened in their sovereign power.
Bitcoin, Libra, States ‘sovereign power at threat?
The development of Bitcoin since 2009 was the first attack to the sovereign power of states over money issuance. Indeed, Bitcoin is a cryptocurrency designed on a decentralized blockchain with the clear intent to offer an alternative to the existing banking system on the ground that our current system is mismanaged leading to repeated crises. The mismanagement is largely attributed to human action and colluded interests between central banks, banks and governments incapable to make decision in the best interest of the citizens. Therefore, Bitcoin offers a safeguard against those evils being produced by an algorithm in a finite quantity of 21 million.
The centralized system being no longer trusted, the trust is now generated by the decentralized architecture of the blockchain and so by the Bitcoin community. So far, the Bitcoin does not represent an immediate threat to States’ sovereign power to the extent that its success as a medium of payment is currently limited by its price volatility due to its fixed supply. The Bitcoin represents approximately 150 billion USD compare to the 1.70 trillion USD notes and coins in circulation. Still the number of Bitcoin addresses reach more than 700 000 addresses in 2019 with 200 000 holding more than 1 Bitcoin compare to 50 000 in 2010. Compare to the potential strike force of Facebook’s 2.4 billion users, the Bitcoin is far from representing an immediate to States sovereign power over money issuance.
Libra, towards the privatisation of money issuance?
States seem to fear that in case Libra succeeds, it will seriously challenge central banks’ control over money supply.
Is this the case?
Libra is a stable coin meaning that for every Libra issued the equivalent of the currencies included in the basket is held as reserves in deposit accounts and holdings of government securities in banks located in different countries.
For countries which currencies are not part of the basket of currencies, Libra is a direct competitor reducing the amount of money supplied by the central bank. As for the currencies part of the basket, the Libra makes it more difficult for the central bank to control money supply because the holdings of government securities by the Libra reserve has an impact on interest rate, and the holdings of deposit accounts affects the ability of banks to create money.
As Libra expands, States fear to see their power over money issuance weakening and so their ability to set their own agenda in terms of monetary policy and policy mix; states are terrified that Facebook could dictate their economic policy.