The Libra Lie: Why Facebook’s Libra Has No Stable Value

By Tammo Peters on ALTCOIN MAGAZINE

Facebook, the biggest enemy of privacy, will launch its own cryptocurrency in 2020: the Libra. This cryptocurrency is sold as a value stable cryptocurrency and that is a lie. I will explain why.

The Libra is a so-called stable coin whose underlying value is linked to traditional money (fiat). This makes the Libra part of the group of fiat-backed stable coins. Just like the infamous Tether and TrueUSD.

I have a great deal of difficulty with the concept of ‘underlying value’ because there is no underlying value. Libra uses fiat and fiat has no underlying value. It may sound nice, but it’s just keeping up appearances.

How Does Libra Work?

As you know, crypto rates can fluctuate a lot but with Libra, that’s not going to happen. The volatility is strongly limited because they can create new Libra on the one hand and destroy existing Libra on the other hand. That’s what they call minting and burning. At the same time, fiat is taken and fiat is sold, respectively. This is roughly how it will work:

My interpretation of The Abraca-LIBRA coin mechanics

Abraca-LIBRA, sim-sala-bim may the volatility dim.

Where Do They Make A Mistake?

In their communication, including the official Libra documentation, they mention this:

To drive widespread adoption, Libra is designed to be a currency where any user will know that the value of a Libra today will be close to its value tomorrow and in the future.

So they indicate that the Libra is made as a currency that will continue to be worth about the same amount in the future. That’s a promise they can’t keep and if you know that in advance, it’s a lie.

The Libra is linked to the Libra Reserve. This is a fund consisting of four currencies that are not inflation-proof.

Inflation

The official inflation rates by currency:

USD: 3,26% inflation (average inflation rate from 1914 until 2019)

EUR: 2% inflation (average inflation rate from 1991 until 2019)

JPY: 2,97% inflation (average inflation rate from 1958 until 2019)

GBP: 2,57% inflation (average inflation rate from 1989 until 2019)

On the basis of official inflation rates, which average 2.7% a year, the value of the Libra would have halved after 25 years. We have not even taken into account the fact that actual inflation rates are probably higher. The Libra is therefore not at all stable in value. The new currency is at best only slightly volatile. By the way, did you know that $1 in 1959 is now only worth 12 cents?

On the basis of official inflation rates, Libra’s value would have halved after 25 years.

Can They Do Anything About This Fall In Value?

Yes, they can maintain short-term stability while limiting long-term depreciation. They could use the investment profit for this purpose. The money in the Libra Reserve is used to invest. The official Libra documentation reports the following:

How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions.

So investments are made and the profits go to the early investors in Libra as well as to the Libra Association. What if they use this profit to buy up Libra and then destroy it? That would have a positive effect on inflation, allowing the Libra to keep its value for longer. I just don’t expect them to destroy their profits.

Are They Going To Lend Out The Money In The Libra Reserve?

Yes, unfortunately, and that can be a risk to the value of the Libra. The question is also whether they will use fractional banking where most of the money is lent out.

The documentation of the Libra Reserve mentions this:

On the capital preservation point, the association will only invest in debt from stable governments with low default probability that are unlikely to experience high inflation. In addition, the reserve has been diversified by selecting multiple governments, rather than just one, to further reduce the potential impact of such events. In terms of liquidity, the association plans to rely on short-dated securities issued by these governments, that are all traded in liquid markets that regularly accommodate daily trading volume in the tens or even hundreds of billions.

What Happens At A Bank Run?

With a bank run, I assume that everyone wants to convert their Libra to fiat in a very short time. In this situation, it is impossible for the Libra Association to buy back all published Libra directly with fiat. They have invested in short-dated securities. These are, for example, government bonds with a term of several years and they first have to sell them with a possible price loss, as a result of which the pot of money may also become too small.

As soon as the resale stagnates, resellers may want to get rid of their Libra in some other way. They will then, for example, dump Libras on the market. This will cause the price to fall considerably.

The early investors in Libra are mainly companies that benefit from a high return. They receive a dividend from the investments made with the Libra Reserve. Since most companies want more profit, this profit need can cause too much risk to be taken, which will make a bank run even worse for the value of Libra.

What Is The Libra Good For?

Libra also offers a number of advantages:

The Libra is useful for cryptocurrencies such as bitcoin. Libra brings more people into contact with crypto and more fiat flows to crypto. This is beneficial for the adoption rate and value of bitcoin.

The Libra can be useful for the 1.7 billion people who currently have little or no access to banks. With Libra, they can borrow money more easily and save on expensive international money transactions. For example, in a situation where they receive money from family members from abroad.

The Libra is an excellent currency for parking some value for a short time if it can’t be done in fiat. It also seems to be a better alternative than Tether.

Conclusion

It’s a lie that the Libra is going to keep its value. It does not take account of inflation. In the long run, and I’m talking about several years, I’d rather bet my money on Bitcoin. Bitcoin is hardly affected by inflation.

I see clear advantages for people without a bank account, but the central character of Libra and the possibility of censorship is a cause for concern to me. I don’t need a new kind of central bank with even more power. That really reminds me of China and WeChat, where there is no privacy at all.

I hope the Libra isn’t a Trojan horse.