When the Libra Association released its ideas for the operations of the Libra Reserve, the document was intended to be a proof of concept rather than a ﬁnished roadmap for the project. Since June 2019, we have met with many different organizations, regulators, policymakers, and academics to understand key concerns and integrate actionable improvements into the economic design of the Libra network. These consultations and meetings around the world have been invaluable in informing our direction. In particular, the Association greatly appreciates the thorough and thoughtful research the G7 working group completed on stablecoins.1 The concerns raised in the report helped highlight immediate questions to be answered, as well as longer-term challenges that may emerge.

A key concern that was shared was the potential for the multi-currency Libra Coin (≋LBR) to interfere with monetary sovereignty and monetary policy if the network reaches significant scale in a country (i.e., ≋LBR becomes a substitute for domestic currency). While we believe this is unlikely because ≋LBR introduces foreign exchange exposure for coin holders in domestic transactions and the use of ≋LBR may be subject to restrictions, such as foreign exchange controls, we take this concern seriously.

The Libra network is designed to be a globally accessible and low-cost payment system — a complement to, not a replacement for, domestic currencies. The stabilization of currencies and value preservation are key efforts that are properly within the exclusive remit of the public sector. Therefore, we are augmenting the Libra network by including single-currency stablecoins (e.g., ≋USD, ≋EUR, ≋GBP, etc.) and planning to increase the number of single-currency stablecoins over time. These will enable a range of domestic use cases by giving people and businesses the ability to transact in a stablecoin denominated in their own currency. Each single-currency stablecoin will be supported by a Reserve of cash or cash-equivalents and very short-term government securities denominated in that currency and issued by the home country of that currency. Single-currency stablecoins will only be minted and burned in response to market demand for that coin. Because of the 1:1 backing of each coin, this approach would not result in new net money creation.

We believe this approach can lower costs and enable new functionality while giving maximum ﬂexibility and control to central banks for how the Libra payment system is used in their countries.

Initially, the Association expects to offer a small number of single-currency stablecoins based on the presence of highly liquid and safe government securities markets in the relevant currencies. We hope to work with regulators, central banks, and ﬁnancial institutions around the world to expand the number of single-currency stablecoins available on the Libra network over time and to explore the technical, operational, and legal requirements to access direct custody with them. In particular, if adoption in a region without a single-currency stablecoin on the network generates concerns about currency substitution, then the Association could work with the relevant central bank and regulators to make a stablecoin available on the Libra network. The Association welcomes feedback on how it can help support local monetary and macroprudential policies.

For countries that do not have a single-currency stablecoin on the Libra network, we believe ≋LBR is a neutral and low-volatility alternative that could ensure users in such regions can beneﬁt from accessing the network and increased ﬁnancial inclusion. In this context, ≋LBR could operate as a settlement coin in cross-border transactions, and people and businesses could convert the ≋LBR they receive into local currency to spend on goods and services through third-party ﬁnancial service providers. For example, consider a Libra user in the US wanting to send money to their family in another country. The sender in the US would likely use ≋USD as their default Libra Coin to make the transfer. If the receiver lives in a region with a different single-currency stablecoin on the Libra network, the sender could transfer that single-currency stablecoin or the receiver could convert ≋USD to that single-currency stablecoin or local currency through a third-party ﬁnancial service provider, providing a convenient and simple option for the receiver to access and use the funds. If a single-currency stablecoin is not available, the transfer could be made in ≋LBR. The receiver could convert ≋LBR into their local currency through a third-party ﬁnancial service provider to buy goods and services in that currency. The Libra network would not itself provide for, record, or settle conversions between Libra Coins and ﬁat currency or other digital assets; instead, as noted, any such exchange functionality would be conducted by third-party ﬁnancial service providers. Regardless of the region, we expect to require all Virtual Asset Service Providers (VASPs), such as currency exchanges that have addresses on the Libra Blockchain to hold and transfer Libra Coins, to fully comply with all applicable foreign exchange limitations and capital controls in order to mitigate currency substitution risk.

Moreover, our hope is that as central banks develop central bank digital currencies (CBDCs), these CBDCs could be directly integrated with the Libra network, removing the need for Libra Networks to manage the associated Reserves, thus reducing credit and custody risk. As an example, if a central bank develops a digital representation of the US dollar, euro, or British pound, the Association could replace the applicable single-currency stablecoin with the CBDC.

Single-currency stablecoins simplify the design of ≋LBR. ≋LBR can be implemented as a smart contract that aggregates single-currency stablecoins using ﬁxed nominal weights (e.g., ≋USD 0.50, ≋EUR 0.18, ≋GBP 0.11, etc.). This approach to the ≋LBR design is similar to what is used by the International Monetary Fund (IMF) in the Special Drawing Rights (SDR). Because ≋LBR is composed of ﬁxed amounts of single-currency stablecoins that are supported by the network, ≋LBR is fully backed by the Reserve assets backing each single-currency stablecoin.

To limit concerns about the Association updating the ≋LBR weights unilaterally, the Association would welcome the oversight and control over the basket composition (both currencies included and their respective weights) by a group of regulators and central banks or an international organization (e.g., IMF) under the guidance of the Association's main supervisory authority, the Swiss Financial Market Supervisory Authority (FINMA).

Single-currency stablecoins, however, may add complexity for wallets, exchanges, and merchant solution providers. For example, exchanges will need to maintain suﬃcient liquidity across multiple digital assets rather than just one. Wallets will need to handle cross-currency use cases, such as sending remittances, even though we expect people will default to the single-currency stablecoin for their domestic currency (where available), to another single-currency stablecoin (e.g., ≋USD, ≋EUR, ≋GBP, etc.), or to ≋LBR.

The Libra network is intended to support global, cross-border exchanges by extending the functionality of ﬁat currencies, which are appropriately under the governance and control of central banks. Under this new approach, we seek to reduce concerns around monetary sovereignty and help usher in more accessible payments and ﬁnancial products for people and businesses around the world.