The Libra Association’s release of a second whitepaper updates its vision for the Libra cryptocurrency, following regulatory pushback and scrutiny of the project’s first iteration.
The association has abandoned its plan to form a free-floating global coin tethered to a basket of currencies. This was the most offensive part for central banks and policy-makers of the original plan. The offering now extends to single currency stablecoins: Libra dollar, Libra euro and so on. These will be backed by cash, or cash equivalents, as well as short-term credit worthy government debt denominated in the base currency of the stablecoin. This will require the Libra Association to work with central banks and regulators of a currency’s jurisdiction to provide and expand the number of stablecoin currency offerings and expand the network.
From these single currency stablecoins, a digital weighted composite will be created. This ‘Libra coin’ will be similar to the original concept, creating a denomination made from a currency basket. This digital composite will be available for cross-border transactions. Such a strategy will dampen the concerns central banks and regulators had about the original Libra coin, which posed a significant threat to monetary sovereignty and policy control.
The association is also committed to prove that all stablecoins in circulation are backed by corresponding assets. The data on the composition of the reserves and the current market value of the underlying assets will be available live. Everyone will be able to access it. The Libra reserve which underwrites each stablecoin will be made up of 20% cash, or cash equivalents, while roughly 80% will be short-term debt.
Libra is beefing up regulation. It has outlined a multitude of compliance measures, from requiring all permissioned members on the blockchain network to conduct due diligence to the method through which the supply of coins is managed, issued and burnt. For good measure, Libra will allow its blockchain to be publicly verifiable, giving powers of audit to all.
The Libra Association is applying for a payments system licence from the Swiss Financial Market Supervisory Authority (FINMA), allowing for central banks, regulators, and international bodies to have greater oversight. This move was described by Christian Catalini, a co-creator of Libra, in an OMFIF podcast late last year. The association will also make the blockchain permissioned, where authorisation to participate in the network is needed, following FINMA concerns that a permissionless system would be harder to ensure for compliance.
The association is keen to distance itself from its parent, Facebook. The whitepaper reiterated that the Libra Association was an independent membership organisiation governed by the association’s council. It clarified that Facebook has no special rights in the association.
The increased support for central bank digital currencies has given encouragement to the Libra project. The hope is to integrate CBDCs within the Libra ecosystem in the future. This will streamline the operations used to manage the Libra reserve and remove credit and custody risks if CBDC transfers to reserves are instant and atomic. If CBDCs can be incorporated directly into the payment system it could remove the need for Libra’s stablecoins. This would turn Libra into a more traditional payments service provider, like PayPal.
As the project moves over the past year from abstruse over-ambition to more palatable reality, central banks will have no choice but to respond to Libra’s revised strategy.
Bhavin Patel is Senior Economist and Head of Fintech Research. OMFIF is launching a Digital Finance Institute to create a high-level community to meet the policy, technology and regulatory challenges posed by digital finance in the 2020s, with a particular focus on payments. More information here.