Facebook Coin Libra: What do Economists Think?

Are Libra bank runs likely?

Cecchetti and Schoenholtz (2019) argue that Libra poses systemic risks for the worldwide financial system due to an increased likelihood of bank runs. However, it can be argued that the likelihood of bank runs can be mitigated by a proper design of Libra. This can e.g. be reached by (1) always ensuring a 100% backing of Libra by the Libra Reserve and (2) by ensuring that Libra can always be converted to fiat currencies without barriers. These factors depend on the degree of transparency provided by the Libra Association and how the conversion process of fiat currency into Libra is designed via “authorized resellers”. Both is not yet clear. It is obvious that systemic risks can arise from Libra. However, these risks can be mitigated by a proper design of Libra.

Can the value of Libra be expected to be stable?

Cecchetti and Schoenholtz further argue that using a currency basket consisting of the special drawing rights (SDR) by the International Monetary Fund (IMF) as a proxy for the Libra Reserve, the value of Libra is not expected to be stable over time. However, according to simulations by Groß, Herz, Schiller (2019) the value of Libra — measured in EUR or USD — can be expected to be quite stable in the long-run (see Figure 1) even if in the mid-run fluctuations might occur and an exchange rate risk is apparent. On the very short-term, that is getting money today and spending it tomorrow, Libra can also be expected to be relatively stable. Therefore, when discussing the value stability of Libra, it is always important to specify the time frame. For developing economies with weak currencies, Libra can provide an attractive means of payment and a relatively stable store of value to hedge against depreciation and inflation risks — even if slight fluctuations occur.

Figure 1: EUR and USD relative to exemplary Libra basket

Is the Libra Blockchain centralized?

In his recent publication Eichengreen (2019), a well-known economist, discusses what is currently known about Libra and what is still unclear. He concludes that it is not clear that Libra will be 100 percent backed by the respective reserve assets. This is surprising since it is clearly stated in the white paper of the Libra Reserve that “the reserve will be fully backed across time.” Therefore, if it is ensured that the Libra Association indeed commits to this statement and fully backs Libra by the Libra Reserve, risks stemming from a fractional backing are currently not justified.

Remarks

If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. More information about the Frankfurt School Blockchain Center on the Internet, on Twitter or on Facebook.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Jonas Gross

Jonas Gross

294 Followers

Jonas Gross is Chairman of the Digital Euro Association (DEA) and Head of Digital Assets and Currencies at etonec. Further, Jonas holds a PhD in Economics.