The fact that entities in charge of regulation are criticising Libra is no secret for the cryptocurrency community. However, talks have started towards recognising Facebook’s project as a beneficial innovation rather than a cash-grab from a large corporation.
The shift was quite quick and interesting and could be traced all the way to China.
Despite the numerous issues that Libra may cause in terms of financial regulations in a specific jurisdiction, or alter a new age of finance, it is still a very useful tool that the West can have against China’s growing political dominance on the global scene.
This was highlighted in Zuckerberg’s testimony in congress
In October, Mark Zuckerberg, the CEO of Facebook testified in front of congress to address all of the regulatory questions about Libra and clear the waters as much as possible.
Although critics have accused Zuckerberg of trying to manipulate the understanding of Libra in a messiah kind of state, it’s obvious that the arguments still had some merit. It’s true that some of them were exaggerated to create a problem and then paint Libra as a solution, but in complete honesty, that may be exactly the case.
The Chinese digital currency is going to be the dominant force on the global markets simply due to its volume of usage. Sure, the USD is now the dominant force and will most likely not lose that position in the foreseeable future, but we need to look even further ahead.
A couple of decades from now, the soft power that China is practicing right now, which means billions of investments in foreign countries, is going to require some kind of usage of the CBDC (Chinese Bank Digital Currency).
Forcing billions and sometimes trillions of dollars to be processed via a single currency, is going to increase the liquidity much more. Factor in the cost and speed of transactions and we get a situation where entities, regardless of their political beliefs will be forced to use the CBDC due to how economically healthy it would be for their finances.
The main regulation concerns about Libra are easily addressed
In order to determine the solutions to the concerns about Libra, we first need to identify these concerns.
Currently, there are three main issues.
- Is it moral for a private company to create currency?
- What asset class would the Libra Coin be assigned to?
- How will international transactions be monitored?
These are concerns that most of the financial regulators have voiced over Libra. They simply do not trust Facebook to take the moral high ground and adhere to these rules. But when it comes to solving a lot of issues, it is unlikely for Zuckerberg to allow any serious violation after the fine that Facebook got for selling user data.
Anyway, here are the solutions.
Is it moral for a private company to create currency?
Yes, it’s completely moral and it has been going on for a couple of decades now. Gift cards are a clear example.
A gift card is just a card with a specific identifiable number, which carries some kind of value. This value is determined by the creator of the gift card which is then exchanged for cash. The gift card can only be exchanged for a specific product, but that doesn’t mean it doesn’t have good liquidity value.
The fact that it can be exchanged, and has been purchased by real money, makes it a viable medium of exchange. It’s something we are all used to and can be a perfect birthday present if gifting money is too awkward.
Therefore, creating a digital currency that can be purchased with real money, and then exchanged for a slightly limited number of products or services, does not make Libra any more different than a gift card.
In fact, Libra is much more traceable to prevent fraudulent activities, whereas gift cards have been used by phone scammers as a means of income for years now.
What asset class would the Libra Coin be assigned to?
The Libra Coin is definitely not going to be a security token, it’s not something that will gain in value at all. The Libra Association has said many times that it’s going to peg the coin to multiple fiat currencies. This is done in order to balance the exchange rates of various fiat currencies in the world.
For example, if it was only pegged to the USD, an economic recession would not only wreck the US economy but take Libra down with it as well. Considering that the project is aiming to support a global clientele, that would be a disaster.
Therefore, it would be a lot wiser to recognise Libra as a miscellaneous income rather than an asset. It’s not real money, but tax still applies. The coin does not have to adhere to too many exchange regulations, simply because they’re not relevant, and the government remains calm as they receive tax on it as well.
How will international transactions be monitored?
It’s almost impossible to have a global presence without having relevant offices overviewing a specific region. When it comes to regions like Europe, it’s best to have offices for each country, but when it comes to places like Central Asia, an office in a country like Kazakhstan would be sufficient.
These offices on a worldwide spectrum would have to supply information to their relevant financial regulators, which will then be shared across a global spectrum. This is pretty much how trading of fiat currencies, stocks, and various other assets take place.
There are already global platforms that specialise in regulating these markets. Adding a separate commission of around 3-4 people should be enough to keep everything in check.
Is Libra centralised?
Although this was not necessarily mentioned in the list above, it’s a concern that the customers have towards Libra rather than the regulators.
For regulators, when a project is centralised it is a lot more beneficial, as they have only one representative to deal with. For a customer base, it’s best to have multiple parties involved as they’d be like opposition to one another.
This question is extremely relevant right now after multiple large members like PayPal and Visa decided to leave the Libra Association.
Facebook did say they’d leave the association as well if regulatory concerns aren’t dealt with. But it would be much better to simply focus on the improvement of member listings and expand them.
But this is where we get the paradox. Large players don’t want to take part in Libra due to regulatory scrutiny, and Libra can’t get commercial approval without a lot of members.
It’s quite tangled, but not necessarily unsolvable.