Could the New Libra Virtual Currency Generate Global Financial Stability?

The imminent arrival of the new virtual coin Libra has just been announced. To me, what is most interesting is the stress on the stability of the coin’s value in actual money. To that end, it will be actively managed using a basket of all major currencies to counteract fluctuations in currency markets.

That is huge. As far as I am aware, that is a first for a virtual currency. Heretofore, ‘stable coins’ have been pegged to a single currency, usually the American dollar.

Combining stability with its extremely modest fees (a fraction of a penny), this coin could become a ‘safe haven’ currency, a place where people and businesses — and even governments — could safely park their cash. The implications of that are difficult to overstate.

For starters, it would sharply lessen demand for US dollars, currently considered the world’s most reliable safe haven currency. Since its role as the world’s ‘safest haven’ has underlain the demand for dollars, helping to keep it ‘strong’ (high in price relative to other currencies), any weakening of that position would weaken the dollar in terms of its price in other currencies.

That would have major implications for our current accounts balance. It would make U.S. exports more expensive. That in turn would make this nation’s position in any trade war more precarious. It would be like a global tariff on all American products.

More importantly, if the Libra were to become the world’s safe haven currency, it would make the management of it the most significant single factor in the realm of global finance. As long as that management remained neutral with respect to all of the currencies in the basket, it could actually usher in a era of unprecedented global financial stability.

Alas, neutrality would be impossible. Libra would be purchased with actual money. The business model for those investing in Libra is to earn “interest” from that money (as well as the money they invest in it). Is it to be limited to interest earned from savings accounts? Would it include investments? How speculative might such investments be?

Those decisions would have definite implications for the stability of Libra. It will not be a fractional reserve currency; the full amount of money from all purchases of Libra is to be on hand, available for redemption, at all times. That suggests an absence of speculation.

[I have learned since this was posted (thanks to ‘Market Mad House’) that the plan is to put the money in “bank deposits and short-term government securities.”]

Whatever were done with that money, however, particular denominations of money would have to be used. Therefore, whatever the criteria might be that would go into making those decisions, the results of those decisions could not be neutral with respect to individual currencies.