From UPSC perspective, the following things are important :
Prelims level : Libra
Mains level : A new currency system
The Libra Association is fragmenting. Visa, Mastercard, PayPal, Stripe, Mercado Pago and eBay have abandoned the Facebook-led corporate alliance underpinning Libra.
- It is the asset-backed cryptocurrency meant to revolutionize international money.
- Anyone with a mobile phone would be able to buy Libra tokens with domestic currency by standard methods such as debit cards and online banking.
- Those tokens could then be used to make payments to other Libra users, whether to purchase goods and services or repay debts.
- To ensure full transparency, all transactions would be handled by blockchain technology.
- In sharp contrast to Bitcoin, Libra tokens would be fully backed by copper-bottomed assets.
- To anchor Libra to tangible assets, the association backing it promised to use its revenues, along with the seed capital contributed by its member companies to buy highly liquid, highly rated financial assets.
Challenges with Libra
- Privatising – Humanity would have suffered if Facebook is allowed to use Libra to privatize the international payments system. The sole beneficiary would be the Libra Association, which would collect tremendous interest income on the assets from around the world using the large portion of global savings on its platform.
- Too big – Libra association would soon advance credit to individuals and corporations, graduating from a payments system to a global bank that no government could ever bail out, regulate or resolve.
- Out of financial system – 2.4 billion monthly active Facebook users would suddenly have a new currency allowing them to transact with one another and bypass the rest of the financial system.
- Criminal misuse – There is every possibility for high potential criminal uses of Libra.
- Volatility issues – Countries have invested a lot in minimizing the volatility of the purchasing power of domestic money. As a result of those efforts, 100 euros or dollars buy today more or less the same goods that they will buy next month. But the same could not be said of 100 euros or dollars converted into Libra.
- Business cycles – Since the 2008 financial crash, authorities have struggled to manage inflation, employment and investment with the fiscal and monetary levers. Libra would further diminish states’ capacity to smoothen the business cycle.
- Fiscal policy challenge – Fiscal policy’s efficacy would suffer as the tax base shrinks with every payment shifting to a global payments system residing within Facebook.
- Impact on monetary policy – Central banks manage the quantity and flow of money by withdrawing or adding paper assets to the stock held by private banks. The more successful Libra becomes, the more money people will transfer from their bank account to their Libra wallet and the less able central banks will be to stabilize the economy.
Potential of Libra – to the IMF
- The core concept of Libra can be handed over to the International Monetary Fund (IMF).
- It can be used to reduce global trade imbalances and rebalance financial flows.
- A Libra-like cryptocurrency could help the IMF fulfil its original purpose.
- Entrust implementation of the idea to the IMF to reinvent the international monetary system in a manner reflecting John Maynard Keynes’ rejected proposal at the 1944 Bretton Woods Conference for an International Clearing Union.
- IMF would issue a blockchain-based, Libra-like token, say Kosmos, whose exchange rate with domestic currencies floats freely.
- People continue to use their domestic currency, but all cross-border trade and capital transfers are denominated in Kosmos and pass through their central bank’s account held at the IMF.
- Trade deficits and surpluses incur a trade-imbalance levy, while private financial institutions pay a fee in proportion to any surge of outward capital flows.
- All international transactions become frictionless and fully transparent.
- Small but significant penalties keep trade and capital imbalances in check and fund green investment and remedial North-South wealth redistribution.