Facebook’s much vaunted Libra stablecoin project seems to have gone quiet lately, and according to one economic historian, will “never see the light of day.”

Blockchain developers ignorant of economics and history?

UC Berkeley professor, economic historian, and former IMF policy adviser, Barry Eichengreen, has said that Libra will likely encounter too many “insoluble” problems and roadblocks from national governments to ever properly launch. 

Speaking at the Unitize conference on 10 July, Eichengreen argued that, despite those behind stablecoin projects being experts in blockchain technology, they were mostly ignorant of monetary economics and history. 

Summing up the situation, he said:

“Stablecoins are either fragile — they are prone to attack and collapse if they are only partially backed or collateralized with actual dollars or dollar bank balances, or they are prohibitively expensive to scale-up if they are, in fact, fully or over-collateralized.”

Additionally, he pointed to the problem of a stablecoin like Libra undermining national monetary policies – something especially problematic in countries with unstable fiat currencies, where citizens may switch to the stablecoin en mass. 

Libra’s capital buffer was also called into question, with Eichengreen pointing out that, in order to encourage adoption, Libra would need to keep transaction fees low – resulting in a possible shortfall in terms of backing. 

Libra would need central bank backing to succeed 

Furthermore, he also warned that the potential proliferation of derivatives relating to Libra would result in it essentially needing a central bank. This, he argued, would be an issue because “national governments are going to be queasy about the creation of a private, Facebook-owned and operated central bank.” 

So, unless Libra could come to some arrangement with existing central banks, like the Federal Reserve, which is highly unlikely given the currency political hostility to Libra, the stablecoin could be very vulnerable. 

Indeed, as Eichengreen has previously warned, the emergency protections included in Libra’s revised white paper are very similar to the clearinghouse certificates intended to prevent bank runs in the years before the creation of the Federal Reserve in 1913. 

These clearinghouse certificates were loan certificates, issued by a network of private clearinghouses, intended to provide an alternative means of payment if confidence in notes issued by a single bank collapsed. But, unfortunately, this led to some dollars being perceived as inferior to others. 

All of these issues, he concluded, would be “insoluble” and mean Libra will never get anywhere. 

AYO.NEWS says:

While we totally agree with Eichengreen that there are numerous issues surrounding Libra, there are also a few points to note.

Firstly, whether or not you see a stablecoin undermining national monetary policy as a bad thing very much depends on your views of national governments and their monetary policies. Would it be a bad thing to undermine the monetary policies of, say, Venezuela or Zimbabwe? And, are the current monetary policies of even the most “stable” developed nations, especially the United States, really sustainable anyway?

Secondly, is a Facebook/Libra Consortium-owned “national bank” really any different to what we have now? After all, The United States Federal Reserve System is privately owned, despite its name, as was the Bank of England until 1946. Do people really trust Facebook or the members of the Libra Association any less than they trust the government and banks?

Basically, Eichengreen is entirely correct, if you view the protection of the current system as paramount. However, as we can see very clearly in the world today, increasing numbers of people think the current system needs to be ripped apart and replaced.

‘AYO.NEWS says’ features the opinion of the author and does not necessarily reflect the views of Pentagon Digital Limited or its affiliates or associates. 

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