It has been more than a decade since Bitcoin was introduced as an alternative to fiat money. Although achieving the status of legal tender feels like a pipe dream at this point, it has somehow proven the viability of a cryptocurrency as a medium of exchange.
Financial experts have been contemplating the possibility of crypto-based mass payment for a long time. We may finally see it materialize in the coming months.
In June 2019, Facebook formally announced that it will launch its own blockchain-powered payment network using its own digital currency, called Libra, next year.
The social media giant raised $1 billion to lay the groundwork for the project’s infrastructure. The new currency regime hopes to challenge the popularity of credit cards and enable remittance sans 2% to 3% merchant fees.
The Libra currency will be a stablecoin; its value will be pegged to a basket of safe assets, including low-volatility currencies such as the U.S. dollar, the euro, the British pound, and the Japanese yen.
Unlike bitcoin and many other cryptocurrencies that came before it, Facebook’s virtual coin is designed to retain a stable value in order to gain the trust of consumers.
The Libra Association, a consortium of more than 20 big corporations, including Coinbase, Uber, and Spotify, will oversee the Libra ecosystem. One of the elite group’s primary tasks is the management of the Libra Reserve.
Global regulators have set the alarm bells ringing upon the formal unveiling of Libra. Policymakers are expected to take turns grilling the project’s executives to discuss the implications of the payment network’s existence for the traditional financial system.
If and when Libra becomes a reality, how could it impact the forex and crypto markets?
Supply and demand of Fiat currencies
In a financial market that largely operates on the “supply and demand” relationships between national currencies, Libra could become an unavoidable force in FX trading.
Once it gains enough international adoption, the digital currency could force the interest rate increases of fiat currencies excluded from the Libra basket. At the same time, it could bring upward pressure on the exchange rates of those that influence its price.
As a result, the demand for securities that back Libra could rise. Therefore, their prices would go up and their rates of return would diminish.
Leaders in emerging markets already foresee such a scenario. An official from the People’s Bank of China expressed concern regarding Libra’s potential to accelerate the depreciation and to cause the destabilization of volatile currencies.
Global monetary policymaking
The Libra Association, which will act as a central bank for the payment network, claims that it is not interested in participating in the realm of global monetary policymaking. The association will leave the exclusive power to dictate domestic monetary conditions to central banks.
This statement may hold true, but Libra could nevertheless indirectly compromise the ability of financial institutions to function as usual. For instance, the conversion of less stable sovereign currencies into Libra could make it more challenging for local banks to extend credit.
Initially, nothing drastic would change when transactions begin to take place on the Libra blockchain. The prices of goods and services, as well as the wages, would still be set in domestic currency. There might come a time, however, when the digital coin could become more than a mere transactional tool.
Right now, the association says that it will not pay any interest on untouched balances kept on its platform. It does not want to encourage anyone to invest in Libra.
The Libra Association could sing a different tune someday, though. When the opportunity presents itself, the interests behind Libra could transform it into a safe and liquid form of investment. Ordinary consumers might then feel incentivized to trade their local money for it, allowing the association to have hegemony over the international financial system.
For this reason, the digital coin might not survive merciless regulatory scrutiny. If its governing body will not give the authorities a say in the final composition of the Libra basket and other sensitive matters, the Libra project may be pronounced dead on arrival.
The appeal of other crypto assets
The rollout of Libra could renew the interest of investors in cryptocurrencies in general. The ability of Facebook’s digital coin to drive up the prices of Bitcoin and other crypto assets, however, could be fleeting.
On paper, the Libra platform would just be a variation of the traditional financial system with a crypto flavour. The value proposition of this new digital coin regime is it provides a simple global currency most people could use, including those who do not have a Facebook account.
Despite being electronic coins, Libra and Bitcoin arguably have more differences than similarities. Facebook’s payment network would probably not disrupt crypto markets over the long term – perhaps unless the coin evolves into an extremely profitable asset even conservative investors would consider buying.
Being a cross between fiat and crypto, Libra naturally inspires fear and excitement amongst traders from both worlds. Until it receives the regulatory green light from enough policymakers in key countries (which is increasingly becoming unlikely as thought leaders analyze it further), we can only speculate about its far-reaching effects on currency trading.