We made the mistake of calling Facebook’s possibly-upcoming cryptocurrency, the Libra, a “stablecoin” when it was announced. We wrote this because Libra—which will be governed by a consortium of NGOs, Fintech companies and Silicon Valley heavyweights—will be backed by a “basket” of fiat currencies, including the US dollar, the Japanese yen and the euro.
Whatever primordial, market-adjusted goo then oozes out from that formation will constitute Libra’s price, and there it will remain—with the consortium tasked with chucking out any underlying assets that may threaten that price.
This all sounds very stable, like “stablecoin” levels stable, so we described it as a stablecoin. But we were wrong.
“Technically,” said a Facebook spokeswoman in an email following that story, “Libra is not a stablecoin.” She went on to explain that it is not a stablecoin in the same way the US dollar is not a stablecoin—while its price, nominally, remains the same, it fluctuates in relation to other currencies.
This is different to stablecoins like, say, Tether, which are supposed to closely track the dollar, or other fiat currencies. “While Libra is an asset-backed cryptocurrency similar to existing stablecoins,” explained the spokeswoman, “unlike existing stablecoins Libra is not ‘pegged’ to a single currency and does not have a fixed value in any real-world currency.”
That’s an important distinction. Calling the Libra a “stablecoin” strips it of the pedigree of having “intrinsic value,” as the white paper insists it does. Describing it on its own terms—simply as “the Libra”—will invest it with the power of a traditional currency, laying the groundwork for a “Libra-isation,” whereby all prices everywhere are measured in the bountiful Libra.
“No ordinary user is going to want to figure conversion rates in their head all the time, any more than they do when trying to buy totally legitimate purchases with bitcoin or monero,” said David Gerard, a writer who is deeply involved in the space.
Think about it: if you’re already using Libra to bribe the Words With Friends algorithm and auction off second-hand cars via Facebook Marketplace, you’re not going to want to keep converting that to your local Kenyan shillings—you’re going to want to stay in the currency, stay within the Libra “ecosystem,” and, ultimately, stay on Facebook.
That’s a far cry from Tether, whose entire raison d’etre is that it can, supposedly, be redeemed for real world dollars and any time. Nobody is using Tether to buy their groceries, and nobody ever plans to. It functions as a market gimmick; a neat way of preserving notional dollar value on a blockchain. Libra, on the other hand, wants to be treated as a currency in itself.
Gerard describes this as a form of shadow banking, where money is generated as credit outside of the purview of the mainstream, regulated system. "Shadow banking tends to play fast and loose, because that's its competitive advantage,” he said. “This was a major factor in the 2008 financial crisis. Facebook seem to want to do this again—supply systemic quantities of unregulated shadow bank credit—but they're sure they won't cause a disaster this time, because they're the smartest guys in the room."
Indeed, this prospect is already alarming national leaders across the globe. Yesterday, US Senator Maxine Waters said the project should be banned before it ever sees the light of day. The French have already set up a G7 task force to assess the problem, and Bank of England Governor Mark Carney raised his own concerns—none of which happened when, say, stablecoin company Anchor, which has engineered an almost identical “basket of currencies,” released its own non-committal white paper.
Remember that in Facebook’s Twitter announcement of the Libra it straight up called it a “currency”—not a cryptocurrency, not a digital asset, and certainly not a stablecoin.