Facebook’s Cryptocurrency Libra Will Inherit the Monetary Policy of Central Banks

Social media giant Facebook has recently announced it’s creating a “low-volatility” cryptocurrency that’s fully fiat-collateralized, Libra (LBR). The cryptocurrency, notably is going to inherit the monetary policy of the central banks whose currencies are represented in its reserves.

As first reported by The Next Web, the official Libra website outlines its economics, and notes a secondary token that’ll pay backers dividends is set to be created. This cryptocurrency, the Libra Investment Token, will only be available to members of the Libra Association – which maintain the network – and accredited investors.

The cryptocurrency itself, contrary to initial reports, won’t be a stablecoin, but a cryptocurrency backed by the Libra Reserve, which has various assets such as “a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.”

Libra’s price will, as such, be subject to fluctuations, although its volatility is likely not going to resemble that of cryptocurrencies like bitcoin. The association is set to only invest in debt from stable governments unlikely to default or experience high inflation, the website notes.

As the value of Libra will be effectively linked to a basket of fiat currencies, from the point of view of any specific currency, there will be fluctuations in the value of Libra.

The amount of Libra tokens in circulation isn’t fixed, unlike the maount of bitcoin that'll ever be in circulation, capped at 21 million. Instead, Libra tokens in circulation be determined by the balances of users, with tokens always being backed by an equivalent amount of real-world assets. The organization believes this will discourage “runs on the bank” as the coin won’t be fractionally backed, and users won’t be trying to cash out before others do.

All of this means the Libra ecosystem is going to inherit the monetary policy of central banks issuing the fiat currencies in the Libra Reserve. The Reserve is, in fact, not going to be actively managed, and tokens are going to be created or burned in response to demand from “authorized resellers.” Who these resellers are going to be is still unclear.

Our goal is for Libra to exist alongside existing currencies. Since Libra will be global, the association decided not to develop its own monetary policy but to inherit the policies of the central banks represented in the basket.

It’s worth noting reports have suggested Libra has been in contact with cryptocurrency exchanges and various top financial institutions to let users exchange Libra tokens for their local fiat currencies.

As covered, lawmakers in the U.S. have recently asked Facebook to halt the development of its cryptocurrency, with Congresswoman Maxine Waters claiming that “given the company’s troubled past,” Congress and regulators should have an opportunity to examine the issue and take action.