Libra is not a money market fund

This piece caught my eye in the WSJ.

The setup looks very similar to the money-market funds that many companies and investors have used to manage their cash since the early 1970s. On top of traditionally fixing the value of their shares at $1 to give them the appearance of actual cash, these funds invest clients’ money in very short-term debt that can easily be redeemed, but still provides some extra return.

With Libra, Facebook will be earning all of that income. Users of the digital currency benefit only from the ease of transfer. The company believes it could be popular in countries where access to banks remains difficult. This week, however, regulators in Japan joined those in the U.S. and the U.K. in expressing concerns about Libra.

To be fair there is a superficial similarity between Libra and market money funds.

Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra. That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when traveling. This approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.

Money market funds exist to provide a near-money with a higher rate of return than holding actual money (which provides a zero rate of return and in times of inflation a negative rate of return). A money market fund represents an investment – the investor wishes to earn a positive rate of return. The fund itself would invest in highly liquid assets but optimise the portfolio to earn as high a rate of return as possible.

Libra will exist to provide consumers with purchasing power. The Libra users will not earn a rate of return on holding Libra per se – unless they are in the business of trading Libra itself.  I don’t know what the transactions costs of that would be – but if the Libra association were doing their job properly that shouldn’t be a profitable opportunity.

The Libra association will earn the profits from the portfolio of low-volatility assets that underpin Libra, and if they were wise they would optimise that portfolio to be a minimum variance portfolio (exactly what a money market fund would not try to be doing). In effect they would be earning the global risk-free rate.  That means the motivations and incentive structures would not be the same.

Nobody seriously suggests that the gold standard was a government mandated gold unit trust. So too the suggestion that Libra is simply a money market fund is misleading. To be sure this is governance issue for the Libra association – that it not become a money market fund.  But it seems to me that not being an investment but rather a store of value is the Libra business model.

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29 Responses to Libra is not a money market fund

  1. pbw

    So too the suggestion that Libya is simply a money market fund is misleading.

    Come on, Sinc. I don’t think anyone is seriously suggesting that Libya is a money market fund.

    [Yes. Yes. Fixed that. Thank you. Sinc]

  2. Frank Walker from National Tiles

    I don’t know anyone who has bought anything but ads on facebook, and they suck.

    The unbanked can use BTC or mobi money, or another app.

    Mobi Money has been around since at least 2009.

    https://en.wikipedia.org/wiki/African_MobileMoney

  3. MPH

    And when the global risk free rate is negative, what then?

  4. Sinclair Davidson

    Why would the global risk free rate go negative?

  5. Tim Neilson

    As best I can see cryptocurrencies are just Sportsbet with a lower government tax takeout.

    Not that there’s anything wrong with that, but there’s nothing I can see that’s inherently worth while about them.

    There’s no great difficulty in buying and selling in government fiat currencies, and if Libra has to be backed with government fiat currencies why not just cut out the middleman? Especially if “The Libra users will not earn a rate of return on holding Libra per se” when you may get some interest (even if pitiful) from fiat currency in a bank account.

    There is, however, one very good reason to stay well away from them.
    The cult-like Messianic worship of cryptocurrencies, “blockchain technologies” etc. is eerily like the dotcom hysteria of the late ’90’s when a dog turd on a shoe was recognised as undesirable but a dog turd on a shoe .com would attract vast amounts of investors’ money. It all came terribly unstuck. No doubt some people walked away with a pile of cash but many others crashed and burned and often took a lot of innocent bystanders with them.
    Maybe that won’t happen this time, but unless there’s some demonstrable advantage of cryptocurrencies over government fiat currencies (which no-one has yet been able to explain satisfactorily) then why take the risk?

  6. Frank Walker from National Tiles

    Why would the global risk free rate go negative?

    Indeed. I say it literally cannot.

  7. Bowser

    This is awful and for a few reasons, Facebook and other big tech happily de-platform anyone that doesn’t meet their standards, they will happily

  8. Tel

    Why would the global risk free rate go negative?

    Governments might have finally figured out how to destroy wealth faster than anyone can create it?

    Just throwing ideas out there.

  9. Ƶĩppʯ (ȊꞪꞨV)

    Why would the global risk free rate go negative?

    deflating populations, it’s pretty much negative now.

  10. Gertrude

    Libra looks like just another payments platform operating as a debit system as opposed to conventional credit system. It uses a different verification engine than a familiar debit/credit card. It hopes to make a profit by holding your transactional cash. It will probably force the credit card operators to ALWAYS display currency options on payments – nothing like a bit of competition to improve the product and trim margins. Until Libra starts providing credit it will not make very much money.

  11. Rob MW

    Could this interfere with the US’s intention to place a tax on welfare checks flowing back across the Mexican border to try and curtail illegal migration ?

    If so, I would assume welfare checks leaving other countries might be in a similar situation. Nothing like looking down the barrel of the RIS or RICO to get the juices flowing !

  12. Bruce of Newcastle

    Has Libra the tampon company sued Libra the cryptocurrency company yet?

  13. Herodotus

    They’ll stick it up ’em soon Bruce.

  14. MPH

    Why would the global risk free rate go negative?

    I think the question is more whether it will ever go positive again.

    https://www.macrobusiness.com.au/2019/07/australian-dollar-falls-global-yields/

  15. If it involves Facebook, it must be fraud. Or is that Borg?

  16. Dr Fred Lenin

    Off topic a bit ,is the photo at the top the one of the fossilsed footprint of an aboriginal contruction worker in worksafe boots 180,000 years ago , taken at the site of the huge shipbuilding bark canoe yard in Botany . ?

  17. Frank Walker from National Tiles

    MPH
    #3097766, posted on July 5, 2019 at 2:54 pm

    Why would the global risk free rate go negative?

    I think the question is more whether it will ever go positive again.

    Explain to me how this actually works, in real, and not nominal terms.

  18. Publius

    Libra will exist to provide consumers with purchasing power.

    Libra exists as a product offering by a corporation to provide shareholders with a return. Amazingly naive view by our kind host in juxtaposing a noble purpose over what is basically a product pitch. Unless libra is run like a co-operative returning all profits to members (or coin holders in this case), I expect the financial engineering on what is possible going to be the worlds largest cash cache will be where the juice really lies.

  19. Frank Walker from National Tiles

    I doubt Libra offers any value.

    FB apparently monetised Marketplace in 2018, and thereafter lost 120 bn in equity in one day the following July.

    https://www.cnet.com/news/facebook-marketplace-is-used-in-70-countries-by-800-million-people-monthly/

    https://variety.com/2018/digital/news/facebook-market-cap-120-billion-user-growth-slow-1202886792/

    I can’t see FaceBook killing off eBay let alone Amazon.

  20. Frank Walker from National Tiles

    Pt 3:

    Think of the market value of the US compared to 500 million Africans who may have a FB account:

    US users are leaving in droves.

    https://www.marketplace.org/2019/03/06/exclusive-look-numbers-showing-users-leaving-facebook-by-the-millions/

  21. Tel

    US users are leaving in droves.

    Libra might help stop the bleeding.

  22. MPH

    Explain to me how this actually works, in real, and not nominal terms.

    The most trustworthy ie risk free repositories for your assets take a percent of the value of the asset as a holding fee until they return it to you. Not that complicated.

  23. Frank Walker from National Tiles

    As a depositor, you may have to cop that.

    As a bond investor, wouldn’t you just hold cash?

    A nominal negative interest rate is a sign of attempted madness by central bankers, a real negative rate also implies that the banking system is being implicitly recapitalised.

  24. John Constantine

    http://www.hbcheritage.ca/history/fur-trade/currency

    Canadas hudson bay company, among many others, already successfully used company issued tokens to harvest profits from herds of proles under their control.

    They start off with tokens based on real beaver pelts, but the end goal is always trade tokens the company can create from nothing and issue as credit to be used at the company store.

    During the fur trade, the Indigenous peoples in Rupert’s Land brought pelts to Hudson’s Bay Company posts in order to trade for European manufactured goods. HBC needed something that was recognized by the Indigenous population as a basic value, and by 1748, beaver pelts were the recognized “Standard of Trade.” Trade goods, as well as all other furs, were evaluated against one beaver pelt in prime condition, referred to as a Made Beaver (MB). Sometimes, depending on the size and quality of the beaver pelt, it would take more than one beaver pelt to equal an MB. Trade items were given a worth equal to a specified quantity of MB: one beaver pelt purchased a pound of black lead, or two pounds of sugar, for instance. Other animal pelts were also worth a specified quantity of MB. For example, two marten pelts were required as the equivalent of one beaver pelt. In the Pacific Northwest, in places like Fort Langley, British Columbia, the abundance of salmon made it a natural means of exchange. A trade tariff dating from 1829 gives the price of various trade goods in numbers of fish rather than Made Beaver.

    Hudson’s Bay Company posts servicing the fur trade developed a completely separate currency for trade — fur trade tokens. Trappers could bring in all their pelts for exchange at a single time and receive any “change” in trade tokens applicable to subsequent purchases. Early examples were made of wood, ivory, or shell. Tokens were issued by different districts in various denominations. Brass Made Beaver tokens, believed to be in use as early as the 1860s and 70s, were issued by the Eastmain District and came in 1 MB, ½ MB, ¼ MB, and ? MB. Aluminum tokens were used in the north for arctic fox that were valued on cents (5, 10, 25, 50, 100), and then one large square token that represented one fox pelt. These two examples are just a sample of the many different tokens created by HBC both for the fur trade and for retail.

  25. Zatara

    US users are leaving in droves.

    Libra might help stop the bleeding.

    The reason users are leaving is that Facebook has proven itself massively untrustworthy with their data. Adding the opportunity to be massively untrustworthy with their money wouldn’t seem to be a plus.

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