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.