The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for institutional investors curious about cryptoassets, with news and views on crypto infrastructure delivered every Tuesday. check in here.
Coming from a corporation so tied to the question of identity (whether real or not), it’s surprising that Facebook’s Libra coin seems confused about its own.
The organization has chosen to brand Libra “a stable global cryptocurrency,” and therefore the label “cryptocurrency” has been replicated by media round the world. Yet Libra isn’t a cryptocurrency.
Don’t get me wrong – those folks within the sector appreciate the worldwide attention given to the concept since the announcement.
But during this case the definition matters beyond semantics: it’ll affect eventual use cases and regulatory treatment. It could also transform how investors view both stablecoins and blockchain-based securities going forward.
What’s during a name?
First, let’s check out why it’s not a cryptocurrency.
While definitions vary, one key characteristic of cryptocurrencies is their resistance to censorship. For this, they have to be “decentralized enough” to stop anybody group from deciding who gets to transact. Libra doesn’t yet fulfill that criteria, and although the inspiration has said it plans to maneuver towards a “more decentralized” system over time, doing so (or not) is entirely in its hands.
Furthermore, the worth of a Libra coin isn’t created by the underlying technology, the market, math or however you select to know bitcoin and similar assets. It’s a digital representation of a basket of fiat currencies and other securities.
The only thing Libra coin has in common with cryptocurrencies is that all of them advance a blockchain.
So, what’s it? On the surface, it’s a “stablecoin,” a token that maintains a stable value via a peg to “real world” assets like fiat currencies or a commodity (some stablecoins have an algorithmically-determined value mechanism, but they belong during a different discussion). the world is currently awash with stablecoin projects building solutions for payments and settlements, most of which aren’t yet live. of these that have launched, few outside of U.S.$-backed Tether have significant volume, although the market is young and still shifting.
Where Libra differs from its stablecoin peers is within the peg: consistent with the white book , it’ll be backed by “a basket of bank deposits and short-term government securities” (my italics). Notice the utilization of the term “securities.” An asset backed by securities is, by definition, also a security. Libra is more like an ETF than a fiat-backed stablecoin.
We can attempt to argue that short-term government debt is more a currency than a security. But even without the telltale use of the word, the regulators’ approach to stablecoins remains up within the air. At the Crypto Evolved conference in ny last month, SEC Deputy Director Elizabeth Baird was asked for her combat stablecoins. Her response was blunt: “I think they’re securities.”
Others have posited that even relatively simple fiat-backed stablecoins might be characterized as swaps or “demand notes,” both of which might be treated as securities. and therefore the SEC’s head of digital assets, Valerie Szczepanik, confirmed at a hearing last week that it doesn’t matter that the stablecoin “does not have an expectation of profits” (with the standard caveat of “facts and circumstances”).
Note that this is often Libra coin we’re talking about, not the Libra Investment Token which is clearly a security. We’re talking about the token that Facebook hopes will become the de facto payment mechanism for many of the planet .
The white book opens with: “Libra’s mission is to enable an easy global currency and financial infrastructure that empowers billions of individuals .” Glossing over the unrealistically aspirational qualification of “simple” (really??), can we use a security as a “currency”?
Asset-backed representations useful are currencies before – consider the dollar and other national currencies back within the days of the gold standard. But they were backed by a commodity that wasn’t controlled by anybody entity and didn’t have an “issuer.” The Libra proposition is extremely different.
With this, we start to ascertain why the definition is so important. If the Libra token is officially classified as a security, as is probably going , then using it during a transaction will involve a “sale” of that security, and a financial gain or loss. Since we’re talking a few stablecoin, the taxable event is unlikely to be significant. But it’ll be greater than zero, since Libra’s basket value will fluctuate relative to the currency into which Libra coin has got to be converted to finish the transaction (because Libra is unlikely to become a “unit of account” during which the worth of local goods is denominated).
Sure, software will emerge to smooth the friction and helpfully calculate what we’ve to officially declare – but the necessity to try to to so in the least will act as a big barrier. It’s not only the effort and price involved; it’s also the understandable desire of most even law-abiding users to remain off the tax authorities’ radar.
What does this mean for crypto investors?
In terms of portfolio allocations, not much. Libra because it is currently structured won’t provide competition-beating gains for funds trying to find alpha. As its ecosystem matures, it could provide stable returns through lending or collateralization – many funds prize liquidity and stability over high risk and performance. But that’s not getting to set the securities world ablaze .
The main impact will come not such a lot from Libra itself, but within the glimpse it offers of where a replacement asset class could emerge.
The idea of securities as payment mechanisms is innovative and will open up a number of potential use cases. The requisite stable value needn’t necessarily mean limited upside, as new share issuance as a kind of value-linked dividend (for example) could maintain a peg while providing the holder with a return. rather than the share price rising , an algorithm would issue you more of them, and destroy some if the worth went down. Your wealth would fluctuate, while the worth of the share remains stable.
The fiscal friction from employing a security as payment wouldn’t be a problem for institutions, since they typically have back offices well versed in handling this.
Another intriguing thread to tug on is that the idea of securities backed by a basket of currencies and government debt. We could see the emergence of custom-made securities that hedge the currency risk of the issuer. Currency hedges are a serious concern for both corporates and investors – imagine a certificate of indebtedness that packages those complex equations into a stable yield, or into a pre-hedged token to be used in either capital markets or supply chain transactions.
Expect the unexpected
Financial innovation didn’t start when blockchain technology got a replacement lease of life through connected networks and decentralized consensus. Markets are furiously evolving since there have been markets, often in unexpected ways with unintended consequences.
For all its features and faults, Libra represents a big breakthrough during this process. Its stated aim of extending financial inclusion and reducing payment friction is one that has consumed entrepreneurial minds for many years , and while this might not be the answer the planet is expecting , it’s a minimum of pushing the conversation forward in constructive ways.
However, when it involves technology of any type, few inventions find yourself getting used for his or her original intent. Libra is unlikely to be any different. In combining elements of distributed ledger technology, economic philosophy and savvy marketing, the initiative will find yourself boosting awareness, adoption and development of cryptocurrencies and security tokens more broadly. Just not within the way the designers originally anticipated.