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Facebook-coin Libra: benefits vs. risks — opinions from German economists | by Philipp Sandner | Medium

Facebook-coin Libra: benefits vs. risks — opinions from German economists

In the recent publication of the Ifo Schnelldienst , various German economists have expressed their opinions about Libra. To ensure that Libra is perceived and accepted as value-stable money, it is designed as a stable coin, i.e. Libra will be covered by government securities and bank deposits denominated in fiat currencies and thus has an intrinsic value. In contrast to classical stable coins such as Tether, the value of Libra will not be stabilized against one single anchor currency but against a basket of currencies and government bonds. From a scientific point of view, it is essential and welcome that ever more economists analyze the implications of Libra and stable coins to estimate its potential on worldwide financial markets in order to regulate it properly. This article summarizes and discusses the main aspects brought up by German economists in the recent report. — Authors : Jonas Groß, Jonathan Schiller, Philipp Sandner

Main benefits of Libra

Cheap payments and a solid store of value

The benefits of Libra are similar to the ones discussed in Bekemeier, Groß, Sandner ( 2019 ). First, Libra can be expected to become a bum alternative for cross-border payments, since the plan technical infrastructure saves costs, e.g., with deference to personnel and infrastructure ( Mayer 2019 ). This is rooted in Libra being a alleged “ stable mint ” which reflects some stable asset running on a blockchain-inspired organization. Besides, Libra can be expected to be a stable store of value only with a minor exchange rate hazard ( Mayer 2019 ). As shown in Groß, Herz, Schiller ( 2019 ) particularly in developing and emerging economies Libra could be a comparably stable alternate to fiat currencies and provide a good memory of measure. In industrialize countries, on the early hand, central rate fluctuations might be more concern. We argue that presently there are already diverse well-established competitors in industrialize countries, which provide cheap and firm payment solutions and consequently put substantial grocery store entry barriers for Libra. conversely, such submission barriers might be missing in developing and emerging countries .

Unit of account and financial inclusion

furthermore, Mayer ( 2019 ) argues, that Libra can be expected to act as a unit of measurement of account. Grigo and Hansen ( 2019 ) follow the lapp argument. The composition of the Libra Association including big finance and technical school companies such as Facebook, Mastercard or Visa suggests that Libra could potentially be used as a unit of history within all these companies.

Eichler and Thum ( 2019 ) conclude that a solid fiscal system could arise in developing and emerging economies, which is based on Libra where e.g. loans could be granted in Libra. This could significantly increase fiscal inclusion of recently unbanked or underbanked people and, subsequently, local wellbeing .

Central Bank Digital Currency (CBDC)

Mayer ( 2019 ) and besides Grigo and Hansen ( 2019 ) argue that the Euro area should react to the US-dominated Libra consortium by issuing its own digital currency. eminence that chiefly US companies have acknowledged their membership in the Libra Association. Interestingly, the german government has explicitly mentioned in its presently released blockchain strategy that it will “ further expand the dialogue with the Bundesbank on cardinal bank digital currentness [ CBDC ] in rate to keep analyse the current condition of the development. ”

Main risks of Libra

Besides Libra ’ s main advantages the authors besides discuss risks .

Data security

One of the main risks mentioned in the composition is data and IT security. Facebook has been involved in diverse data scandals within the final few years ( Grigo and Hansen 2019 ). David Marcus, Head of Calibra, has explicitly stated that the members of the Libra Association will not use the transaction data for commercial purposes. however, it remains to be seen if the members of the association will indeed commit to this statement. If data security system is not ensured, then the unharmed project is doomed to fail .

Bank run risks

Another risk factor is that Libra can actually be seen as a global reciprocal fund. This is an aspect, which is profoundly analyzed in Groß, Herz and Schiller ( 2019 ). Grigo and Hansen ( 2019 ) argue that, assuming a high market penetration of Libra, the store could end up being highly capitalized. therefore, the musical composition and management of the fund can influence the prices and returns of the implicit in assets. Besides, it is argued that a run on the Libra store is not unlikely in times of crisis. We discuss systemic risks in Groß, Herz, Schiller ( 2019 ) in depth. Our independent recover is that a proper frame-up of Libra and the involve authoritative resellers, which provide Libra to the clients, can mitigate the risk of bank runs due to marketplace fluctuations and sensed risks. particularly as Libra is fully backed by liquid assets, the common dynamics of bank runs are identical improbable to unfold. however, trust issues related to the members of the Libra Association, e.g. ascribable to a datum scandal, remain an important return as besides argued by Eichler and Thum ( 2019 ) .

The market for government bonds

Hornuf ( 2019 ) argues, that the Libra Association could evolve to an significant player in the market for government bonds, which is one of the two asset classes included in the Libra Reserve. Therefore, the Libra Association ’ s investment decisions could influence refinancing conditions for the respective governments. specifically, we estimate that the Libra Association can be expected to hold an sum of approximately 1.5 % of all outstanding short-run politics bonds assuming a rather high Libra market capitalization of USD 250 billion. consequently, the influence on the global government bond markets seems accomplishable. Of naturally, this would be different if Libra ’ s grocery store capitalization would be in the end higher. This, however, is relatively improbable at this detail in time.

Default risks

Since the Libra Reserve besides includes assets, like government bonds, it is not surprising that nonpayment risks exist ( Hornuf 2019 ). If government bonds nonpayment, the value of the Libra Reserve and frankincense the rate of Libra in terms of decree currency would decrease. however, the Libra Association has stated in its whitepaper, that it will back its currentness merely with politics bonds issued by “ stable economies ”. therefore, the likelihood of defaults of high-rated bonds, such as united states government bonds, seems only marginal. Considering that stable economies normally act as safe asset providers and that their bonds increase in respect in economically strain times, default risks are partially negligible .

Conversion fees

Balz and Paulick ( 2019 ) argue that the fees for converting Libra into decree currency and vice versa could be hearty. This is a valid compass point since in the Libra ecosystem authorized resellers operate as intermediaries who engage with clients and the Libra Association ( see Figure 1 ). At this point, however, the whitepaper does not provide enough information about how the empower resellers will operate in the Libra ecosystem. This aggravates promote analysis of potential conversion fees .

Monetary policy aspects

monetary policy aspects are besides named as significant risks ( Balz and Paulick ( 2019 ) and Eichler and Thum ( 2019 ) ). The authors argue that less efficient monetary policy transmissions can not be ruled out and that Libra could influence monetary policy measures of central banks. however, the size of potential effects depends on the actual market capitalization of Libra, which is presently heavily to quantify. Since we argue that Libra will be more widespread in developing and emerging economies as compared to industrialize countries, the short-run impact on monetary policy of the european Central Bank ( ECB ) seems limited. The key interrogate whether monetary policy is just “ forwarded ” by Libra or actually “ made ” by Libra is related to the rules of the administration of the Libra Association and to the rules how the Libra Reserve is dynamically changing over fourth dimension — all these rules are not clear so far .

Conclusion

While the authors have correctly identified diverse advantages of the Libra Association ’ sulfur enterprise, their scepsis chiefly prevails. The plus effect on fiscal inclusion body of possibly billions of people is outweighed by concerns about electric potential data abuse, risks for fiscal stability and less effective monetary policy. however, we argue that a proper regulation combined with adequate supervision can mitigate likely disadvantages and unleash the substantial potential of an international currency .

Remarks

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Authors

Jonas Gross is a project coach and research adjunct of the Frankfurt School Blockchain Center ( FSBC ). His fields of interests are chiefly crypto currencies. Besides, in the context of his PhD he analyzes the shock of blockchain technology on monetary policy of cosmopolitan cardinal banks. He chiefly studies innovations as central bank digital currencies ( CBDC ) and central bank crypto currencies ( CBCC ). You can contact him via mail ( jonas.gross @ fs-blockchain.de ), LinkedIn ( hypertext transfer protocol : //www.linkedin.com/in/jonasgross94/ ) and via Xing ( hypertext transfer protocol : //www.xing.com/profile/Jonas_Gross4 ). Jonathan Schiller is a research adjunct at the University of Bayreuth. His fields of interest are macroeconomic model and Euro area heterogeneities. His stream projects concern the influence of fintech innovations on monetary policy. You can contact him via mail ( jonathan.schiller @ uni-bayreuth.de ) and via LinkedIn ( hypertext transfer protocol : //www.linkedin.com/in/jonathan-schiller-305868166/ ). Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center ( FSBC ). From 2018 to 2021, he was ranked among the “ top 30 ” economists by the Frankfurter Allgemeine Zeitung ( FAZ ), a major newspaper in Germany. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is besides on the Board of Directors of FiveT Fintech Fund, 21e6 capital and Blockchain Founders Group — companies active in speculation capital financing for blockchain startups and crypto asset investment management. The expertness of Prof. Sandner includes crypto assets such as Bitcoin and Ethereum, decentralized finance ( DeFi ), the digital euro, tokenization of assets, and digital identity. You can contact him via mail ( molarity @ philippsandner.de ) via LinkedIn or follow him on Twitter ( @ philippsandner ) .

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