Necessity of the research
As we enter the 21st century, the global economy encounters unprecedented challenges and opportunities, particularly in the finance and money sectors, which significantly influence each country's economic development Despite notable advancements in financial theory and management, the rapid and complex evolution of financial markets presents substantial challenges and risks for both managers and investors.
In today's globalized economy, the role of money as an intermediary for exchanges is crucial for sustainable economic development The evolution of currency has seen significant transformations, reflecting the progress of the world economy Initially, currencies were based on commodities, including both non-metallic and metallic forms like copper and silver This evolved into nominal money, which includes coins and paper currency Currently, advancements in credit institutions and information technology have led to the emergence of new forms of money, such as credit and electronic money, further enhancing transaction capabilities.
The rapid growth of cryptocurrencies in recent years highlights their significant advantages over traditional paper money With benefits such as lower transaction costs, faster processing times, enhanced liquidity, and user-friendly features, cryptocurrencies are establishing themselves as a superior alternative and are poised to become the currency of the future.
Launched in 2019, Libra has sparked considerable debate, particularly among blockchain and decentralization advocates who question its potential Despite skepticism, Libra is positioned for significant growth While Libra's initial focus isn't on profitability, Facebook is establishing a subsidiary named Calibra to develop products and services centered around Libra, which are expected to create substantial revenue and profit opportunities for the tech giant.
Our research team focused on the topic of "Libra Currency and the Federal Reserve's Response," providing a comprehensive analysis of Libra currency Recognizing the significance of the Federal Reserve's reaction to this emerging cryptocurrency, we also proposed strategic solutions for how the Fed can effectively manage the challenges posed by Libra.
Objects of the research
This article aims to elucidate the features and mechanisms of virtual currencies, specifically Libra, while assessing market effectiveness and the current legal framework Additionally, it analyzes the Federal Reserve's response to Libra's emergence and offers recommendations for the Fed based on this analysis.
Clarify the theoretical basis for cryptocurrency, the process of formation and development of Libra.
Clarify the characteristics, liberalization and its mobility in the economy
Clarify Libra currency’s effects to the economy including advantages and disadvantages
Clarify the current use and management of Libra in the world, especially on regulatory framework for Libra currency management;
Analyse the circumstances when Libra appears in US and How Federal Reserve reacts to Libra currency appearance
Proposing solutions to manage and ensure the sustainable development of the market of Libra
Research subjects and scope
Subjects of the research include Libra virtual currency, the market of Libra and the reactions of Fed of the appearance of Libra
The scope of the research is limited to the following:
- Overview: Libra market in US
- Since Libra was formally announced on June 18, 2019 until the present
Methodologies
Our team employed analytical methods and desk study techniques to explore the theory, utilizing previous research and articles related to cryptocurrency and Libra currency By leveraging secondary data, we developed our own model and reached meaningful conclusions.
Content of the research
The study comprises several pages, including various tables, charts, and appendices It features a conclusion, lists of abbreviations, tables, charts, documents, references, and is organized into four distinct chapters.
Chapter 1: Overview about cryptocurrencyChapter 2: Introduction to Libra currency Chapter 3: The effects of Libra currency to the economyChapter 4: How Federal Reserve reacts to Libra currency’s appearance
about cryptocurrency
Introduction to cryptocurrency
Cryptocurrency is a digital currency secured by cryptography, making it nearly impossible to counterfeit or double-spend The term "cryptocurrency" originates from the encryption techniques used to protect the network Many cryptocurrencies operate on decentralized networks using blockchain technology, which is a distributed ledger maintained by a network of computers A key characteristic of cryptocurrencies is their lack of issuance by a central authority, theoretically protecting them from government interference or manipulation.
Cryptocurrency’s characteristics
Cryptocurrency operates on a trustless model, eliminating the need for a central authority, which has historically been the vulnerability of traditional currencies Instead, each participant in the network independently verifies transactions, ensuring accuracy without relying on trust When a cryptocurrency transaction is broadcast, all nodes validate the signatures; invalid transactions are discarded This system is supported by a decentralized ledger known as the blockchain, which is accessible to all network members, removing the necessity to trust any single entity Additionally, the proof-of-work (PoW) consensus algorithm incentivizes honest behavior among network participants, as it encourages nodes to act truthfully to maintain their rewards In this way, even if a malicious actor amasses significant computing power, they face a choice between defrauding others or generating new coins, reinforcing the integrity of the network.
Satoshi Nakamoto suggests that adhering to established rules is more beneficial for an individual, as these rules can lead to acquiring more new coins than others collectively This approach not only enhances personal wealth but also preserves the integrity of the system.
Cryptocurrencies are here to stay, even as we continue to explore their various uses One of the most significant advantages of cryptocurrencies and blockchain technology is their ability to address the centralized trust issue, providing a strong foundation for their enduring presence in the financial landscape.
“Immutable”, in its simplest sense, means “cannot be undone.”
Immutability regards to blockchain and cryptocurrency should follow 3 principles:
It should be highly improbable or difficult to rewrite history.
It should be impossible for anyone but the owner of a private key to move funds.
All transactions are recorded on the blockchain (to guarantee the above 2 principles)
To monitor our bank account expenditures, we rely on our transaction history, trusting banks to accurately process and deliver our transactions In cases of fraud, we expect banks to rectify the issues However, with cryptocurrency eliminating centralization and the need for trust in a third party, transaction records become public and immutable, ensuring transparency and security without reliance on intermediaries.
Although it isn’t impossible to change the transaction ledger, cryptographic security makes it extremely difficult It require you to compromise the entire network of cryptocurrency users.
Since “decentralization” is such a relevant buzzword in the crypto community, it’s important to define it well It can take on different meanings.
Blockchains exhibit political decentralization, meaning they lack a single controlling entity, and architectural decentralization, which ensures there is no central point of failure in their infrastructure However, they maintain logical centralization, as there is a universally accepted state, allowing the system to function cohesively like a single computer.
Fault tolerance: decentralized systems are less likely to fail accidentally because they rely on networks of separate components.
Decentralized systems offer enhanced attack resistance, as they lack vulnerable central points that can be easily targeted This makes them more costly and challenging for attackers to disrupt, destroy, or manipulate compared to traditional centralized systems.
Collusion resistance in decentralized systems makes it challenging for individuals to exploit others for personal gain In contrast, corporations and governments frequently engage in collusion that serves their interests while adversely affecting others.
Central banks and governments exclusively manage the supply and creation of money through mints and interest rates, leaving users of fiat currencies vulnerable to the unpredictable money-printing decisions of these institutions.
Milton Friedman emphasized the importance of dispersing power to prevent its concentration The central banking system's money-printing practices can be viewed as a hidden tax that erodes the value of your fiat currency savings In contrast, cryptocurrency offers a decentralized solution where no individual or group can manipulate the currency supply without majority consent, protecting your wealth from inflationary pressures.
Cryptocurrency’s effect on the economy
A decade ago, the concepts of Bitcoin and cryptocurrency were virtually unknown, along with the ideas of mining and miners Today, the implementation of blockchain technology across various sectors has become a reality, significantly impacting the global economy in diverse ways.
As we all know, the global economy depends on the USD It’s a reserve currency of the global economy With Bitcoin on the road, USD is up to a big challenge.
Cryptocurrencies are increasingly dominating global transactions, while the US dollar is gradually losing its influence Over the years, various countries and governments have made efforts to de-dollarize the global economy, seeking to diminish the USD's longstanding supremacy.
Every attempt ended in failure until the Bitcoin was born Cryptocurrencies seem to manage the de-dollarization process, thus, changing the global economy No use for the middlemen
Why is the Bitcoin so attractive? It doesn’t need a middleman to control the flow of the currency Middlemen are, for example, banks, small financial companies and so on
Transferring USD typically requires a middleman and can be time-consuming due to multiple transaction steps In contrast, Bitcoin eliminates the need for intermediaries, allowing for instantaneous international transactions In the Bitcoin economy, the network users effectively serve as the middleman, streamlining the process.
Crowdfunding is an effective method for raising funds, especially favored by entrepreneurs and individuals looking to launch small businesses This approach significantly accelerates their development process and enhances their chances of success.
Cryptocurrencies and blockchain technologies have revolutionized the crowdfunding landscape, making it more accessible and efficient Since 2017, Initial Coin Offerings (ICOs) have emerged as the primary crowdfunding mechanism, allowing entrepreneurs to bypass traditional funding sources like business angels and venture capitalists for their projects.
An exchange-traded fund (ETF) represents a new opportunity for cryptocurrencies, particularly Bitcoin Numerous proposals for a Bitcoin ETF have been submitted, but all have been rejected by the U.S Securities and Exchange Commission (SEC).
Some experts say that Bitcoin ETF will lead to the more controlled pricing of bitcoin.
Bitcoin ETFs are poised to usher in a new era for novice and inexperienced investors, despite some experts opposing their introduction Regardless of differing opinions, it is clear that Bitcoin ETFs will play a significant role in the future of cryptocurrency investment.
Our generation has embraced a modern payment method, shifting away from the cash transactions that our parents and grandparents relied on Today, debit and credit cards have become essential tools for managing our finances and making purchases.
Innovations in the financial system is not a new thing for us Cryptocurrencies are bringing a new payment method They are already implemented in several countries.
People in Russia can buy plane tickets, can pay in taxis and purchase thousands of other services with Bitcoin, Litecoin and other Altcoins.
Cryptocurrencies like Bitcoin, Litecoin, and Ethereum are experiencing significant growth in both value and adoption worldwide Their innovative features and tools are transforming everyday life, reshaping traditional systems and processes.
How Governments React to Cryptocurrency?
Cryptocurrencies face significant challenges due to government authority, as governments hold the ultimate power to shape global operations They are particularly resistant to any threats to their control, especially in the economic sphere The disruptive potential of blockchain technology poses a major challenge to traditional economic structures, which governments are keen to protect.
While there are valid concerns regarding the regulation of cryptocurrency, it is important to acknowledge that digital currencies have often been associated with criminal activities and questionable initial coin offerings (ICOs) On a positive note, several countries have begun to recognize Bitcoin as legal tender, with more nations actively pursuing similar recognition.
Most experts agree that by the mid to late 2020s, cryptocurrencies will gain widespread recognition among countries This shift is driven by the transformative potential of cryptocurrencies and the increasing pressure on governments to align with the demands of their citizens.
to Libra currency
Definition of Libra currency
On June 18, 2019, billionaire Mark Zuckerberg announced on his personal page that Facebook is collaborating with 27 other organizations to establish the Libra Association The initiative aims to launch a virtual currency called Libra in 2020, designed to create a global financial infrastructure accessible to billions worldwide This announcement sparked widespread curiosity about the nature and purpose of Libra.
To grasp the essence of Libra, we must explore the history of money As societies evolved and production increased, the necessity for exchanging goods emerged This led to the demand for a standardized medium of exchange, giving rise to the concept of money.
As money evolved, the necessity for distant transactions between unfamiliar individuals emerged, highlighting the importance of mutual trust This need gave rise to reputable third parties that acted as intermediaries, ultimately leading to the establishment of banks.
The introduction of Libra by Facebook and the Libra Association aims to disrupt the traditional banking system by utilizing blockchain technology In this new framework, miners or validators will serve as intermediaries for transactions, fundamentally transforming how financial exchanges occur.
Libra is a permissioned blockchain digital currency proposed by the American social media company Facebook, Inc with the symbol: ≋
Libra, Facebook's innovative cryptocurrency, enables users to make instant transactions and send money globally with minimal fees This digital currency is designed to facilitate seamless purchases and transfers, making financial interactions more efficient and cost-effective.
Facebook describes Libra as a "global financial and monetary infrastructure," representing a digital asset that utilizes blockchain technology, the same technology that powers well-known cryptocurrencies like Bitcoin and Ethereum.
Libra, derived from the Roman measurement system, has the abbreviation "lb" for "pound." The term also resonates with the French word "Libre," which translates to freedom Additionally, the Libra zodiac symbol represents the balance of justice, highlighting its significance in both measurement and philosophy.
You can purchase or cash out your Libra either online or at local exchange points, such as grocery stores, and use it through interoperable third-party wallet apps or Facebook's Calibra wallet, which will be integrated into WhatsApp, Messenger, and Facebook's app Recently, Facebook published its white paper detailing Libra and introduced its testnet to refine its blockchain system ahead of a public launch planned for the first half of 2020.
Facebookcoin, also known as Libra, is a stablecoin backed by a diverse range of assets, including bank deposits and various securities such as short-term government bonds These assets are held in the Libra Reserve to ensure that each Libra is fully guaranteed, providing stability and trust for users.
Libra is a stablecoin designed to be pegged to various global currencies, allowing for stable transactions Through Libra, Facebook will maintain a degree of control over user wallets, alongside access to user interests and data.
Libra currency’s appearance
After a series of scandals about fake information and user information security, the world's largest social network Facebook was fined US $ 5 billion by the US Federal Trade
In early 2020, Facebook and its 20 partners aimed to launch the Libra cryptocurrency project, raising significant concerns among government officials, lawmakers, and financial institutions globally.
Libra's popularity stems from its significant influence on the global financial system and its origins Governed by the Libra Association, a non-profit organization with 28 members, each participant contributed an initial capital of USD 10 million, which grants them corresponding voting rights in the project's development.
"dividends" in the form of profits earned from trading and trading Libra and interest (after deducting operating expenses dynamic) Among these founding members are well-known organizations such as:
Payment: Mastercard, PayPal, PayU, Stripe, Visa
Technology and market: Booking Holdings, eBay, Facebook / Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
Blockchain: Neo, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
Venture capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
Non-profit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
The number of members of the Libra Association is expected to expand to about 100 members when Libra officially launches, expected in the first half of 2020 Having
The founding members of the Libra Association, which include prominent leaders in various industries, significantly enhance the potential for Libra to be recognized as a mainstream medium for trade and exchange Facebook is expected to maintain a pivotal role in the Libra Association and its blockchain through at least the end of 2019 Furthermore, the establishment of Calibra aims to differentiate user information from transaction data, thereby reinforcing trust in the system Utilizing Libra for transactions within Facebook's ecosystem also serves as an additional factor that may facilitate its acceptance.
And of course, Facebook has only one vote in the council like the other founding members of the Libra Association.
Libra’s characteristics
According to Facebook, Libra is a cryptocurrency that allows instant transfers with almost zero fees around the world.
With the launch of Libra, users will be able to send, save, and spend money through the Messenger and WhatsApp applications, making digital transactions accessible even for those without a bank account.
Libra employs a decentralized authentication system that facilitates information exchange among numerous individuals and entities Serving as a distributed ledger, Libra meticulously tracks each user's financial balance and status The currency's governance lies with the 28-member Libra Association, which includes Facebook as a key participant.
Libra's key features are its openness and decentralization, which mirror the advantages of contemporary cryptocurrencies Unlike Bitcoin's volatile price fluctuations, the Libra Association is committed to maintaining a stable value for Libra Additionally, transferring money using Libra will be more cost-effective compared to both cryptocurrencies and traditional banking methods.
Libra can handle approximately 1,000 transactions per second, significantly surpassing Bitcoin's 7 transactions per second and Ethereum's 20 transactions per second However, it still lags behind major payment networks like Visa and Mastercard, which process around 24,000 transactions per second.
Created on the basis of a decentralized blockchain ("permissioned", meaning only authorized organizations can track this block chain / ledger)
Guaranteed (or anchored) by some less volatile assets such as certificates of deposit, government securities
Administered by an independent Libra Association that is responsible for developing the payment ecosystem and is separate from Facebook activities
Facebook's financial services company Calibra will be responsible for developing e-wallets and products that use Libra, allowing users to send cryptocurrency to others via smartphones, similarly sending text message.
Libra users must utilize a Calibra wallet or a compatible wallet, as identity verification is managed by the wallet service provider This presents an innovative opportunity to integrate a global identification application with crypto wallets, which are secure and challenging to forge.
Upon installing the wallet application, users must register for a Libra account, which utilizes a combination of public and private keys for transaction purposes While user identification information is not linked to this account and remains hidden in transaction data, wallet service providers can access it when necessary.
Each user account is stored on a general ledger with two groups of content:
The first one is: the Module group contains the resources declared by the account holder and the procedure is possible for these resources throughout the system,
The second one is: Resource group containing the values of the resources.
In the initial phase, the declaration of resource types and procedures is restricted Once the declaration feature is activated, users can create smart contracts by utilizing the new content declaration mechanism within the module group of their account.
Libra’s liberalization
Facebook's financial services company Calibra will be responsible for developing e- wallets and products that use Libra, allowing users to send cryptocurrency to others via smartphones, similarly sending text message.
The consensus mechanism of Blockchain Libra operates similarly to Delegated Proof of Stake (DPoS), where major members of the Libra alliance are responsible for validating transactions within the system.
DPoS is one of the fastest consensus mechanisms to date, capable of executing thousands of transactions per second, outperforming Bitcoin's number 7 or Ethereum's 15.
Many businesses are eager to invest up to $10 million to become network validators due to the significant value that Libra offers Prior to developing applications within the Libra ecosystem, its members possessed substantial financial resources, raising the question of the origins of this funding.
Libra Coin operates without limits, as its market supply is determined by user exchanges When you exchange 50 USD for Libra Coin, an equivalent amount is instantly minted and provided to you.
When you attempt to withdraw money from the system, Libra Coin will be automatically destroyed This operational mechanism of Libra Coin mirrors the Special Drawing Rights (SDR) utilized by certain countries within the IMF.
Libra members stand to profit significantly from the unique mechanism of Libra Coin, which is backed by fiat currency When users convert their fiat currency into Libra Coin, the value flows directly to Libra members This influx of capital allows them to invest, trade, or deposit in banks to earn interest Essentially, validators can generate substantial income from the very money they manage.
Libra Coin is a stablecoin, which means it does not fluctuate in value like traditional cryptocurrencies While it aims to maintain stability, it is still susceptible to inflation due to its peg to fiat currencies, making the risk of devaluation a possibility.
Validators on the Libra network will not only benefit from significant user investments but also create and sell applications, effectively transforming the platform into a robust e-commerce hub By integrating smart contracts and voice messaging systems, Libra is poised to establish itself as a dominant force in the market, potentially evolving into a super monopoly with immense influence.
E-commerce is a good bait that no cryptocurrency has been able to reach until now If crypto projects want to compete with Facebook, they need to be smart and build a business model similar to what Facebook is doing.
Libra boasts a comprehensive ecosystem that significantly enhances community engagement, leveraging billions of users This innovative platform is set to be the first to effectively challenge traditional banking systems and governmental monetary policies.
In case Libra exists in parallel with the national currency, whether people still use the traditional banking system when Libra offers a better service with cheap cost and fast speed.
Libra’s mobility in the economy
In his speech, the CEO of Facebook highlighted that the Libra Project aims to enhance financial inclusivity by enabling users to send and receive payments globally in a secure, cost-effective, and efficient way Facebook cites research indicating that access to financial services can empower individuals to break free from poverty The company is committed to addressing this challenge and contributing to a viable solution.
Mobile payment technologies have greatly benefited the unbanked population globally, with around 1.7 billion individuals lacking bank accounts Remarkably, nearly two-thirds of these individuals possess mobile devices capable of facilitating online payment services.
Experts suggest that leveraging financial technology (Fintech) and moving away from traditional cash payments can significantly enhance the economic stability of individuals and families By integrating technology into finance, more people can be engaged in the economy, empowering them to utilize their funds for purposes beyond mere daily expenses.
If the Libra actually goes into operation, its development and ecosystem will have at least four major impacts on the global economy and financial and monetary markets.
Libra has the potential to enhance the efficiency of payment systems and boost consumer confidence by providing innovative digital currencies and tools on advanced technology platforms This can lead to lower costs and improved access to financial services However, these benefits hinge on the reliability of digital currencies and the technology that supports them, along with widespread acceptance among users Any failures associated with Libra could erode consumer trust in electronic payment systems as a whole, making it difficult to revert to traditional payment methods quickly.
The emergence of Libra presents significant challenges in preventing money laundering and criminal activities Inadequate management of these risks could expose Libra to fraud and result in claims unsupported by the issuer's assets As technology evolves rapidly, the threat of cybercrime, forgery, and fraud becomes increasingly difficult to mitigate Moreover, the potential for unlimited transfers with Libra, combined with transaction anonymity, raises concerns about its misuse for money laundering, tax evasion, and terrorist financing.
The emergence of Telra Money poses a significant threat to financial intermediaries, Fintech companies, and e-wallet services by enabling individuals to conduct low-cost, rapid transactions directly with one another through the Libra blockchain platform and its associated applications Additionally, the potential for countries to impose bans on digital currencies, particularly Libra, introduces substantial risks for these financial entities if they choose to accept such currencies.
The rise of Libra and digital currencies significantly influences central bank policies and regulatory frameworks worldwide As the adoption of digital money grows, it affects payment systems, alters money supply dynamics, and necessitates a reassessment of management and oversight responsibilities to mitigate systemic risks Various countries are exploring approaches to effectively manage and monitor these changes Additionally, experts warn that the proliferation of digital currencies may result in budgetary losses due to tax evasion, money laundering, and inadequate taxation practices.
effect of Libra currency to the economy
Positive impacts of Libra currency
Libra effectively fulfills essential monetary functions such as serving as a measure of value, a means of exchange, a method of payment, a way to accumulate wealth, and facilitating international transactions While some aspects require further clarification, Libra's transparent design offers significant advantages over traditional cash, including enhanced stability, secure storage, convenient and cost-effective transactions, and programmability.
Libra, a stablecoin, aims to revolutionize the global economy by maintaining a stable value and avoiding the volatility seen in cryptocurrencies like Bitcoin and Ethereum Unlike existing cryptocurrencies, which are not backed by physical assets and are susceptible to speculative bubbles, Libra will be fully backed by a diversified basket of bank deposits and short-term government securities in major international currencies such as the US dollar, Euro, yen, CAD, and AUD This backing will provide global citizens with a reliable digital alternative to their local currencies, ensuring that Libra remains stable and free from wild price fluctuations.
The backing of assets can significantly reduce the risk of high inflation globally, as highlighted by Nobel Prize-winning economist Friedrich Hayek in his book “The Denationalisation of Money.” Hayek argued that allowing individuals to choose from various forms of private money, such as Libra, rather than relying solely on government-issued currency, would enhance overall economic stability He believed that the introduction of private money would effectively eliminate inflation, as people would naturally gravitate towards the most stable currency available.
Libra is poised to significantly reduce global money transfer costs, as its low marginal cost will benefit the vast network of Facebook's 2.4 billion users Currently, travelers and migrants face hefty fees for transferring funds internationally, but Libra aims to eliminate these charges entirely With direct access through popular apps like Messenger and WhatsApp, Libra will provide a seamless and cost-effective solution for users around the world.
Libra aims to facilitate a cash-less society, enabling users to make purchases and pay bills with a simple tap on their smartphones However, this service primarily targets individuals with access to smartphones, internet connectivity, and bank accounts, potentially excluding those in developing nations Claire Finkelstein, a national security researcher at the University of Pennsylvania Law School, cautions that Libra could undermine the authority of nation-states Additionally, there are significant concerns regarding the taxation of money exchanges through Libra in these emerging markets.
Negative impacts of Libra currency
Libra poses challenges to national monetary policy by introducing unpredictable effects on money supply and demand Banking expert Mr Ly Xuan Hai warns of potential risks associated with Libra's supply, particularly if deposit and credit transactions occur without proper management of the money multiplier However, Libra's involvement could mitigate the risk of capital shortages for economic development, provided the economy remains healthy Ultimately, while central banks may struggle to regulate the money supply as effectively as before, this shift may not be as critical as it once seemed.
The monetary multiplier is a key concept that quantifies how commercial banks amplify the money supply in the economy It is defined as the ratio of the total money supply to the base money supply The formula for calculating the money supply is expressed as m = 1 + (C + D + E) / (C + R), which can also be represented as m = ((C + E) / D + 1) / (C / D + R / D) Understanding this multiplier is essential for analyzing the impact of banking activities on overall economic liquidity.
In a stable economic environment, the total money supply (M) can be defined by the formula M = C + D + E, where E represents the circulating amount of Libra, C denotes cash, and D signifies digital money and deposits It's important to note that the denominator H, which equals C + R, remains constant throughout this equation.
The stability of the monetary multiplier (m) is crucial for the Central Bank's ability to manage the money supply However, the increasing adoption of Libra in the economy may lead to unpredictable changes in this multiplier, complicating the Central Bank's efforts to regulate the money supply through traditional legal currency controls.
Libra is expected to influence fiscal policy significantly, particularly concerning taxes and fees, potentially leading to tax losses in the tourism and import-export sectors A recent press conference highlighted an increase in Chinese tourists using Alipay in Vietnam, suggesting that Libra could create a similar trend on a much larger scale.
Software companies can engage in cross-border sales without the need for income tax returns Additionally, the use of Libra as an anonymous payment channel facilitates the potential for large-scale smuggling and unregulated money transfers abroad.
Libra is poised to significantly influence exchange rate policy, prompting governments to align their exchange rates more closely with market supply and demand As Libra gains traction, stakeholders may feel disadvantaged if the exchange rate remains disconnected, leading to a greater reliance on Libra for transactions.
Libra significantly influences interest rate policies, banking regulations, and the functioning of commercial banking systems With reduced entry barriers, virtually anyone can compete with Libra-based banks, prompting governments to lower base rates to enable local currency credit services to compete Users are likely to prefer Libra loans, which offer low interest rates and fast, low-cost transfers, over traditional banking options burdened with high fees and complex processes The impact of services like Alipay and WeChat on China's banking system illustrates this shift, as they have become integral to the economy, facilitating transactions worth up to $24 trillion Ant Financial, the parent company of Alipay, ranks as the 10th largest bank globally and operates the Yuebao cash fund, which attracts users with its simple interest-generating balance feature In response to this growth, the Central Bank of China established a separate clearing system to manage mobile payment activities, highlighting the challenges other countries may face in regulating Libra transactions.
Fifth, Libra will affect the management, mobilization and control of capital flows.
Businesses can more effectively access global capital through Libra, eliminating the complexities of raising domestic funds Startups and highly digitalized companies stand to gain significantly by utilizing this innovative funding channel.
The impact of Libra is largely determined by the overall health of the economy, the effectiveness of monetary control, government reliability, corruption levels, and tax policies.
FEDERAL RESERVE’S REACTIONS TOWARD LIBRA
US and Fed circumstances when Libra currency first appeared
Facebook's Libra currency has the potential to become one of the most profitable ventures in history, but it poses significant risks to the public and central banks like the Federal Reserve With 2.45 billion users globally and 244 million in the U.S., Facebook is the most popular social network, making Libra easily accessible through a simple "login." This innovation effectively transforms Facebook into a comprehensive banking platform, offering services like payments, savings, and money transfers in a widely accepted currency If the Libra Association were considered a nation, it would have a population of 2.5 billion, positioning it as the largest nation in the world and establishing the Libra Association as a new central bank.
The rising popularity of cryptocurrency transactions poses a significant threat to central banks, particularly the Federal Reserve This trend underscores the growing influence of digital currencies like Libra, highlighting the need for traditional financial institutions to adapt to the changing landscape of monetary systems.
The globalization of cryptocurrency has diminished governments' monopolies on currency issuance, allowing firms and associations to create their own private currencies accessible to anyone with the right technology This shift complicates governmental control over national economies and monetary policies, as traditional frameworks struggle to address the rise of cryptocurrencies The decentralization of currency authority poses risks, including potential increases in criminal activities such as money laundering and terrorism.
As global exchanges increase, the demand for a unified monetary currency grows, facilitating trade and lowering transaction costs In this evolving landscape, the role of government becomes crucial in addressing the challenges posed by diminishing currency value and maintaining their influence in economic matters.
Third, decentralized network is undeniably hard to stop, yet decentralization is greatly against what central banks and governments are for.
Lastly, programmable money is now the taste of the century.
The emergence of cryptocurrencies, particularly Facebook's Libra, poses a significant threat to governments and central banks, especially the Federal Reserve, which has long controlled the global economy by managing the USD, the world's reserve currency As some experts suggest, Libra could potentially undermine the Fed's authority by offering an alternative that challenges the traditional banking system This concern has led U.S regulators to react strongly, while the cryptocurrency community views Libra's rise as a non-threatening development in the broader crypto landscape.
The emergence of Libra poses a significant concern for the Federal Reserve, especially as it prepares to launch its own real-time payment system, FedNow, in 2024 FedNow aims to provide firms with fast and efficient international payment services If Libra had launched successfully in 2020, it would have directly competed with FedNow, potentially undermining its adoption and effectiveness The success of Libra represents a substantial threat to the Federal Reserve's payment initiatives.
Federal Reserve’s reactions toward Libra currency
The Libra currency has sparked significant debate globally due to its numerous advantages and disadvantages This controversial cryptocurrency has generated conflicting opinions among Federal Reserve associates, highlighting the complexities of its impact Below are some key insights from the Central Bank of America regarding Libra.
The Libra currency faces significant criticism and scrutiny from various sectors, highlighting the potential negative impacts of this innovation In response to these concerns, the Federal Reserve has issued statements and implemented actions to address the challenges posed by Libra.
2.1.1.A great deal of criticism in semiannual report to Congress, July 2019
Launched in June 2019, Libra has sparked widespread protests, prompting Fed Chairman Jerome Powell to raise concerns about the currency In response, Powell established a working group to investigate potential implications, emphasizing the need for careful scrutiny during his testimony before a Congressional Committee.
Libra has sparked significant worries related to privacy, money laundering, consumer protection, and financial stability, highlighting the necessity for these issues to be addressed comprehensively and transparently.
During a recent hearing, Rep Bran Sherman, D-Calif., expressed strong concerns about Libra, arguing that it could shift power from the U.S government to individuals involved in sanctions evasion, terrorism, and drug trafficking, while diminishing the U.S dollar's status as the global reserve currency Sherman also criticized Facebook CEO Mark Zuckerberg, stating, “It is time to bring Mark Zuckerberg here,” emphasizing that Zuckerberg profits significantly from the U.S system yet seeks to undermine it The hearing concluded with a call for Facebook to delay the Libra project until appropriate regulations and standards for cryptocurrency circulation are established.
Despite ongoing criticism, there remains hope for Libra as the US and the Federal Reserve have not fully rejected the initiative According to Mr [Name], this indicates a potential path forward for the project.
Before its launch, Libra must navigate significant regulatory challenges, as emphasized by Powell The central bank has engaged with Facebook representatives and established a working group to address unresolved issues Powell highlighted the Fed's collaboration with other regulatory bodies and central banks globally, affirming their support for responsible innovation in financial services, provided that risks are properly identified and managed.
2.1.2.Federal Reserve claimed to have no responsibility to control over Libra currency
Much as the concern about the appearance of Libra currency that is aiming the knife at Federal Reserve’s power, and a variety of sectors in the economy like cryptocurrency (eg:
During his testimony, Fed Chairman Jerome Powell emphasized that the Federal Reserve does not intend to regulate cryptocurrencies, suggesting that Congress has the option to create a cohesive regulatory framework or allow a fragmented approach He redirected inquiries about Libra and cryptocurrencies, indicating that the Fed is not the appropriate authority for such matters The key takeaway is that the Fed is primarily concerned with the risks posed by Libra, which is governed by the international Libra Association rather than any single country (Full disclosure: I own Bitcoin and other cryptocurrencies.)
The Federal Reserve, led by Powell, faced criticism for its limited engagement with Facebook's regulatory discussions, having met only a few times without plans for future meetings Powell emphasized that the Fed lacks the necessary responsibilities and powers to address issues surrounding Libra and cryptocurrencies, suggesting that Congress should seek answers elsewhere He also remarked that it is premature to assess the monetary impacts of cryptocurrencies, highlighting the ongoing uncertainty in this evolving landscape (Full disclosure: I own Bitcoin and other cryptocurrencies.)
2.1.3.Further comments from Federal Reserve Governors
Despite facing criticism, Federal regulators acknowledge the potential of Libra, although its launch will encounter significant hurdles According to Reuters, a spokesperson highlighted that “it should be no surprise that Facebook’s Libra is attracting a high level of scrutiny from lawmakers and authorities.” They emphasized that Libra, along with any globally scaled stablecoin, must resolve essential legal and regulatory challenges before it can process its inaugural payment.
The Federal Reserve's November financial stability report warns that a poorly designed and unregulated global stablecoin network may threaten financial stability It highlights that if a stablecoin fails to function as intended, it could lead to disruptions in other areas of the financial system.
Despite their statements made on Libra currency for the period from July up until November of 2019, in 17 November 2019, Fed finally admit the possibility of this project.
Libra like global stablecoin initiatives “have the potential to rapidly achieve widespread adoption,” said the central bank in its latest Financial Stability Report published Friday.
The conclusion is based on the clear potential of Libra and the significant influence of Facebook, Calibra, and the Libra Association, indicating that there are no substantial obstacles that could hinder the successful launch of this initiative.
The Group of Seven emphasizes that no global stablecoin initiative should launch until all legal, regulatory, and oversight challenges are thoroughly resolved This requires careful design and compliance with regulations that are clear and proportionate to the associated risks, according to the central bank's conclusion.
The Federal Reserve's report presents a generally optimistic outlook, though it includes some cautionary notes However, there is a noticeable lack of supportive feedback regarding Libra from the Fed and other global central banks Consequently, the challenges and potential support that Libra may encounter from the Federal Reserve remain uncertain.
Conclusion and Recommendation for Federal Reserve
The launch of Libra currency poses both opportunities and challenges for the Federal Reserve and the global economy, potentially impacting the use of the USD and monetary policies worldwide Without careful regulation, risks such as money laundering, financial instability, and anti-trust issues could arise, making its impact on society questionable However, if implemented with stringent oversight, Libra could ultimately deliver more benefits than drawbacks, aiming to establish itself as a de facto currency in the market.