7 PM | The IMF should take over Libra and make the most of the idea | 24th October, 2019

Context: Facebook’s cryptocurrency Libra.

More in news:

  • Social media giant Facebook had planned to launch a new digital currency, called Libra, in 2020.
  • Visa, Mastercard, PayPal, Stripe, Mercado Pago and eBay have abandoned the Facebook-led corporate alliance underpinning Libra. Thus, the Libra Association is fragmenting.
  • Mark Zuckerberg appeared before the House Committee on Financial Services on 23 October to discuss Libra and its planned roll-out.

Libra:

  • Libra is a simple global currency and financial infrastructure that empowers billions of people. 
  • Libra is made up of three parts that will work together to create a more inclusive financial system:
    • It is built on a secure, scalable, and reliable blockchain;
    • It is backed by a reserve of assets designed to give it intrinsic value;
    • It is governed by the independent Libra Association tasked with evolving the ecosystem.
  • The Libra currency is built on the “Libra Blockchain.” Because it is intended to address a global audience, the software that implements the Libra Blockchain is open source.
  • Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets.
  • A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.
  • The Libra Reserve will be administered with the objective of preserving the value of Libra over time. 
  • The Libra Association is an independent, not-for-profit membership organization headquartered in Geneva, Switzerland.
  • The association’s purpose is to coordinate and provide a framework for governance for the network and reserve and lead social impact grant-making in support of financial inclusion.

How Libra can be a game-changer?

  • As Business Insider reported back in August 2017, 2 billion people around the globe don’t have a bank account. Here are some more statistics about the unbanked population:
    • More than 20% of unbanked adults receive wages or government transfers in cash, and many people in developing countries pay bills and school fees in cash.
    • Women make up just over half (55%) of unbanked people worldwide.
    • SE Asia alone has 438 million unbanked people, which is 73% of the entire population. According to a study done by McKinsey, reaching to the unbanked population in this region could increase its economic contribution from $17 billion to $52 billion by 2030.
    • India, which is the target market for Libra, has about 190 million unbanked people, the second largest in the world after China.
  • The advent of the internet and mobile broadband has empowered billions of people globally to have access to the world’s knowledge and information, high-fidelity communications, and a wide range of lower-cost, more convenient services. These services are now accessible using a $40 smartphone from almost anywhere in the world.
  • Libra is a global, digitally native, reserve-backed cryptocurrency built on the foundation of blockchain technology. The vision of Libra is that people will be able to send, receive, spend, and secure their money, enabling a more inclusive global financial system.

Concerns about Libra: Facebook’s Libra, a global cryptocurrency, poses three main challenges:

  • The governance of the currency: Libra is privately generated and governed. Private governance of money implying unaccountability, enclosure of reams of financial data, and the socialisation of its risk leading to a public bailout possibility.
  • The control over financial data: Commentators and governments have raised issues related to the dangers of combining financial data with behavioral data. There is no indication that this data will be open for use by anyone outside the Libra Association, although the Libra blockchain itself will be open for anyone to build products on top of.
  • The financial risk associated: Many have pointed out that if there is a run on a widely-adopted private currency- that is, if Libra loses public confidence and people start selling it all at once, the currency will need bailing out using public funds. This would be yet another instance of the process of socializing capitalist risk.

International Monetary Fund (IMF):

  • The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
  • In 1944, representatives of 44 nations met in Bretton Woods, New Hampshire, to draw up a plan for the post-World War II economic order. Their goal was to avoid a repetition of the destructive policies that could spark another conflict. So they created the IMF to promote international monetary cooperation. Ever since, the IMF has played a vital role in maintaining global economic stability and ensuring broadly shared prosperity.
  • Thereby, created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
  • The IMF’s primary purpose is to ensure the stability of the international monetary system, the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

Way Forward:

Libra is very innovative, useful and visionary concept. For the reason of being monopolistic in the hands of Facebook, the technology should not be just thrown away.  The core concept of Libra can be handed over to the IMF so that it can be used to reduce global trade imbalances and rebalance financial flows. Indeed, a Libra-like cryptocurrency could help the IMF fulfil its original purpose.

Source: https://www.livemint.com/opinion/online-views/the-imf-should-take-over-libra-and-make-the-most-of-the-idea-11571854142243.html

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