If Facebook’s “stable coin” is an MMMF backed by short-term forex assets attached to a blockchain, and MMMFs are shadow banks, then Libra is pitching to be a shadow bank with a blockchain payments system.īanks make promises, MMMFs make promises, and it looks like Facebook is making promises too. The entire system is based on the ability of these Libra “primary dealers” to ensure liquidity in the currency-to-Libra market, just as the MMMF ecosystem is based on market making between units and the underlying treasuries, and just as banking is predicated on making a market between checking accounts and central bank money. How good your promise is might depend on how large your reserve is (fractional or 100%), but the fact remains that whether it is checking accounts, MMMF units, or Libra coins, it is a promise, not a token.Īuthorised resellers make a market between money and Libra for a spread.
Banks have a fractional reserve so they are not “fully backed” (most of their assets are illiquid), but this is a difference of degree and not kind. Banks have checking accounts whose “units” they promise to maintain at par (law mandates their spread is 0) with a particular underlying asset: central bank liabilities or “high-powered money”. This is familiar to us from the operations of MMMFs.Įconomist Perry Mehrling has shown us how MMMFs and banks share the same internal logic: that of a securities dealer making a spread. A market maker called an “authorised reseller” stands ready to undertake this transaction, and there has to be something in it for the reseller: this is the spread. Why this spread? The answer is simple: to withdraw your money from the Libra “bank”, the reserve will have to undertake a market transaction to liquidate some assets. Unlike MMMFs, Facebook promises that “it will be possible to convert coins back to fiat at a narrow spread above or below their current value”. Terms like “fully backed” and “intrinsic value” invoke the token idea: one token for one particular coat. Libra is therefore a “derivative”: it derives its value from an underlying asset. Like MMMF units, Libra coins are liabilities whose value is derived from the other side of the reserve’s balance sheet: key currency treasury bonds. To see how this works, think of an old-fashioned money market mutual fund (MMMF) that promises to preserve its net asset value at $1 (promising not to “break the buck”). For “backing”, we should read “promising”.
This backing makes Libra a “stable coin” and gives it the ring of a token representing some real asset. Libra is a banking venture dressed up in cryptography.įacebook claims that Libra coins will be “fully backed” by a set of “reserve” assets. After all, the business of issuing promissory notes that function as money is called banking. Facebook’s proposed cryptocurrency plays on this confusion between a token and a promise one might even say it weaponises it. Your coat token is not a promise to return any coat on demand it represents your particular coat. Rather than carry your coat around with you in a restaurant, you keep it at the door and get a numbered token.
A token is not a promise to pay something it merely represents something else in a more convenient form. Cryptocurrency enthusiasts have always erred in identifying modern money: they have never appreciated the fundamental difference between a token and a promissory note.
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