What if the market for the underlying currencies and assets is (for a while?) more liquid than the market for Libras? Say the basket values adjust before Libra values do. What kind of arbitrage opportunities does that create? If we know Libras are due to depreciate, is there a higher nominal rate of interest on them, as with traditional currencies in an international multi-currency setting? What are the equivalents of covered and uncovered interest parity in this setting? Does a kind of “program trading” arise to perform the arbitrage? Can perfect redemption be offered credibly while the prices are still out of whack?

plus there are smart contracts

Another important aspect of the Libra Blockchain is Move, its new programming language. This programming language will allow users to define their own smart contracts in the future. Smart contracts are agreements written in code whose clauses are automatically enforced when a set of predetermined criteria is met.

and analysis by Matt Levine:

there are probably some things to say about regulation? Is this thing a payments processor? A money-market fund? A bank? I dunno, maybe, a little bit. 7 I cannot get too worked up about the regulatory framework applicable to it. For now I would prefer to be swept up by Facebook’s grand vision for it. That vision seems to involve competing with or even displacing national currencies, and if you’re going that far why not displace national regulatory regimes too? If we meet back here in 20 years and Libra has become the currency of the internet, we’re not going to be talking about whether Libra complies with banking regulation, we’re going to be talking about how the Libra Association regulates and stress-tests the Libra banks that it licenses

and a possible long game:

And this is when this bet would pay off for Facebook (and the second point I missed in my earlier analysis): the implication that digital currencies will do for money what the Internet did for information is that the very long-term trend will be towards centralization around Aggregators. When there is no friction, control shifts from gatekeepers controlling supply to Aggregators controlling demand. To that end, by pioneering Libra, building what will almost certainly be the first wallet for the currency, and bringing to bear its unmatched network for facilitating payments, Facebook is betting it will offer the best experience for digital currency flows, giving it power not by controlling Libra but rather by controlling the most users of Libra.

2022-01-29:

Facebook announced in 2019 with enormous fanfare that it was going to launch a stablecoin and work closely with all of the relevant regulators blah blah blah, and it went to the Federal Reserve and said “what do we need to do to launch a stablecoin,” and the Fed said “you must bring me the egg of a dragon and the tears of a unicorn,” and now the Facebook stablecoin is shutting down. One of the largest companies in the world devoted millions of dollars to figuring out how to launch a stablecoin and concluded that it was impossible. It is demonstrably not impossible! Tether did it! Tether has a hugely successful stablecoin! Tether does not care at all about working closely with all of the relevant regulators! That’s why!

• Uncategorized