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Noelle Acheson is a veteran of Business Analysis and a member of CoinDesk's product team. The opinions expressed in this article are those of the author.
The following article was originally published in Institutional Crypto CoinDesk, a free newsletter for institutional investors interested in cryptoassets, with news and views of crypto infrastructure delivered every Tuesday. Register here.
Coming from an organization so attached to the question of identity (whether real or not), it is surprising that Facebook's Balance piece seems confused as to its own.
The organization chose to call Libra "a stable global cryptocurrency" and the "cryptocurrency" label was replicated by the world's media. Yet, Libra is do not a cryptocurrency.
Do not misunderstand, those in our industry appreciate the attention to the concept since the announcement.
But in this case, the definition counts more than the semantics: it will affect the possible cases of use and the regulatory treatment. It could also transform the way investors view both stable and block-based securities.
What's in a name?
First, let's see why it's not a cryptocurrency.
Although the definitions vary, one of the main features of crypto-currencies is their resistance to censorship. For this, they must be "sufficiently decentralized" to prevent any group from deciding who will be able to process. Libra does not yet fulfill these criteria, and although the Foundation has announced its intention to gradually move to a "more decentralized" system, this is (or not) entirely in its hands.
In addition, the value of a Libra piece is not created by the underlying technology, the market, the mathematics or as you wish, to understand bitcoin and similar assets. This is a digital representation of a basket of fiat currencies and other securities.
The only thing that the Libra coin has in common with the crypto-currencies is that they all move in a chain.
So what is it? On the surface, it is a "stablecoin", a token that maintains a stable value through attachment to "real world" assets such as fiduciary currencies or commodities (some stablecoins have a value mechanism determined by an algorithm, discussion). The sector is currently flooded with stable projects that offer payment and settlement solutions, most of which are not yet operational. Of those that have started, few outside of Tether, supported by US dollars, have a large volume, although the market is young and constantly changing.
Where Libra differs from its stable peers, it is pummeled: according to the white paper, it will be backed by "a basket of bank deposits and short-term government securities"(My italics) Notice the use of the term "titles". An asset backed by securities is, by definition, also a security. Libra is more like an ETF than a stable bank note.
We can try to argue that short-term public debt is more a currency than a title. Even in the absence of revealing use of the term, the regulators' approach to stable currencies is still topical. At the Crypto Evolved Conference in New York last month, SEC Deputy Director Elizabeth Baird was invited to comment on the coins. His response was abrupt: "I think these are titles."
Others have argued that even relatively straightforward stable cash-backed coins could be characterized as swaps or "demand notes", both of which would be treated as securities. Valerie Szczepanik, SEC Digital Asset Manager, confirmed during a hearing Last week, it did not matter that the stablecoin "does not wait for profits" (with the usual warning of "facts and circumstances").
Security payment
Note that this is the Libra coin we are talking about, not the Libra investment chip which is obviously a security. We are talking about the sign that Facebook is hoping to become the de facto payment mechanism for most countries.
The White Paper opens as follows: "The mission of Libra is to put in place a single world currency and a financial infrastructure that empowers billions of people." By slipping on the unrealistic qualification of "simple" (really? ?), can we use security as a "currency"?
Asset-backed value representations were previously currencies – think of the dollar and other national currencies at the time of the gold standard. But they were backed by a commodity that was not controlled by any entity and had no issuer. The proposal of Libra is very different.
With that, we begin to see why the definition is so important. If the Balance token is officially classified as a security, as is likely, its use in a transaction will involve a "sale" of that security and a capital gain or loss. Since we are talking about stable currency, the taxable event is unlikely to be significant. But it will be greater than zero because the value of the Balance basket will fluctuate with the currency in which the Balance document is to be converted to complete the transaction (because it is unlikely that Libra will become a "unit of account" in which the value of local goods is referred to as).
Of course, software will emerge to mitigate friction and usefully calculate what we need to formally declare – but the need to do so will be a major hurdle. It's not just the hassle and costs involved; it is also the understandable desire of most users, even those who abide by the law, to stay out of the radar of tax authorities.
New packaging
What does it mean for crypto investors?
In terms of portfolio allocation, not a lot. Libra, as currently structured, will not provide competitive gains to funds seeking alpha. As its ecosystem matures, it could in the form of loans or guarantees, with stable returns – many funds provide superior liquidity and stability to risks and high performance. But that will not set the securities world on fire.
The main impact will not come so much from Libra itself, but from the perspective of a new class of assets.
The idea of securities as payment mechanisms is innovative and could open up many potential use cases. The required stable value does not necessarily have to mean a limited increase, since the issuance of new shares in the form of a kind of value-related dividend (for example) could maintain an anchor while offering a return on the carrier. Instead of increasing the price of the stock, an algorithm would emit more and destroy some if the value decreases. Your wealth would fluctuate, while the price of the action would remain stable.
Tax frictions linked to the use of a security as payment would not be a problem for institutions because they usually have well-managed back-office services.
The idea of securities backed by a basket of currencies and public debt is another interesting thread. We could see the emergence of tailor-made titles that cover the currency risk of the issuer. Foreign exchange hedges are a major concern for businesses and investors – imagine a debt instrument that integrates these complex equations into a stable return or into a pre-hedged token for use in capital markets or chain transactions. # 39; s supply.
Expect the unexpected
Financial innovation did not begin when blockchain technology took a new lease of life through connected networks and a decentralized consensus. Markets have been evolving furiously since there were, often unexpectedly with unintended consequences.
Despite all its features and flaws, Libra represents a significant step forward in this process. The stated goal of extending financial inclusion and reducing friction between payments is an objective that has mobilized entrepreneurship for decades, and while it may not be the solution expected by the world, it allows at least to advance the debate in a constructive way.
However, whatever the type of technology, few inventions end up being used in the original intent. It is unlikely that Libra will be different. By combining elements of distributed general led technology, business philosophy and savvy marketing, the initiative will ultimately increase the awareness, adoption and development of crypto-currencies and security tokens more broadly. Simply not as intended by the designers.
Image of the Balance via jakkapant turasen / Shutterstock.com
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