Facebook’s Libra Will Face Considerable Stress as a Payment System
While the bulk of the negative comments surrounding Facebook’s Libra have come from regulators, some financial analysts say the proposed cryptocurrency project could face massive operational issues. These problems reportedly affect cryptocurrencies designated as stablecoins.
Meanwhile, opposition to Facebook’s digital currency endeavor continues to grow with European Central Bank (ECB) board member describing the Libra project as beguiling but treacherous. For regulators, cryptos like Libra pose a threat to the control of mainstream financial institutions.
Libra is Vulnerable to Operational Bottlenecks
For Joshua Younger, a JPMorgan Analyst, Libra could potentially face some serious operational difficulties not related to regulatory compliance. According to Bloomberg, Younger issued a note to the Wall Street bank’s client highlighting some of the deficiencies in the proposed crypto project.
The note stated that Libra did not possess the same short-term liquidity facilities present in robust global payment systems. An excerpt from the note reads:
“As currently designed and proposed, they do not take into account the microstructure of operating such a payment system. The risk of payment system gridlock, particularly during periods of stress, could have serious macroeconomic consequences.”
This vulnerability could potentially become more apparent in times of stress. Their low volatility reportedly makes them susceptible to bottlenecks and seizures. Despite this warning, the analysts did note that Libra has room to grow and possibly corner a significant portion of the global payments arena.
There is already talk that Libra could pose a serious challenge to mainstream payment avenues like Visa. On the crypto side of things, the Ripple hierarchy has consistently stated that their business model will not be affected by a project like Ripple.
Back in July 2019, Blockonomi reported that JPMorgan did not consider Libra to be an existential threat to the currently existing status quo in the financial scene.
Negative Yields Could Throw a Massive Curveball
Libra’s operational matrix might also throw up another issue for the proposed cryptocurrency project. This time, the problem lies in the fact that it is a fiat-collateralized stablecoin. In Libra’s case, the stable crypto will be tied to a basket of currencies like the U.S. dollar.
Currently, the yield curve has turned negative, sparking fears of a recession. For Libra, the situation might even hold more trouble with the JPMorgan analyst stating:
“Any system that relies on reserve-asset income to fund operational and other ongoing costs becomes unstable in a negative yield world. With more than half of high-quality short-term sovereign debt already negative, the vast majority of the remainder made up of U.S. government securities, and trends pointing towards global monetary easing, a fully negative yielding Libra reserve has become a plausible (some would argue likely) risk.”
The problem stems from the fact that Libra will use the reserve fiat collateral to run the system. This basket of funds will form part of the payment for network maintenance costs as well as generating revenues for nodes.
The Anti-Libra Crowd Keeps Growing
Meanwhile, Libra has gotten itself another critic, this time in the form of Yves Mersch, an ECB board member. Speaking earlier in the week, Mersch quipped:
“Depending on Libra’s level of acceptance and on the referencing of the euro in its reserve basket, it could reduce the ECB’s control over the euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the single currency’s international role.”
Since the launch of the white paper, Libra has faced serious regulatory scrutiny from within and outside the United States. Facebook CEO Mark Zuckerberg has tried to allay fears by promising that the project will abide by best practices.
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