Fed Economists Call Fears of Original Libra Stablecoin ‘Overstated’

Economists at the Federal Reserve suggest Libra – in its original, basket-backed stablecoin form – might not have had as severe an impact on financial stability as policymakers suggested last year.

AccessTimeIconJun 22, 2020 at 3:39 p.m. UTC
Updated Sep 14, 2021 at 8:54 a.m. UTC

Economists at the Federal Reserve said an earlier version of Libra, the Facebook-linked stablecoin frequently targeted by lawmakers and central bankers as an economic wrecking ball, was unlikely to have lived up to its sovereign currency-killer hype.

Calling “fears of a so-called global stablecoin” “overstated” in a new report published Monday, economists Garth Baughman and Jean Flemming say policymakers may have focused perhaps too acutely on the likely downside of the previous Libra iteration's multiple currencies backing a new stablecoin. The pair modeled a so-called basket-backed stablecoin in a hypothetical scenario, evaluating the likely impact that stablecoin would have on the economy as well as the likelihood of it being adopted.

Critics argued Libra’s original plan to maintain its stablecoin’s value from multiple currency reserves could destabilize or even displace those underlying fiat currencies. U.S lawmakers tried to freeze the project, Australia’s central bank said no one would use it and France’s finance minister threatened to block Libra over fears it could oust sovereign currencies.

The Fed economists wrote that their own modeling discounts that possibility.

“Our model shows that although the basket may have the potential to become important and globally demanded, [the regular ebb and flow of fiat value and trade] make it such that the basket never dominates either of the component currencies,” they wrote. 

Their point is in some ways moot. Libra’s project leaders abandoned plans for a single basket-backed stablecoin in April 2020 in a major concession to regulators. Now, Libra’s “global stablecoin” will be a basket of other stablecoins themselves backed by fiat reserves.

But the Fed's paper, written in February and apparently updated a month after Libra’s change, nonetheless raises questions about whether policymakers moved too aggressively against the tech project they blasted for months.

“A simpler question arises: Does a basket currency actually provide substantial value relative to the current system?" they asked. They found that may well be the case in certain circumstances. 

“Although the basket currency will never dominate the sovereign currencies it comprises, we find that there can be substantial gains in world welfare if many sellers accept the basket as payment,” they wrote.


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