Updated: Apr 3, 2021
Calvin Coolidge said "Doubters do not achieve, skeptics do not contribute, and cynics do not create". At the outset let me truthfully confess that I am neither of the three on this subject. On the contrary, I truly believe that we are changing the world as how business is conducted, and transactions are processed, “one blockchain at a time", and as we use this technology true to its potential, this world will turn a better place for everyone. However having said that, I do also believe that the blockchain community (world over) is obsessed with treating all digitized tokens being conceived on any blockchain protocol as currencies in general sense and the media latches on to this term quite easily for a simple reason that if its termed as a currency then there can be more excitement created over, if and how cryptocurrencies can tip the world over in replacing fiat currencies.
Before we dig deep on this subject, let’s first get a little amused by these headlines which have kept us on the edge of a currency-war hype, since LIBRA was born.
“Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets"
“Facebook's Libra May Spark a Currency War”
“Libra Wants to Be a New Global Fiat Currency, Not a Cryptocurrency"
“Facebook’s Libra cryptocurrency: where are the banks?
A few months back I had written a similar column on JP-Coin (https://www.thebtn.tv/exclusive-content/article/settling-skepticism-over-jpm-coin-prasoon-mukherjee) when the media was equally excited over a claim that JP Morgan had invented something that was parallel to Bitcoin. Whereas why PM-Coin was conceived as a token linked to USD, was so that it could be transacted over JP's permissioned DLT framework, enabling clients to send money through blockchain. The framework would allow the tokens (as coins) to get transferred instantaneously, and subsequently redeemed for the equivalent amount of U.S. dollars, thereby reducing the typical settlement time and inefficiencies in the system. There wasn't a thing about JP-Coin being a currency to be used as medium of exchange. This time on its LIBRA and goodness gracious, the consortium of organizations which have come together to put this protocol in place, is led by none other than facebook, and so catching on to the hype was quite natural.
However once the dust has settled surrounding so much of noise around LIBRA being a currency, what we will find beneath the heap is LIBRA, as just another Securities Token Offering (STO), technically driven by similar protocols that drive other STOs in the blockchain space, however different from most others because this time brand LIBRA is backed by facebook and others as part of the LIBRA association which are big names like UBER, PayPal, Spotify etc.
Why is LIBRA a Securities Token Offering (STO)?
A security is a fungible and negotiable financial instrument that holds monetary value. In other words it’s an investment vehicle that is backed by real-world asset such as a portfolio of currency, bonds or stock, a proportionate representation of ownership in a company etc. And a “securities token”, represents the ownership information of the investment vehicle, recorded on a blockchain. When one invests in traditional stocks, for example, ownership information is recorded by a registrar & transfer agent and issued as a digital certificate. For STOs as well, the end purpose being the same, however, they are recorded on a blockchain, issued as a token and transacted via execution of smart contracts.
LIBRA is also conceived to be a STO that will be fully backed by a reserve of real assets and like all STOs, LIBRA will also have to comply with regulatory governance related to STOs, in all countries where it will be transacted. Additionally, like most securities, LIBRA will be held safe at depositories and with custodians (for institutional holding) and traded at exchanges against money as currency to ensure that there is sufficient liquidity.
Why is LIBRA not a Currency?
For the same reason as why no security which represents unit of holding in a collective investment fund is a currency, LIBRA is also not a currency. A person investing in LIBRA, will be just like any other investor in an unitized fund, holding his share of ownership in the fund represented by the units of the fund that he or she has bought. In fact as we progressively move towards a token based economy, most unitized funds will be issuing securities in the form of STOs which will transacted over some DLT framework powered by smart contracts. However, this doesn’t warrant that all such STOs will be currencies posing as many use case for replacing national currencies. It's common sense.
Why no STOs can possibly be currencies that can potentially replace a national currency?
The pertinent reasons to support this answer are very macroeconomic in nature related to Central Banks playing the role of a governing body in every nation that controls money supply, and which is a tool of immense importance for any nation's economic, political and social stability. Before this central authority is diluted (if ever that be the case), or before consortium of corporates start playing the role of issuer of currencies (hypothetically), there needs to be some alternate theory in place to govern money supply, inflation, national fiscal imbalances etc, which is rather a far-fetched thought from the context of where we stand today in terms of even ideation.
There are two unique economic principles that get challenged the moment we place any STO as a national currency, or a world currency replacing all national currencies.
In our hypothesis that any STO becomes a national currency, the most flawed assumption would be that the issuance of such an asset class will be self-governed in a permission-less state with no central authority in charge. This in macro-economic sense takes away the authority of a central bank in governing money supply. If this authority is taken away the flawed assumption that this hypothesis makes, is that, fiscal conditions will always be balanced, public expenditure will always equal public revenue, and therefore, there will be no need for a central bank to intervene using monetary policies. In other words, this means no fiscal deficit, balanced inflation, steady employment and market driven interest rates. These are quite utopian thoughts.
In our second hypothesis that STOs become a world currency - Theoretically, it would mean that all countries of the world will surprisingly, not only have all their internal fiscal conditions in perfect order as explained in point 1, but as well share amongst all other nations the same level of economic parameters like inflation, unemployment, fiscal deficits etc. which would then have no ask for national central bankers and as well any governance at a world level.
The above macroeconomic factors are seldom brought on to the table for discussion when considering the feasibility of STOs becoming a currency and given these reasons, the adoption of any STO as a currency is still a long time away.
Why is it important to term LIBRA an STO and not a currency for it's own success?
The answer is twofold.
The first being simply - Blockchain, still being an evolving area, it will be more prudent for the industry to start using an ubiquitous language surrounding the development of multitude of use cases to keep information consistent. And informed journalism will play a big role in maintaining this standard across It's use.
The second reason is more fundamental to regulations in different geographies which are trying to standardize the STO market and give it a legitimate place, unlike what's happening in the cryptocurrency space where no government is keen to give it a regulatory look for the same reasons as why STOs can't take the place of being "currencies" as "legal tenders" in the near future. The reasons are more macroeconomic as explained in the earlier section and the support of this argument can be found in how are STOs being defined and regulated around the world. The Securities and Exchange Commission (SEC) in the United States is perhaps leading the pack in being most vocal on how a security token be defined, and whether or not certain utility tokens be qualified as, security tokens that should be regulated.
According to the SEC, all tokenized asset classes should be treated as a security (and not currency) if they fall under the definition of an investment contract. And it goes on to clearly state that - "An investment contract is, an investment of money, in a common enterprise, with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others". And if we were to frame LIBRA within the bounds of this statement it perfectly fits the definition.
On similar stands, Britain's Financial Conduct Authority (FCA) also clearly distinguishes between three types of tokens - "Exchange Tokens", "Utility Tokens" and "Securities Token". And also Switzerland's Financial Market Supervisory Authority (FINMA) released its STO guidelines classifying such investment contracts as "Payment Tokens", "Utility Tokens" and "Asset Tokens". There are other jurisdictions also that allow regulated STOs like Singapore, Estonia etc. However none have classified tokens as currencies with generally qualified features of money as "medium of exchange", and rightfully so.
In Conclusion - My view is that soon enough, the association of corporate which have conceived LIBRA, will realize that it will be much easier to maneuver through the complex regulatory maze, if it's legally branded as a tokenized asset and not a currency.
Having said that, most likely LIBRA, will first get officially launched in those geographies which have started regulating the STO market. And there are also countries which have either no stand on STOs (still) or are on the other end of the spectrum, having banned the circulation of cryptocurrencies and STOs completely, where LIBRA will find it difficult to get a start initially. These countries include China, South Korea, Vietnam, Morocco, Bolivia, India, Lebanon etc.
Lastly, success of LIBRA, to an investor, will not be attributed as much to the technology that drives it's tokenization, but more on characteristics, such as liquidity, and the quality of asset management that will determine it's stability plus underlying value in the market, like every other collective investment trust or fund. In other words, the future of blockchain, is not on the technology alone, but also it belongs to those how can use it to make ideas happen.
So while we rejoice the birth of another token in the blockchain space lets also be rational enough to give it its right place within the regulatory framework that it meaningfully deserves as an STO. Let's not doubt what it can achieve or be skeptical in how it can contribute to business and technology. I am deeply convinced that it's an idea which is very well conceived and a work, well done, that will pave the way for more STOs to be structured with equally strong fundamentals.