The Libra Association, a 28 company, non-profit organization led by Facebook announced an intent to launch a digital currency or cryptocurrency on the internet. The cryptocurrency, called the Libra, would be a price-stable digital asset tied to a basket of fiat currency holdings in a sort of globally shared bank called the Libra Reserve. 28 founding members, companies that include the likes of Uber, Spotify, Mastercard and various nonprofits like Kiva, Mercy Corps and Women’s World Banking would be in charge of the Libra Reserve, the main responsibility of which would be ensuring that all Libra currency circulating on the market was backed with an equivalent amount of fiat deposits at the Libra Reserve.
The fiat currency deposits in the Libra Reserve would consist of a basket of proven, price-stable assets like the British Pound, the Euro, the US Dollar and the Japanese Yen but it could change if the founding members, which will be at least 100 large companies and organizations by the time of launch, democratically voted to change its holdings.
If the Libra Association manages to do what it says it’s going to do, we could have the first universally trade-able, price-stable currency to use in global digital commerce. A currency that takes all the good things about fiat currencies, like their relative stability and digitizes it into a cryptocurrency format, which allows for the exchange of value on a global and instantaneous scale. Libra would work like a message on your phone does. Anyone on earth with access to the Internet or a cheap mobile smartphone could suddenly engage in global internet commerce.
This is a concept famously pioneered by the launch of Bitcoin by an anonymous individual(s) or group by the name of Satoshi Nakamoto in 2009. At it’s core, Bitcoin is two things:
Bitcoin is a breakthrough in computer science. A way to establish digital scarcity in an online environment. Similar to how cash you keep in your wallet works. You know that there’s only so many US dollars out there in circulation and that are available to trade. Their scarcity, or at least perceived scarcity, are what give them value. Their value makes them trade-able.
This same concept applies to any healthy financial market where assets or products are actively being traded. Scarcity gives stocks, bonds, currencies and other financial commodities value and thus they become trade-able. Bitcoin, as a technological breakthrough, allowed for financial assets and other commodities to be traded in a digital environment. A digital environment that allowed for value to be exchanged on an instantaneous and global scale. Traditional global financial barriers didn’t apply anymore.
Value could now move as simply as a text would. Suddenly anyone could leverage blockchain, the open-source technology behind Bitcoin, and create financial instruments on top of it and trade it in a global, borderless digital environment. Bitcoin just happened to be the first financial instrument built on top of it. Which brings us to our next point; bitcoin as it relates to monetary policy.
2. So when Bitcoin was created by that anonymous person or group, Satoshi Nakamoto, in 2009 in the core code of the bitcoin software was programmed a unique monetary policy. Software code that controlled the issuance rate of bitcoin, or in other words the number of new bitcoin created every year.
Any functioning currency needs a good monetary policy behind it. A citizen needs to be reasonably confident that the currency they’re transacting with won’t just be printed uncontrollably out of thin air, thus devaluing it through inflation. Most developed economies in the world shoot to keep their currencies inflation rates near 2%. So, on average your $1 US dollar sitting in your savings account will have 2% less spending power in 1 years time. The most dependable fiat currencies we have right now with the longest positive track record and the most widespread use are the US dollar, the Japanese Yen, the British Pound and the Euro.