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The Libra project was inspired by bitcoin, ethereum, and other cryptocurrencies, which are virtual tokens that can be exchanged securely over the internet without the need for a trusted third party, such as a bank, to validate transactions. The technology that enables this exchange is known as blockchain. By cutting out middlemen, blockchain-based payment systems promise stronger security and lower costs compared with traditional systems.
Cryptocurrencies attracted a lot of attention after their introduction in 2009, but so far they have failed in their stated mission of becoming the premier means for internet payments. They are not issued by governments, so nobody is forced to accept them. Their success depends on spontaneous adoption by consumers and merchants, who have been discouraged by the volatility in token values, slow settlement mechanisms, lack of scalability, and poor user interfaces. Out of the 1,600 cryptocurrencies that ever existed, some managed to solve a few of these problems, but none has addressed them all.
Libra could change this status quo. Its connection to Facebook implies a potential user base of almost 3 billion people. Sending and receiving Libras would be easy even for consumers who do not have strong technical skills. The relevant software would be embedded into user-friendly apps such as Messenger and WhatsApp. The founders have addressed the problem of volatility by pegging Libra’s value to a basket of major currencies. Libra also promises to crack the speed and scalability challenges, although some experts have raised doubts about the viability of the proposed solutions.
Financial authorities have responded more coherently. Central banks and finance ministers of G-7 countries got to work mere days after Facebook’s announcement in mid-2019 and, together with the Bank for International Settlements, presented a first assessment of the risks that Libra and similar tokens pose to the global monetary and financial system. These risks range from interference with sovereign monetary policy to facilitation of money laundering and the financing of terrorism. The authorities stated clearly and emphatically that an in-depth evaluation must be conducted and appropriate regulations must be in place before the Libra project can take off. The People’s Bank of China also made its voice heard, pointing out that Libra could reinforce American dominance in payment systems, thus hurting everyone else’s interests.