The Financial Times on the inherent reserve requirements of the Facebook-led stablecoin Libra:
Furthermore the association fails to address how such a buffer will be maintained if the liquid securities it needs to invest in become negative yielding?
… even if Libra’s system did create cost savings which could then be passed on to customers, those extra-margins would be even more sensitive to negative interest rates than banks’ own net interest margins.
While banks have mostly not passed on negative rates to retail deposit holders en masse, they have been able to pass them on to subgroup account holders made up of corporate and high-net worth entities. Banks can also offset some of the net interest margin erosion from negative rates by continuing to lend at more positive rates in other sectors, something the Libra Reserve would not be able to do.
The only way to make this work is to keep the reserve in, well, reserve, but to invest it in short term securities, which is exactly Libra’s plan. In which case, as we have seen nearly a year ago,
That since the underlying basket includes short term securities, that Libra is also a security, not a currency as FB describes it. It behaves more like a (stable) ETF, and so a transfer is a buy/sell transaction that should attract (minsicule) capital gains.
But it’s not a reserve, then. Maintaining the stability of such a large investment, albeit into short-term securities, will a constant challenge. Banks with their fractional reserve and ability to make loans are going to be at an advantage.
Eventually there will a decentralised currency that is its own unit of account, free of these constraints that’ll truly combine movement of information with movement of money, that’ll be immutable, non-inflationary and, when required, pseudonymous. That’s going to take a world free of, or parallel to central banks. Of course, cryptocurrency won’t be close to the most interesting bit of such a world.