Libra’s pilot initiative served as an inspiration for subsequent exploration into stablecoins. Although most current stablecoin models still struggle to fulfill fundamental functions such as payments, the introduction of various regulatory frameworks signals that governments are willing to give the future a chance.
Six years ago today, on June 18, 2019, Facebook released the white paper for its stablecoin, Libra.
At the time, Libra caused a huge stir in the market. Facebook established an association in Switzerland to operate Libra. According to the white paper released at that time, many well-known internet companies worldwide (with initial members of the association including PayPal, Mastercard, Visa, eBay, Stripe, Booking Holdings, etc., though some later withdrew) came together to create an ecosystem and issue a unified “currency” called Libra. Libra was backed by a basket of real, high-quality fiat currencies as reserves, which could take the form of deposits or government bonds. Libra was to operate on a distributed ledger, and in their vision, users could access it through digital currency exchanges or apps from other association members, and use Libra within this ecosystem.
According to the introduction, the innovation was intended to address the issue that many people around the world at that time were unable to access formal financial or payment services effectively. Hence, the inclusiveness of financial and payment services was the primary goal. The association included many enterprises in the fields of payments, virtual currencies, e-commerce, communications, and financial institutions, covering a vast number of users, with the potential to build a complete ecosystem for trade and finance. Essentially, it was like creating a complete ecosystem in the virtual world. From this perspective, China’s internet companies have already established a highly mature ecosystem for finance, payments, and even life services, making it very convenient for ordinary people. Compared to China’s mature approach, Libra’s innovation is not particularly groundbreaking. Its differences from China’s approach mainly lie in:
A Basket of Fiat Currencies as Reserves: China’s ecosystem inevitably uses its own fiat currency as reserves. Initially, Libra did not disclose the exact composition of the basket of fiat currencies, but later stated that it planned to peg 50% to the U.S. dollar, 18% to the euro, 14% to the Japanese yen, 11% to the British pound, and 7% to the Singapore dollar. Libra planned to back its value with 100% fiat reserves, while also reducing the impact of fluctuations in any single fiat currency.
Running on Distributed Ledger: A distributed ledger effectively solves the problem of multilateral governance, allowing giants and small enterprises to interact on equal terms without concerns about any single entity controlling the entire system. It also enables anonymity and immutability.
Thus, the idea of a decentralized stablecoin, backed by a basket of major fiat currencies, designed to be used in multiple payment scenarios globally, was born.
As we know, the outcome was that the U.S. and other countries effectively stifled Libra in its cradle.
The reasons for this are not hard to understand. Libra’s creation of a massive ecosystem outside of sovereign currencies posed significant concerns for governments, particularly around the loss of monetary sovereignty and the anonymity of transactions. The U.S., in particular, reacted strongly, as it is the current issuer of the international reserve currency.
Replacing Fiat Currencies, Especially the International Reserve Currency: Although Libra’s reserve included 50% in U.S. dollars, this was still insufficient. In theory, the other half of the international monetary position of the U.S. dollar would be replaced. Smaller countries were even more concerned: if users all adopted Libra, their national currency sovereignty would be bypassed entirely. Even though the dollar still accounted for 50% of the reserves, the reserve itself would no longer have other policy functions, and U.S. monetary policies would be bypassed.
Anonymity in Blockchain Transactions: Once transactions were on the blockchain, they would take place in a borderless virtual world, which could facilitate gray market activities, money laundering, and terrorism financing. This, which could have been a way to broaden financial inclusion, ultimately posed a greater risk, which governments were most worried about.
In the meantime, Facebook made some attempts at adjustments. In the 2020 white paper 2.0, some changes were made, such as no longer referring to it as “a borderless currency” and instead calling it a “global payment system,” in an effort to avoid triggering governments’ concerns about the use of the word “currency.” They also suggested that monitoring mechanisms could be incorporated into the system. However, even with these changes, governments’ concerns were not alleviated, and Libra was ultimately shut down.
Libra represented a bold attempt in the payment field for stablecoins. Prior to it, stablecoins had not become mainstream payment tools, mostly being limited to internal settlements within the virtual currency industry and had relatively niche use, with little impact on society. Libra, on the other hand, brought together many major payment and e-commerce companies globally, aiming to create a more inclusive ecosystem, which led to government concerns.
Of course, the pursuit of a better life for humanity never stops. Libra’s attempt has provided inspiration for later explorations of stablecoins. Currently, multiple countries and regions have already incorporated stablecoins into their regulatory frameworks. While most stablecoin projects still face challenges in fulfilling basic functions like payments, the introduction of various regulatory measures signifies that governments are willing to give the future a chance to continue exploring.