Fed Economists Call Fears of Original Libra Stablecoin ‘Overstated’

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Economists at the Federal Reserve project that Libra, the Facebook-linked stablecoin frequently targeted by lawmakers and central bankers as an economic wrecking ball, was unlikely to have lived up to its sovereign currency-killer hype.

Calling “fears of a so-called global stablecoin” “overstated” in a new report published Monday, economists Garth Baughman and Jean Flemming suggested that policymakers may have focused perhaps too acutely on a basket stablecoin’s unlikely downsides. The pair modeled a basket-backed stablecoin in a hypothetical scenario, evaluating the likely impact it would have on the economy, as well as the likelihood of its being adopted.

Critics argued that Libra’s original plan to maintain its stablecoin’s value from multiple currency reserves could serve to destabilize or even displace those underlying fiat currencies. U.S lawmakers tried to freeze the project, Australia’s central bank said no one would use it and France’s finance minister threatened to block Libra over fears it could oust sovereign currencies.

The Fed authors wrote that their own modelling discounts that potentiality.

“Our model shows that although the basket may have the potential to become important and globally demanded, [the regular ebb and flow of fiat value and trade] make it such that the basket never dominates either of the component currencies,” they wrote. 

Their point is in some ways moot. Libra’s project leaders abandoned their plans for a single basket-backed stablecoin in April 2020 in a major concession to regulators. Now, Libra’s “global stablecoin” will be a basket of other stablecoins themselves backed by fiat reserves.

But the Fed’s paper, first written in February and then apparently updated a month after Libra’s pivot, nonetheless raises questions about whether policymakers moved too aggressively against a tech project they blasted for months with abandon.

“A simpler question arises: does a basket currency actually provide substantial value relative to the current system?” they asked.

They found that may well be the case in certain circumstances. 

“Although the basket currency will never dominate the sovereign currencies it comprises, we find that there can be substantial gains in world welfare if many sellers accept the basket as payment,” they wrote.

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