Truly Enlightenting Questions About Libra
Whether Libra is a debt instrument or a mutual fund share is more of a legal question, I believe, than a monetary question. In my mind, once a currency earns the trust of users, it gains network effects that create its own market. In the end, it will be priced independently of the basket of currencies that “back” it.
Backing is a tricky thing because it is only important initially, during trust network effect value establishment. When the USD gained its own worldwide network effects, removing its liability for gold did not adversely affect its long-term value or purchasing power. Now the USD is the most trusted and most stable currency in the world. (Of course, it will not forever remain so: the Fed itself is unsure about where things stand with respect to the 22 Trillion USD federal government debt.)
Libra is private money: backing it is necessary only initially, in order to “transfer” network effects (that a basket of existing currencies enjoy) to the new currency. When the Euro was established, it did not need to be “backed” by the currencies that it replaced because people already trusted its legal standing even before it was released.
I might add that, for RockStable’s ROKS, choosing to be backed only by a single currency (USD only, as opposed to Libra’s basket of currencies) makes its legal standing much simpler than Facebook’s Libra. It also makes ROKS more stable than Libra. Why? For an answer, read Larry White’s enlightening article below:
