Economic historian Barry Eichengreen believes that stablecoins are either too fragile, or too expensive, to emerge as a dominant monetary form.
UC Berkeley professor Barry Eichengreen argues that Facebook’s planned Libra stablecoin faces too many “insoluble” problems, and too much resistance from governments, to ever launch.
“Libra is an interesting idea that will never see the light of day,” he told the Unitize conference on July 10.
Eichengreen asserts that the stablecoin sector is largely ignorant of monetary economics and history. He said his economic work had led to invitations “to a series of lunches at excellent San Francisco restaurants with the founders and funders of prospective stablecoins.”
“My conclusion was that my luncheon companions knew all about blockchain, but they didn’t know much about monetary economics,” Eichengreen said, emphasizing they’d been unaware of past speculative attacks on pegged exchange rates.
Eichengreen said that:
“Stablecoins are either fragile — they are prone to attack and collapse if they are only partially backed or collateralized with actual dollars or dollar bank balances, or they are prohibitively expensive to scale-up if they are, in fact, fully or over-collateralized.”
Stablecoin advocates naive
While many analysts believe that Libra has the potential to disrupt the existing financial system, Eichengreen disagrees and points out that despite publishing a second whitepaper this year, “Facebook’s private label stablecoin” remains plagued by numerous “insoluble” challenges.
He said there are concerns that Libra will “undermine the effectiveness of national monetary policies” in both emerging and developed states, noting that citizens in countries with volatile fiat currencies will opt to abandon their local money in favor of a globally accepted “Libra dollar.”
Libra’s planned over-collateralization of its stable token, leads the scholar to predict the excess backing will be provided by transaction fees. But as high fees deter adoption, Eichengreen predicts that “fees are going to be kept low, rais[ing] questions about the adequacy of the capital buffer.”
A Libra central bank?
The economist also posits that “Libra is going to need a central bank, in effect, if the markets that grow up around it are going to be stable,” alluding to the predicted rise of derivatives relating to the stablecoin.
“National governments are going to be queasy about the creation of a private, Facebook-owned and operated central bank,” he added.
“So there are some very big uncertainties, I think, that would have to be resolved in order for this creation to get off the ground, and my conclusion remains that some of those problems are insoluble.”