Calvin Coolidge said, "Doubters do not achieve, sceptics do not contribute, and cynics do not create". At the outset let me truthfully confess that I am neither of the three on this subject. On the contrary, I truly believe that we are changing the world in the way that business is conducted, and transactions are processed, “one blockchain at a time", and as we use this technology true to its potential, this world will turn into a better place for everyone. However, having said that, I do also believe that the blockchain community (world over) is obsessed with treating all digitized tokens being conceived on any blockchain protocol as currencies, in a general sense, and the media latches on to this term quite easily for a simple reason; if its termed as a currency, then there can be more excitement created over, if and how cryptocurrencies can tip the world over in replacing flat currencies.
Before we dig deep on this subject, let’s first get a little amused by these headlines which have kept us on the edge of a currency-war hype, since LIBRA was born.
• “Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets"
• “Facebook's Libra May Spark a Currency War”
• “Libra Wants to Be a New Global Fiat Currency, Not a Cryptocurrency"
• “Facebook’s Libra cryptocurrency: where are the banks?
A few months back I had written a similar column on JP-Coin, when the media was equally excited over a claim that JP Morgan had invented something that was parallel to Bitcoin. Whereas, the reason PM-Coin was conceived as a token linked to USD, was so that it could be transacted over JP's permissioned DLT framework, enabling clients to send money through blockchain. The framework would allow the tokens (as coins) to get transferred instantaneously, and subsequently redeemed for the equivalent amount of U.S. dollars, thereby reducing the typical settlement time and inefficiencies in the system. There wasn't a thing about JP-Coin being a currency to be used as a medium of exchange. This time on its LIBRA and, goodness gracious, the consortium of organizations which have come together to put this protocol in place, is led by none other than Facebook, and so catching on to the hype was quite natural.
However, once the dust has settled surrounding so much of the noise around LIBRA being a currency, what we will find beneath the heap is LIBRA, as just another Securities Token Offering (STO), technically driven by similar protocols that drive other STOs in the blockchain space. Nonetheless, it will be different from most others because this time the brand LIBRA is backed by facebook and others as part of the LIBRA association, which are big names like UBER, PayPal, Spotify etc.
Why is LIBRA a Securities Token Offering (STO)?
A security is a fungible and negotiable financial instrument that holds monetary value. In other words, it’s an investment vehicle that is backed by a real-world asset such as a portfolio of currency, bonds or stock, a proportionate representation of ownership in a company etc. and a “securities token”, represents the ownership information of the investment vehicle, recorded on a blockchain. When one invests in traditional stocks, for example, ownership information is recorded by a registrar & transfer agent and issued as a digital certificate. For STOs as well, the end purpose being the same, yet, they are recorded on a blockchain, issued as a token and transacted via execution of smart contracts.
LIBRA is also conceived to be an STO that will be fully backed by a reserve of real assets and like all STOs, LIBRA will also have to comply with regulatory governance related to STOs, in all countries where it will be transacted. Additionally, like most securities, LIBRA will be held safe at depositories and with custodians (for institutional holding) and traded at exchanges against money as currency to ensure that there is sufficient liquidity.
Why is LIBRA not a Currency?
For the same reason that no security which represents a unit of holding in a collective investment fund is a currency, LIBRA is also not a currency. A person investing in LIBRA, will be just like any other investor in an unitised fund, holding his share of ownership in the fund represented by the units of the fund that he or she has bought. In fact, as we progressively move towards a token-based economy, most unitised funds will be issuing securities in the form of STOs, which will transacted over some DLT frameworks, powered by smart contracts. Taking that into account, this still doesn’t warrant that all such STOs will be currencies posing as a many use case for replacing national currencies. It's common sense.
Why no STOs can possibly be currencies that can potentially replace a national currency?
The pertinent reasons to support this answer are very macroeconomic in nature, related to Central Banks playing the role of a governing body in every nation that controls the money supply, and which is a tool of immense importance for any nation's economic, political and social stability. Before this, central authority is diluted (if ever that be the case), or before consortium of corporates start playing the role of issuer of currencies (hypothetically), there needs to be some alternate theory in place to govern money supply, inflation, national fiscal imbalances etc., which is a rather farfetched thought from the context of where we stand today, in terms of even ideation.
There are two unique economic principles that get challenged the moment we place any STO as a national currency, or a world currency replacing all national currencies:
• In our hypothesis that any STO becomes a national currency, the most flawed assumption would be that the issuance of such an asset class will be self-governed, in a permission-less state with no central authority in charge. This in a macro-economic sense takes away the authority of a central bank in governing money supply. If this authority is taken away, the flawed assumption that this hypothesis makes, is that, fiscal conditions will always be balanced, public expenditure will always equal public revenue, and therefore, there will be no need for a central bank to intervene using monetary policies. In other words, this means no fiscal deficit, balanced inflation, steady employment and market-driven interest rates. These are quite utopian thoughts.
• In our second hypothesis that STOs become a world currency - Theoretically, it would mean that all countries of the world will surprisingly, not only have all their internal fiscal conditions in perfect order as explained in point 1, but as well, share amongst all other nations the same level of economic parameters like inflation, unemployment, fiscal deficits etc., which would then have no ask for national central bankers, as well any governance at a world level.
The above macroeconomic factors are seldom brought on to the table for discussion when considering the feasibility of STOs becoming a currency, and given these reasons, the adoption of any STO as a currency is still a long way away.
Why is it important to term LIBRA as an STO and not a currency for its own success?
The answer is twofold:
• The first being simply - Blockchain, still being an evolving area, it will be more prudent for the industry to start using an ubiquitous language surrounding the development of a multitude of use cases to keep information consistent. In addition, informed journalism will play a big role in maintaining this standard throughout its use.
• The second reason is more fundamental to regulations in different geographies which are trying to standardize the STO market and give it a legitimate place, unlike what's happening in the cryptocurrency space where no government is keen to give it a regulatory look for the same reasons that STOs can't take the place of being "currencies" as "legal tender" in the near future. The reasons are more macroeconomic, as explained in the earlier section, and the support of this argument can be found in how STOs are being defined and regulated around the world. The Securities and Exchange Commission (SEC) in the United States is perhaps leading the pack in being the most vocal on how a security token can be defined, and whether, or not, certain utility tokens can be qualified as security tokens that should be regulated.
According to the SEC, all tokenised asset classes should be treated as a security (and not currency) if they fall under the definition of an investment contract, and it goes on to clearly state that - "An investment contract is, an investment of money, in a common enterprise, with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others". If we were to frame LIBRA within the bounds of this statement it perfectly fits the definition.
On similar stands, Britain's Financial Conduct Authority (FCA) also clearly distinguishes between three types of tokens - "Exchange Tokens", "Utility Tokens" and "Securities Token". In a similar strain, Switzerland's Financial Market Supervisory Authority (FINMA) released its STO guidelines classifying such investment contracts as "Payment Tokens", "Utility Tokens" and "Asset Tokens". There are other jurisdictions that also allow regulated STOs like Singapore, Estonia etc., however, none have classified tokens as currencies with generally qualified features of money as "medium of exchange", and rightfully so.
In Conclusion - My view is that soon enough, the association of corporate which have conceived LIBRA, will realise that it will be much easier to manoeuvre through the complex regulatory maze, if it's legally branded as a tokenised asset and not a currency.
Having said that, its most likely that LIBRA will first get officially launched in the geographical regions that have started regulating the STO market. As there are also countries which have either no stand on STOs (still), or are on the other end of the spectrum, having banned the circulation of cryptocurrencies and STOs completely, LIBRA will find it difficult to get a start initially in those areas, which include China, South Korea, Vietnam, Morocco, Bolivia, India, Lebanon, Nepal, Bangladesh etc.
Lastly, the success of LIBRA, to an investor, will not be attributed as much to the technology that drives its tokenisation, but more on the characteristics that define a security, such as liquidity, and the quality of asset management that will determine its stability, plus underlying value in the market, like every other collective investment trust or fund. In other words, the future of blockchain, is not on the technology alone, but also it belongs to those who can use it to make ideas happen.
So, while we rejoice the birth of another token in the blockchain space, let's also be rational enough to give it its right place within the regulatory framework that it meaningfully deserves as an STO. Let's not doubt what it can achieve, or be a sceptic to how it can contribute to business and technology. I am deeply convinced that it's an idea which is very well conceived and work well done.
Prasoon Mukherjee has more 20 years of combined experience in IT Consulting and Capital Market operations having worked as a thought leader and domain specialist in multiple streams of IT functions that includes Portfolio Accounting, Mutual Fund Analytics, Securities Lending & Borrowing, Custodial Operations, Corporate Actions Processing and others areas of Capital Markets.
Currently, he is employed with a French Bank, leading the Fund Services and Custody Operations Unit in delivery and IT strategy. By virtue of having been in the industry for close to 19 years, during a time when the financial sector is continuously witnessing disruptive changes in the electronic segment, with the introduction of complex trading instruments, shortening of settlement cycles, host of regulatory changes and how they hook up with multi-channel online applications, he has led many of these engagements successfully into production. He has gained extensive International exposure having executed, delivered and managed strategic projects in various capacities across large banks and financial institutions in North America, Europe & APAC.
Besides, Prasoon loves nurturing his interests in writing and sharing acquired wisdom on disruptions in the field of finance, technology, economics, politics and how they impact the banking and financial services world in general.