It is no longer just the central banks and the regulators who are starting to pick apart Facebook’s Libra coin project. Now, analysts from JPMorgan have suggested that the new swath of stablecoins entering the market could be prone to failure brought on by popularity.
The concern is, especially for a coin like Libra, that if some 2 billion users under Facebook’s wing decided to pile into the Stablecoin and ramp up the transactions from day one, they would lack the short-term liquidity of other payments systems. Usage could grow faster than the network can safely support.
It is a double-edged sword because Stablecoins are being viewed more and more as a useful and powerful alternative to other forms of digital payments; partly through their legitimization from the likes of JPMorgan and Facebook, but also because of the adoption of cryptocurrency.
However, the technology on some of these networks may not yet be ready to tackle that kind of popularity or the numbers that some stablecoin projects are anticipating. JPMorgan’s analysts are now stressing the need for network responsibility.
“Stablecoins, and Libra in particular, have the potential to grow substantially and ultimately shoulder a significant fraction of global transactional activity,” the analysts said in a note.
“However, as currently designed and proposed, they do not take into account the microstructure of operating such a payment system. The risk of payment system gridlock, particularly during periods of stress, could have serious macroeconomic consequences.”
This is a fair concern coming from analysts, and it is one predicated on the network potential and capacity of the new coin rather than external factors like regulations. More so, there is another danger that has been pointed out – negative yields.
Libra relies on the income from collateral in the reserve account – which will be fiat currencies – to pay for maintaining the network and rewarding association members. Yet yields on most major currencies are negative yields.
“Any system that relies on reserve-asset income to fund operational and other ongoing costs becomes unstable in a negative yield world,” added the analysts. “With more than half of high-quality short-term sovereign debt already negative, the vast majority of the remainder made up of U.S. government securities, and trends pointing towards global monetary easing, a fully negative-yielding Libra reserve has become a plausible (some would argue likely) risk.”
It appears as if the road to fruition for Libra is still a long one. Not only are the regulators getting in the way, but there are also real concerns about the running of such an extensive network, and trying to get it off the ground.
It is still essential, and sound, to have these concerns aired before such a significant endeavor is undertaken, especially by a company that has a poor reputation already, and not the most established cryptocurrency presence.