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General Market Update – Currencies

Authors: Phillip Feng Co-VP Education/ Research, Edward Su Co-VP Education/ Research, Brent Huang Research Analyst, Jenny Chen Research Analyst

Libra. Facebook’s Latest Revolutionary Idea.

What is Libra? Libra is a permissioned blockchain currency that was proposed on June 18th, 2019 by the Libra Association. The Libra Association is a group of 28 members led by Facebook. Notable members include MasterCard, PayPal, Visa, Lyft, Spotify, and Uber (for a full list of members, refer to the end of the report). Libra was first introduced to the public in 2018 as the “GlobalCoin” and “Facebook Coin” and with the latest developments, the Libra Association hopes to launch the currency to the public in early 2020. In addition, Libra is backed by a basket of currencies (in attempt to create a global currency) and US treasury securities (used to minimize volatility). Furthermore, the main difference between Libra and other cryptocurrencies, such as Bitcoin, is that Libra is not decentralized. Finally, Libra will be used primarily in Facebook applications, such as Messenger, Instagram, and WhatsApp.

Following the June 18th announcement, Libra took much scrutiny. Regulators, such as the US Federal Reserve, Bank of England, and European Central Bank, all opposed the idea with concerns around the shortage of regulatory framework for cryptocurrencies, the potential for money laundering, national security concerns, privacy concerns, and consumer protection concerns. In addition, U.S. President Donald Trump hinted that Facebook’s new currency would be under close watch upon release, stating that Facebook would have to follow all Banking Regulations. Other concerns around Libra include the large number of organizations involved in the currency. This structure contradicts the main goals of cryptocurrencies: giving power to consumers and keeping the currency separate from large institutions such as banks and large companies.

Despite all of the negativity surrounding Libra, there are certain benefits. One of those benefits is the potential use of Libra in countries found in Africa which have high remittance fees and limited banking networks. For countries with such issues, Libra will create an easy and efficient way to send and receive currencies instantly at no cost. In addition, people with limited access to banks will gain access to an efficient method in transferring currencies around the world.

In summary, Facebook’s attempt at revolutionizing currencies with Libra faces many major regulatory concerns and has many questions that need answers.

Currency Volatility

Recently, currency markets have maintained abnormally low volatility. Many analysts believe the abnormal volatility levels are a result of the competing policies of central banks. In addition, former Chief Currency Strategist at Goldman Sachs, Thomas Stolper, has observed that “there are very, very rare moments [in which] currencies really move with persistence”. As a result of the low volatility levels and high costs of currency hedging, the idea of not hedging foreign bonds has become more popular. Not hedging foreign assets comes with many risks such as sudden unexpected currency movements. With all that being said, currency volatility has reached a calmness not seen in recent years, and according to a strategist at JP Morgan, “markets [will] become more vulnerable as market participants tend to take more risk”.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.