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Comment by ur--whale | Hacker News Reader

Conspicuously missing from the entire libra story is how they are actually going to manage the peg. How will they handle the custodian counter-party risk?

What I mean by that is: for libra to actually be a stablecoin, for every libra unit in circulation, FB and their merry band of friends will need to stash a frozen combo of {dollar, euro, yen} somewhere.

That "somewhere" is actually not easy at all to design from a financial infrastructure point of view: any institution (other than central banks) who will actually store that stash will have to:

   - be regularly audited by independent auditors

   - be risk-free (and there is no such a thing) or the peg will drift.

Worse, these custodians of what is already essentially virtual money are going to be sitting on a huge pile of currency and to guarantee the peg, won't be allowed to do anything with it.

I give it 6 months before that money is re-invested somewhere through some smart financial engineering.

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> Conspicuously missing from the entire libra story

All of this is answered in the Libra whitepaper.

> is how they are actually going to manage the peg. How will they handle the custodian counter-party risk?

"The assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets."

> be regularly audited by independent auditors

Pretty much any custodian with investment-grade credit ratings will be audited and heavily regulated.

> Worse, these custodians of what is already essentially virtual money are going to be sitting on a huge pile of currency and to guarantee the peg, won't be allowed to do anything with it.

The funds are not held in currency -- the funds are invested in "a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks."

> be risk-free (and there is no such a thing) or the peg will drift.

Also answered: "as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate. However, the reserve assets are being chosen to minimize volatility, so holders of Libra can trust the currency’s ability to preserve value over time."

> funds are invested in "a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks."

They're underestimating how difficult it will be to avoid losing money.

Bank deposits So what if Facebook and their partners don't park their reserves in mortgages and derivatives if their banking intermediaries do? Banks routinely go insolvent in recessions and financial crises.

Short-term government securities Which are currently paying negative interest rates in "stable" and "reputable" nations like Germany and Japan.

A "negative interest rate" means you buy a government obligation for $1000, and a year later you get back $997.

Can Libra reserves earn a high enough return to (a) fund their admin and security apparatus, (b) cover insolvent partners and institutions, and (c) cover fraud and abuse?

It's clear from the whitepaper that there is no upside to holding this currency, but it's not at all clear that it won't "break the buck" and actually lose money.

Sooner or later, FB partners will go to a fractional reserve model and effectively convert this "cryptocurrency" into a vehicle for inflating the money supply to a multiple of actual reserves by issuing debt.

My bet is this will happen sooner rather than later, because there's zero profit in sitting on giant pile of short-term cash.

I've only read the white paper, but finance is one of my biggest hobbies, so I'm going to take a stab at addressing the concerns you mention.

It's not entirely a currency peg - it's an asset peg. The assets will be Treasurys, bunds, etc. that are _representative_ of currencies, but are not direct currencies.

The peg is going to drift. The history of currency pegs is filled with struggles by institutions to maintain the peg at a fixed level, only to let go of the peg and convert to floating. I think the idea behind Libra is that, while the peg will drift, Libra will still be a drastically more stable store of value compared to almost every other crypto.

I would not be surprised to learn that the Libra Foundation's custodians are the people holding the assets and handling the counter-party risk. It explicitly says in the white paper that the interest earned on the reserves held by the custodians will be used to pay for expenses of maintaining the network. If I was Visa, I would be more than happy to hold a basket of bonds and take a cut in a play to try to expand my customer base, by moving more people into the transaction market space.

I understand why my answer wouldn't sit well - putting trust into thesee parties and buying into the ideas behind Libra require a huge leap of faith, one that I don't think I would even participate in. But I do think that the mechanics behind how Libra manages the peg are actually not as nefarious or difficult as you laid out.

> I think the idea behind Libra is that, while the peg will drift, Libra will still be a drastically more stable store of value compared to almost every other crypto.

There will be a temptation to speculate on it. And once started, speculation could easily get out of hand. If they want some semblance of stability they’re going to be prepared to actively engage in monetary operations, just like any other currency.

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