This is how every bank works.
If all the Libra association members are willing to be bound by the same laws, then cool: but do you trust Vodafone, or Facebook, or Andreessen Horowitz, to not try to bend the rules so they can make more money?
A huge float invested very conservatively still makes a lot of money. That is how most insurance companies actually profit.
""" How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size. """
What Facebook is proposing is merely to have assets equal to the deposited funds. For a bank, that is called teetering on the edge of insolvency. If a bank's assets ever dip below its liabilities, it is insolvent and either has to raise equity capital or be wound down by the government. This is why banks have capital requirements, so that they have a buffer against loans going bad.
History has shown us that unregulated banks, and regulated banks that push the limits or evade regulations fail and cause damage to the entire economic system.
I have no interest in protecting banks from businesses that act just like banks, and then get punished for doing those things, only because they are not legally considered banks. The last time banks pushed the limits, failed, and caused damage to the entire economic system, it was 2007-2009, and no one was ever held individually responsible for it. I haven't forgotten or forgiven.
So yes, please. Hurt banks. Protecting them just turns them into privileged asses. The "tight regulations" function mainly as their cartel membership rules.
Split tally sticks worked as privately-issued financial instruments for centuries, before banking lobbied to have them outlawed. Banking works better (for the banker) when there are no lawful alternatives to the bank's notes. A cryptographic equivalent to a split tally stick is very acceptable from a historic perspective.
Secondly, banking regulation does nothing to mitigate the risk of fractional reserve banking. Your average bank holds maybe 10% of deposits, the rest is loans way into the future. No such bank can survive a bank run.
What does mitigate the risk (for the average bank customers) is the government insurance for bank deposits. A government can always print the money necessary to bail out a failed bank. What such a bailout could do to a currency is another story. Let's just say we got lucky.
In any event, the government wants the banks to loan out all this money, because that's economic stimulus. You can't have both tight regulations and easy money.
I think a better description would be: Facebook says that right now they're not planning to do fractional reserve. There's nothing holding them to this promise. There's also no control that their partners in Libra will keep it.
It may well be the same situation as tether (or worse).
There may be, the exact terms aren't clear yet. Of course the terms might just say "you have no rights whatsoever". The market will price those terms in.
> It may well be the same situation as tether (or worse).
I don't think that's a good argument against Libra. Tether is still trading around 1.00$, despite its reserves being at best 74%. The market is pricing the risk of ending up as bagholder as next to nothing.
Nobody is arguing that holding large amounts of Libra as a "store of value" is a wise thing to do. Neither is storing large amounts of cash under your bed.
Having said that, if you want to issue worthless tokens backed by nothing in exchange for real money, you can do that. That's your average initial coin offering. Laws still apply and you need to do due diligence, but it's possible.
What happens when someone wants to make a withdrawal?
Fractional reserve in general isn't really a thing in modern banking. The US still does have a reserve requirement but pretty much the rest of the world relies on capital adequacy ratios (some capital is usually stored as reserves in exchange settlement accounts but it doesn't have to be).
https://en.wikipedia.org/wiki/Reserve_requirement#Required_r...
Tier 1 capital is not cash reserves, it's risk-adjusted assets, which may or may not be made up of assets that are as liquid as cash.
Basically, for assets less than $124 million, the reserve requirement is 3%.
For more than $124 million, the requirement is 10%.
In other words, for every $100 on deposit at a bank, it can create "out of thin air" $90 and loan it out.
If someone then gets that $90 and puts it in a checking account at the bank, the bank can create and loan out $81, then $72, than $64, $57.6, $51 etc.
[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm