Question

a. Provide one reason, fully explained why the Chairman of the US Federal Reserve would oppose the creation of the Libra.

b. How will the Libra enhance the financial efficiency of the US and Global Financial System. Provide only one reason and fully explain it.

Answer 1

a. Being a cryptocurrency, Libra will be a decentralized currency. This means there will be no central bank controlling the currency. As Facebook as a tremendous userbase across Facebook, Whatsapp, Instagram, there is a very high chance that this cryptocurrency will grow wide and beyond. While the very basic loss to the US Federal Reserve will be that it will lose control over the most dominant currency, it has highlighted other potential problems. While developing the monetary policy, since Libra cannot be controlled, not only will US lose control over its own monetary policy, but the policy of many weaker nations cannot be influenced by the US and it will eventually lose the power it has over them. Basically, the main opposition to Libra is because the development will lead to a huge loss of power of the US Federal Reserve and thus the Chairman would oppose the creation.

b. Theoretically, the Libra can work wonders for the US and Global financial system. But this will only be possible when every individual using Libra has knowledge of how the financial markets work. In today's day and age, dollars can be used by people in any way, but eventually, the supply, velocity, and reserve of dollars are eventually controlled by the larger financial bodies like the WTO, IMF, US Federal Reserve. Their actions impact the markets across the world. So if the Libra is brought into action, there will be no controlling mechanism and the markets will be a purely competitive market in all respects as it will be an open economy with free flow of the currency across locations, states, countries, and individuals. This would greatly improve the efficiency of the markets and the financial system. However, if someone manages to accumulate a huge lot of Libra, (seeing that the total amount of Libra will be fixed), he will basically gain controlling power over the currency and can influence its valuation and thus the global financial system when the markets are overdependent on this currency just like the United States can afford to do now.