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Launching Libra, its planned digital currency, was never going to be easy for Facebook . Low interest rates may make the job harder.
The social-networking company wants Libra—proposed in June to be the basis for a new global payments and financial system. Not surprisingly, it immediately faced intense opposition from American regulators and legislators.
To go ahead with its plan, Facebook (ticker: FB) will have to win approval from the Federal Reserve and a bevy of other regulators. Interest rates represent an additional problem, JPMorgan fixed-income strategist Joshua Younger wrote in a note to clients on Thursday.
The structure Facebook has planned for Libra, outlined in a white paper on June 18, is the key to understanding why. Libra isn’t a cryptocurrency in the mold of Bitcoin, which is free to—and often does—fluctuate wildly.
Instead, Libra is a so-called stablecoin. It will be pegged to the value of a set of major global currencies and then backed by assets presumably denominated in those currencies.
Buying up those assets will cost billions of dollars initially—a sum that will only rise as Libra grows. Yet some of those assets will pay interest, which is supposed to fund the maintenance of the Libra payments infrastructure and its governing organization.
That, Younger wrote, is a problem because most major currencies are subject to negative yields. The European Central Bank, for example, effectively charges investors to buy debt it issues. Yields on vast portions of European corporate debt are below zero as well.
It is “unclear how such a system could continue to function if the collateral is a cost rather than a revenue source,” Young said of Libra. Facebook didn’t immediately respond to a request for comment.
And if a global economic crisis hits once Libra is actually up and running, the currency’s negative-rates problem would likely only get more acute as central banks across the world slashed rates. Libra could have to charge people to buy or sell using the currency in order to cover its expenses.
“The need to impose transaction costs as rates decline—especially when they turn negative—could worsen and prolong recessions by acting as an escalating tax on consumers and businesses as conditions worsen,” Younger said.
Write to Ben Walsh at ben.walsh@barrons.com