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Facebook has come up Libra its version of crypto-currency.

The unique feature of Libra is the "reserve" which backs Libra. The reserve is supposed to be held in stable global currencies (USD, GBP, JPY and EUR).

For a Libra coin to be created and equivalent amount of local currency (based on exchange rate) needs to be transferred to Libra reserve. I am assuming that during this transfer the local currency is converted to USD/GBP/JPY/EUR and then transferred to the reserve.

Essentially for every Libra that is in circulation its equivalent amount is held in its reserve.

Given this, I am assuming that:

  1. Libra would behave like Hong Kong dollar against USD and it would remain stable against USD, GBP, JPY and EUR

  2. There would be volatility in the price of Libra against the local currency (except for USD, GBP, JPY and EUR).

Are these assumptions right?

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  • $\begingroup$ HKD is not stable as you can confirm for yourself by looking at any chart that has the time axis longer than a few minutes. $\endgroup$ – H2ONaCl Jun 23 at 4:25
  • $\begingroup$ @H2ONaCl is this again because of the trust issue that is explained in the answer? I am not sure that would be the reason. Is there a reason HKD/USD varies? $\endgroup$ – nmdr Jun 24 at 2:15
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It will vary in value because trust in it will fluctuate just as trust in facebook fluctuates.

There will also be volatility as trust varies in confidence in the payment system; its integrity and security; how exchangeable it is; its exposure to fraud, to tax, to money-laundering investigations

For holders, there is also significant counter-party risk in whether Facebook chooses to honour their holding. And the majority voting rights in Facebook are vested in a single person. So their counterparty is, in some regards, essentially one man and his whims.

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    $\begingroup$ One addendum: the USD/EUR rate might be “stable”, but it’s not constant. If that exchange rate moves, Libra has to move against at least one of those currencies, most likely both. $\endgroup$ – Brian Romanchuk Jun 21 at 12:53

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