Libra has gotten quite a beating this year. Lawmakers around the world denounced Facebook’s stablecoin, shouting that money creation should be exclusive to governments. That’s why it’s a breath of fresh air to hear that one politician believes in cryptocurrency so much -- he’s set to manage a digital stablecoin called Frax.
Libra has gotten quite a beating this year. Lawmakers around the world denounced Facebook’s stablecoin, shouting that money creation should be exclusive to governments. That’s why it’s a breath of fresh air to hear that one politician believes in cryptocurrency so much -- he’s set to manage a digital stablecoin called Frax.
I’ve followed monetary policy for 30 years and always been troubled by the government monopoly on currency, which is unhealthy for markets. (Stephen Moore)
The politician is Stephen Moore, a known and respected economist, and former campaign adviser. President Trump nominated Stephen Moore to join the Federal Reserve and help manage the nation’s currency. The nomination fell short for various reasons. So now Mr. Moore and his partners announced plans for Frax, which will be pegged to the U.S. dollar.
In an interview with Fortune, Moore said:
“I’ve followed monetary policy for 30 years and always been troubled by the government monopoly on currency, which is unhealthy for markets,” said Moore. “It’s very healthy for private competitors to challenge central banks over the money supply.”
Sam Kazemian is Mr. Moore’s co-founder. He’s an entrepreneur who launched a Wikipedia competitor which uses blockchain to record entries and thus make them tamper-proof. Both co-founders announced Frax’s launch date to be in the coming months; they further state that Frax will use established blockchains to record Frax transactions.
However, recording transactions on a blockchain while being pegged to the US Dollar are the only two differences between Frax and other stablecoins. Frax will be the first stablecoin to use and rely on a fractional reserve. This means Frax won’t be backed by a one-to-one pool of reserve dollars held somewhere safe. Instead, much like central banks, Frax depend on algorithms to loan out its reserves. It will then collect interest in order to ensure the value of Frax remains pegged to a dollar through similar algorithms and tricks used by central banks.
If you’re familiar with the way reserve banking works, then you’ll know there’s a risk of collapse for Frax if too many people try to sell it. But Mr. Moore and Mr. Kazemian believe that their loan mechanisms can prevent such a case and instead ensure stability.
That’s not the only hurdle Frax will face. Last year a similar stablecoin project called Basis -- funded by venture firm Andreessen Horowitz for $100 million -- tried to create a fractional reserve stablecoin where the reserve was backed by a series of bond sales. But then regulatory scrutiny hit hard and the project collapsed.
Then again, like all new technologies, people and politicians take time to adjust. In July, President Trump tweeted he was “not a fan of Bitcoin.” He went even further to state that cryptocurrencies are nothing but “thin air.” Federal Reserve Chairman Jerome Powell criticized cryptocurrencies and blamed them for facilitating money laundering.
Cryptocurrency proponents might, therefore, share Mr. Moore’s lament when he said:
“If I had been on the Fed, I would like to have seen encouragement for the development of cryptocurrencies like Frax. It can be a check and balance against runaway currencies.”
