The Libra Association is weighing a shift to a U.S. dollar-backed stablecoin

The Libra Association is considering a significant change to how its proposed stablecoin would be backed, The Block has learned.

Social media giant Facebook sent shockwaves throughout the crypto ecosystem and beyond when it unveiled its plans for Libra, a digital asset that it said would be pegged to a basket of fiat currencies and other assets.

The goal: to bring to market an alternative currency that could help bank individuals in the most financially deprived corners of the world. The unveiling created a media firestorm and drew the eye – and, in some cases, ire – of regulators and policymakers around the world. Indeed, Federal Reserve chairman Jerome Powell said on Feb. 11 that the unveiling "really lit a fire" under efforts to create a central bank-issued digital currency. 

Two sources familiar with the ongoing process say that the non-profit Libra Association – which oversees development of the project – is considering whether it should abandon the proposed currency-and-assets basket model in favor of a purely U.S. dollar-backed model.

That approach, the thinking goes, could mollify the concerns of American regulators and lawmakers, some of whom view Facebook's plans as a direct threat.

Indeed, concerns about "Zuckbucks" flooded Washington last summer, precipitating two hearings on Capitol Hill during which Facebook blockchain lead David Marcus defended the would-be stablecoin. Marcus fielded concerns that Libra's construction would undermine the U.S. dollar and possibly fit the definition of a security.

Those concerns haven't abated since then, D.C. insiders tell The Block.

A spokesperson for the Libra Association declined to comment when reached.

What's more, a report from late January by German-language publication FinanceFWD suggests that the Libra Association may be weighing the issuance of multiple currencies, each backed by its own particular fiat currency, including the euro. According to the publication, policymakers in Europe were approached with such a plan by members of the association.

A 'welcomed change'

"I think it would be a welcomed change," said Kristin Smith, head of lobbying firm The Blockchain Association, in a phone interview. "I think the primary concern that lawmakers had with Libra is that it would undermine the U.S. dollar, so if they were to pivot to a U.S. dollar stablecoin, that would fix a lot of the concerns."

Indeed, such a pivot would make sense.

Facebook CEO Mark Zuckerberg has said Facebook would exit the Association if it didn't secure the necessary regulatory approvals. Already, there is one drafted bill that could serve as an impediment to Libra as it was originally conceived. The Stablecoins Are Securities Act of 2019, sources told The Block, was drafted as a direct response to Libra's model. 

According to a draft, the bill if passed would deem "managed stable coins" as "investment contracts and therefore are securities within the meaning given terms of section 2(a) of the Securities Act of 1933."

Although Facebook doesn't describe it as a "managed" stablecoin, the white paper describes the Libra Reserve – which is intended to underpin Libra tokens – as being a basket of bonds, currencies and government securities that would help maintain a stable price for the tokens.

And it appears Facebook has already removed certain aspects of the token's structure from the white paper, including mentions of dividend payments from the reserve for members and a complimentary investment token for members. In sum: a sign they're not shying away from efforts to walk back on aspects of their original proposal. 

A dollar-backed Libra would mollify some of the concerns about privacy and U.S. dollar competition that lawmakers and regulators have expressed to date.

"It would ease a lot of the concerns," Smith said. "That seems to be the conventional wisdom."

But what happens to Paxos and USDC?

The fact that such a move is even in the works raises questions for the other dollar-backed stablecoins that exist in the market today, namely PAX and USDC.

Insiders say Facebook's entrance into the USD-pegged stablecoin world might not present as big of a threat as one might imagine. Paxos and Circle, the two leading U.S.-regulated stablecoin providers, have carved out their own niche that Facebook hasn't hinted at exploring. 

At Paxos, the firm is just as concerned with building out its stablecoin-as-a-service platform as it is with growing PAX's market share. The firm's technology already underpins stablecoins issued by crypto exchanges Binance and Huobi. In the future, Paxos is looking to partner with firms in the financial services industry as well. 

"We've seen initial interest in blockchain from mature, multi-national corporations, but in 2020, we'll see these firms more make a substantial and concerted push into blockchain by exploring use cases for stablecoins," Paxos chief executive office Chad Cascarilla said in a statement to The Block.

The firm declined to specify exactly which firms it is having conversations with. 

Circle, one of the firms behind the USDC stablecoin, possesses its own moat against Facebook's possible advance. Along with rivals PAX and Tether, USDC is a popular onramp for digital asset traders.

"In a hypothetical world Facebook could go the merchant route and dominate that," one trader said. "Other stablecoins will dominate trading in the crypto world."

"USDC and Tether will grow with the crypto ecosystem because Facebook won't be trusted," the trader added.

This report has been updated with additional information.