Blockchain Firm Advised by Nobel Winner Myron Scholes Launches ‘Stablecoin’ to Rival Facebook’s Libra

Updated: 2019-12-10 08:30:34

A blockchain firm advised by Myron Scholes, co-creator of the famed Black-Scholes model of derivative valuation for which he won the Nobel prize, has launched a new “stablecoin” the company hopes will revolutionize cross-border exchange and become a global currency.

Saga said in a press release that its brand of cryptocurrency is different from volatile blockchain-based currencies like Bitcoin because it resembles central bank-issued money and so would be useful as a more stable asset for storage of value and cross-border exchange.

“SGA is the first digital currency that replicates the mechanics of central bank national currencies and applies them on a global scale,” the company said in a press release, adding that its stablecoin “acts as a bridge bringing digital currencies into the mainstream.”

“Saga has been designed with the global economy in mind and to overcome the challenge of buying globally whilst only being able to pay nationally,” said Liquid, a cryptocurrency exchange that has just announced that it would list the stablecoin on its platform for secondary trading. “Saga has developed a system that means a truly global currency can come into existence—away from national or political tensions.”

Saga’s currency is similar to Facebook’s Libra in that it is pegged to a basket of fiat currencies. Unlike Libra, which is based on a set of currencies of Facebook’s own designation—including the U.S. dollar, Japanese yen, and the Singapore dollar—Saga’s stablecoin would be pegged to the International Monetary Fund’s Special Drawing Right (SDR). This is an international reserve asset composed of a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

“This acts as a stabilizing mechanism to reduce volatility,” Saga said in the release, explaining the rationale of pegging to the SDR.

“The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar,” the IMF explained. “After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.”

The Fund explained that while SDRs are neither a currency nor a claim on the IMF, they act as a “potential claim on the freely usable currencies of IMF members” and so can be exchanged for these currencies.

The downside of most cryptocurrencies is their extreme volatility, which while attractive to speculators, can constrain their usefulness as a medium of exchange and store of value. Saga, like Libra, seeks to address this gap in the market.

“Hyper-volatile currencies, which lack a monetary policy, are usually anonymous,” said Saga founder Sadeh Man, according to TechCrunch. “Stablecoins are pegged to other assets thus preventing their organic growth and major players in this space are opaque concerning their funds. Saga’s economy model is designed to allow growth. Participants are obliged to undergo a Know Your Customer process, assuring Saga’s economy is compatible with traditional financial institutions.”

With ambitions to serve as a global currency, Saga claims to have built “a robust monetary model and effective system of governance.”

The company said it bases its monetary model on a “blockchain-based liquidity provider: a smart contract that adjusts the supply of Saga tokens to meet market demand, and to limit the impact of fluctuations in market confidence on SGA price.”

“The proceeds of issuing new SGA tokens are kept in a reserve, held in regulated banks, and stored in liquid assets that replicate the currency composition of the SDR.”

Ido Sadeh Man, founder of Saga, said: “Currencies have not kept up with the pace of globalization and they do not address the global scope and needs of modern lives. The decreasing economic importance of national boundaries, changes in society, and a need for monetary diversification have created a necessity for a complementary, global, non-governmental currency.”

Others on Saga’s advisory board include Jacob Frenkel, the former governor of the Bank of Israel and chairman of JPMorgan Chase International.

“Technology is not enough,” Sadeh Man told TechCrunch. “The design of a currency requires a broad, interdisciplinary effort. While technology provides the tools, the essence resides in solid monetary policy. Saga has assembled a team of world leaders, combining expertise from several fields: economics, mathematics, the humanities and social sciences, to establish the new currency.”

Myron Scholes, Professor of Finance, Emeritus, at Stanford Graduate School of Business, talks to reporters during a press conference he gave upon learning that he has won the Nobel Prize in Economics in Palo Alto, California, on Oct. 14, 1997. (John Mabanglo/AFP/Getty Images)

European Union Finance Ministers Ban ‘Stablecoins’

European Union finance ministers have put a hold on the launch of global stablecoins like Libra or Saga until the bloc has formulated a strategy to mitigate the risks posed by the technology.

“These initiatives should not undermine existing financial and monetary order as well as monetary sovereignty in the European Union,” the European Council and Commission said in a joint statement.

The finance ministers added that “no global ‘stablecoin’ arrangement should begin operation in the European Union until the legal, regulatory, and oversight challenges and risks have been adequately identified and addressed.”

While acknowledging the potential benefits of stablecoins, including cheaper and faster cross-border payments, the ministers said these technologies pose “multifaceted challenges and risks related for example to consumer protection, privacy, taxation, cyber security and operational resilience, money laundering, terrorism financing, market integrity, governance, and legal certainty.”

“When a ‘stablecoin’ initiative has the potential to reach a global scale, these concerns are likely to be amplified and new potential risks to monetary sovereignty, monetary policy, the safety and efficiency of payment systems, financial stability, and fair competition can arise,” they added.

The ministers called for greater clarity around the legal status of stablecoin arrangements.

“Some recent projects of global dimension have provided insufficient information on how precisely they intend to manage risks and operate their business. This lack of adequate information makes it very difficult to reach definitive conclusions on whether and how the existing EU regulatory framework applies,” they said.

Saga Lists on Japan-based Cryptocurrency Platform

Global cryptocurrency platform Liquid announced in a press release on Tuesday that it is the first exchange to list the Saga token for secondary trading.

“We are delighted to offer Liquid customers the opportunity to buy and trade SGA. We believe SGA offers our traders an interesting opportunity as we see great value in Saga’s approach of replicating the mechanics of central bank national currencies and applying them on a global scale,” said Liquid’s CEO and co-founder, Mike Kayamori.

“Saga is a new borderless global currency that will be used to store value, move money around the world and purchase goods and services. It is a complement to national currencies, owned and governed by the currency holders with a system of checks and balances in place,” Liquid wrote on its blog.

The Saga token will initially be traded against the USD, Bitcoin, and Ethereum, while more trading pairs are expected in the future, Liquid said.

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