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August 27, 2019

From the Dean's Desk

Dean Terence Lau
College of Business Dean Terence Lau

Dear alumni and friends,

Blockchain technology promises to eliminate mistakes and fraud, and drive down transactional costs. This technology is in its early stages of development but has the potential to be as disruptive to business as the creation of the Internet itself. Most people have heard about Bitcoin, the blockchain-based digital currency. Bitcoin’s story may have tainted the public’s view of cryptocurrency, but that doesn’t mean the concept is going away. This spring, Facebook announced Libra, a new form of digital currency that I guarantee you’ll be hearing more about in the weeks and months to come. To help us all better understand Libra, I sat down with professor Arash Negahban, director of our Center for Enterprise Systems and Informatics Research, to get his view.

To begin, Negahban reminded me that currency is trust. When our students purchase a cup of coffee from the student-run Butte Station for $2, for example, the $2 represents an agreement of trust between the buyer and seller that the cup of coffee is worth $2 issued by the US government. For a long time, the value of that dollar was backed by the value of gold holdings (i.e. the government only printed as many dollars as it had gold), but ever since President Nixon abandoned the gold standard in 1971, the government has been free to issue as many dollars as it wants. As long as both buyer and seller maintain trust in the United States government, they are happy to transact for that cup of coffee at $2.

Cryptocurrencies such as Bitcoin, on the other hand, cannot be used as a medium for financial exchange, Negahban said. These currencies are characterized by scarcity and extreme volatility in prices, making them speculative investment vehicles, not currency. Libra aims to change that by joining a different class of blockchain, called Stable Coin. It does this by adopting the same characteristics as the US dollar—it has something backing it, it is in limited quantity, and there is effort to gain it. And it’s those exact qualities that make Negahban so intrigued.

When Libra is launched, it will have a reserve of real assets. For every Libra that is issued, there will be an equivalent amount of government-backed currency held by the Libra Association, an independent nonprofit based in Switzerland.

“Therefore, the relative value of Libra will not change over time, making it ideal as a medium for exchange,” Negahban said.

Consumers will be able to purchase Libra at a price that is relatively stable and does not change over time, and store Libra in a digital wallet. Consumers can then use Libra anywhere it is accepted (including Facebook’s marketplace, Spotify, Lyft, Uber, eBay, PayPal, Kiva, and many other companies). The seller can trade their Libra for cash at any time. Libra works on blockchain technology on a massive scale to track the value of digital wallets.

The advantages are obvious, Negahban explains. First, Libra will drive down transaction costs by reducing interbank fees and foreign exchange fees. Second, Libra will be easy to use. Third, it will be completely secure, as it based on Blockchain. The theory is that while one or two computers may be easy to hack, it’s impossible to compromise thousands of computers or servers. Fourth, it will make capital accessible to millions of people in developing countries that don’t have access to traditional money. Consumer adoption remains an obvious obstacle, but Libra merchants will have the ability to discount (i.e. the cup of coffee may be 1.5 Libra, but $2 if paying in dollars), thus driving consumers to Libra.

Naturally, Neghaban said, Libra is running into some resistance from governments that want to retain control of currency. There are also concerns Libra can be used for illegal purposes such as money laundering, although he believes the traceability of Libra will mitigate these concerns. Finally, there are significant privacy concerns with trusting Facebook with financial records. As long as Libra can satisfy these governmental concerns, Negahban believes we will all have Libra digital wallets in the months to come.

As we navigate the ever-evolving world of business, I’m proud to say that our faculty remain on the forefront and to be able to turn to them to share their insights. Professor Negahan is one of several faculty in the College of Business developing research and applied teaching into blockchain technologies. If you’d like to learn more about his work, please contact him directly. His work—and the work of all our faculty—is not possible without your generous financial contributions. I hope you’ll consider continuing to support the important work of the College of Business.

Terence Lau
Dean, College of Business