What to make of Facebook's Libra?
The new crypto on the block
They say that imitation is the sincerest form of flattery. If so, perhaps WeChat and Ant Financial should be flattered that Facebook has launched its own cryptocurrency, ostensibly with the aim to provide a simplified financial payments system for the world. However, it’s worth examining in further detail why Libra came about, what it might mean, and how it might aim to replicate the successes of WeChat Pay and AliPay. Of course, Libra is far from a simple copy of the Chinese digital wallet, but bears an interesting number of parallels.
Libra is a bit of an odd beast.
It’s not anonymous or even truly decentralized.
Its promise of lower transaction fees and faster transaction times can be just as easily (if not more so) accomplished with a traditional database.
So why launch Libra, and not …?
The location of the headquarters for the Libra Association offers a clue. So far, the US tech giants have not had a real chance to truly play in the financial services, not least because of significant regulatory barriers. By tapping into the cryptocurrency/blockchain movement — for which comprehensive regulations will take years to be developed — and basing Libra in Switzerland, Facebook and the other members of the Libra Association can try to tiptoe around regulations that would potentially jeopardise its mission.
So what is Libra’s mission?
According to its whitepaper:
"Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people."
Some [see note 1 below] are rightly asserting that the problem of the unbanked cannot be solved with digital technology alone. But nor is it mostly a social or educational problem, as has been claimed, though that might be the case if we only consider the US and some other developed markets. At a global level, the reality is far simpler. For the hundreds of millions of unbanked people in the world, even the closest bank branch is just too far away [see note 2].
In short, the direct digitisation of currency will rarely help if there is no physical infrastructure to deposit and withdraw cash.
But can we just skip this intermediate step of concurrently using cash and digital payments, and somehow jump straight to only using Libra? Even assuming that most of those without bank accounts have ready access to mobile devices or computers (and one would suspect there is a large overlap between the world’s unbanked and those without mobiles), this is unlikely.
The issue is that any local government will be disinclined to permit such extensive and exclusive use of Libra, because:
- The local central bank will cede full control over the monetary supply, which it might need to effectively implement monetary policies.
- If the basket of assets in the Libra Reserve do not contain any that are denominated in the local currency, there are the further issues of the local government losing:
- Seigniorage (essentially the revenues from printing money).
- Capital outflow to foreign markets.
- Payments data will be retained by Calibra, the Facebook subsidiary set up especially for this purpose. The domestic government will deal with the twin challenges of:
- Foreign entities controlling their citizens’ data.
- Possible money laundering if identity data is withheld from the local government.
In short then, Libra will have to coexist with the local currency, which will need to be supported by physical infrastructure in the form of bank branches and ATMs. The local government may further demand numerous other concessions before permitting Libra access to its market (or vice versa).
All this means that Libra will find it difficult to find traction in many markets, and so, following the path of resistance — Libra will likely focus most of its formidable resources on a key market – the US. The US is the ideal market, because:
- It's the largest economy in the world.
- Most Libra organization members have large user bases in the country.
- Libra organization members have strong and influential lobbies in the country.
- Data can possibly be kept within the country.
What is the true nature of Libra and the Libra Association?
“One Libra will not always be able to convert into the same amount of a given local currency (i.e., Libra is not a “peg” to a single currency). Rather, as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate.
… Libra’s backed by a reserve of assets, held by a geographically distributed network of custodians with investment-grade credit rating…”
Up to this point, one could be forgiven for confusing Libra with a multi-currency, closed-ended unit trust. Yet that is where the similarities end. Libra.org explicitly states that:
“Users of Libra do not receive a return from the reserve”
So that Libra coins can only be used for transactions (and possibly stores of value), not for investments. Eager and astute readers, however, might have noticed the mention of Libra Investment Tokens. To those familiar with the NEO blockchain, Libra coins are the GAS to the Investment Token’s NEO. In a nutshell, if we describe the Libra project as a public company, those owning Libra coins are the bondholders, even as those owning the Investment Tokens are the shareholders.
And ownership of Investment Tokens is within the exclusive purview of Facebook’s partners.
Apart from a minimum investment of $10 million in the project, investors must meet certain entry criteria such as $1 billion valuation/AuM, and/or minimum numbers of users. In short, Libra Association members are akin to the ecosystem partners that Alibaba and Tencent have developed for themselves, and will be critical to driving up the adoption of Libra as a viable payment option.
Just imagine all places accepting Mastercard also accepting PayPal/ Visa / MasterCard also accepting Libra — and offering a financial incentive to do so!
What does Libra mean for the market?