Designed to take Cryptocurrency Mainstream

In the first part of this two article series, we noted that Libra is Corporate money, as distinct from Government money (fiat), or Private cryptocurrency money exemplified by Bitcoin. We noted that it is also not a true blockchain in the ledger representation.

Libra will create a basket of fiat, to which it will be tethered, and Facebook’s Calibra subsidiary says the basket will provide 100% backing to Libra tokens.

In this second article we look at likely usage, the Association, government pushback and regulation, and a possible relationship with Bitcoin. We will examine whether Libra can be world money.

Who will use it?

The entrance of major companies into the Libra Association is a significant endorsement of cryptocurrency concepts and will boost the importance of digital money. Government money will carry on, and Corporate money will be a significant part of the market, as will Private Money.

Libra will have appeal to hundreds of millions of potential users for obvious reasons. The first is Facebook’s huge reach and easy and familiar interfaces for What’sApp, Instagram, and Facebook. Now in addition there will be a mobile wallet, Calibra, to hold currency amounts and send to users or businesses within the Facebook world of over 2 billion users via What’sApp or otherwise.

So, scale, ease of use, and a growing set of future applications are big wins.

The other is the appeal of a slowly depreciating (under 2% likely) currency because of the underlying strong fiat currency basket. The users are mainly going to be consumers, because there is no strong investment potential. But for those living in higher inflation nations such as Brazil or India, there could be a preference for holding Libra rather than reals or rupees.

Libra will also be very useful for international transfers by expatriate workers sending money to families in their home countries, presumably for much lower fees than they currently pay.

Libra is going to have to be approved by the financial authorities in each country (more on this in a following section). They are going to have to establish banking relationships and relationships with cryptocurrency exchanges. Someone is going to end up with a pile of rupees or other fiat that wants to be exchanged for a combination of $ € £ ¥.

If adoption is strong this will force down the value of non-$ € £ ¥ fiat and disrupt the foreign exchange markets in weaker currencies. The financial authorities will need to manage this, implying capital controls regarding how much Libra can be purchased per day, etc. And it is the higher inflation, weaker currency nations that already tend to have stronger capital controls. So this is a major hurdle in markets that they see as potentially having the most acceptance.

There could even be a banking crisis in a given country if everyone rushes into Libra with its introduction. We do not expect this, because financial regulators, if not the Association itself, will limit the rate of transfer.

Impressive Association

The Association has 28 major players including Facebook, who have created a subsidiary known as Calibra. The participation of members such as Visa, Mastercard, and PayPal indicates they can have a very big reach in payments. This is what PayPal wanted to do, change payments across the globe, and Libra now has a real shot at doing it.

Many other firms will want to join; the Association seeks to have 100 corporate members. Banks will be cautious, and they have other plans in the blockchain arena for their own stablecoins and payment solutions. A voting position and capital position in Libra is a promising investment on its own.

In any case, Visa and Mastercard have relationships with practically every bank worldwide. And they deal in very large volumes of foreign exchange. This provides a path for users, at least the ones with credit cards, to purchase Libra with their particular national fiat, whether pesos, reals, rupees, or rupiahs.

How will the Association make money? They will charge fees for payment services, and develop new applications that operate in the Facebook ecosystem. They will also earn dividends on their special Association-members-only Libra Investment Token holdings since funds will be held in short-term government paper (they have a challenge with the Euro since short-term rates are currently negative in many European nations).

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Government pushback, shadow banking?

This brings us to what will be imminent and certain government regulation. Facebook is a highly visible company already under scrutiny for data privacy and other issues. The Libra Association’s mere entrance into the cryptocurrency world, with its heavy-hitter participants, makes it an urgent matter for governments to clearly define their policies and legal framework. Such regulations will impact the whole project, and might even lead some Association members to back out.

Even in the developed world, including countries such as the US and France, there is going to be significant pushback. Facebook is already under the microscope because of breaches of user privacy including with Cambridge Analytica, who illegally interfered in the 2016 American election, using Facebook as a platform.

The Chairman of the US Federal Reserve has made strong comments that Libra must be thoroughly reviewed before being allowed to proceed. The US Financial Services committee chair in the House, Congressperson Waters, said that Facebook should pause their Libra plans until there is government review. There are Senate and House hearings already scheduled for this month on this topic.

Even Donald Trump has weighed in with a series of tweets, saying Facebook needs to apply for a banking charter.

The French Finance Minister Le Maire was even more emphatic. ‘[It must not happen] ça ne doit pas arriver.’

Facebook is already a target for its surveillance capitalism model, and Congress and European governments know who to require testimony from. Mark Zuckerberg, Facebook CEO, and David Marcus, who heads the Libra effort, the Calibra subsidiary, and messaging products at Facebook. He was previously president at PayPal and is currently on the board at Coinbase, the leading US custodial exchange for crypto.

Facebook is in the midst of a legitimacy crisis and has been slow to change. One can interpret the introduction of Libra as a huge pivot for the company and an attempt to change the market narrative while building trust in a very different way. They may have changed the narrative already.

Now you see why they want to call it Libra Blockchain (‘It’s not money, it’s a blockchain!”). The devil will be in the details, with regulatory permission and banking relationships required on a country-by-country basis. The traditional banking community will be lobbying to restrict what many regulators could view as shadow banking.

Libra and Bitcoin. Will they eat the world?

Will Libra aid Bitcoin?

If Libra is a checking account, then Bitcoin has been a savings account, attracting so-called “hodlers” (misspelling of ‘hold’) who acquire, but are often very loath to sell, Bitcoin. At a minimum, Libra is a big boost for the cryptocurrency space. It will promote additional awareness for Bitcoin, and serve as an on-ramp for people who want to not just spend, but also save, cryptocurrency. Existing cryptocurrencies around the world will need to add Libra onto their exchange and people will be able to move between fiat, Libra, and Bitcoin at will, subject to regulatory restrictions. Moving in and out of fiat to Libra will probably require a banking account and a KYC (know-your-customer) process.

And yet Facebook is selling Libra on the idea of reaching the unbanked. How they are going to thread this needle? It looks as if they expect to push the KYC burden onto the cryptocurrency exchanges. The regulation of these has been steadily tightening. It can sometimes be more difficult to open an account on a crypto exchange than it is to open a bank account. And the unbanked don’t have Visa cards to buy Libra with.

Suppose an overseas worker from the Philippines has a bank account in the country where she works. If she sends Libra to her mom back home, who does not have a bank account, how does her mom convert that to pesos? Perhaps her only option is to use private money changers at unfavorable rates or spend the Libra she has received with merchants on the Facebook platforms.

Bitcoin in the basket?

Will Libra add bitcoin? Now a thought experiment. Suppose Facebook and the Association decide to add cryptocurrency to the basket. Since they are positioned competitively against important cryptos such as Ripple and Ethereum for payments, transfers, and smart contracts, there is really only one clear choice: Bitcoin, which possesses over 60% of the market capitalization of all cryptocurrencies combined.

Now Bitcoin is too volatile, you say. Indeed, Libra is designed to be a low-volatility stable coin. But it already possesses some volatility due to the exchange rate fluctuations between the $ , € , £, and ¥.

A small amount of Bitcoin, a 1 or 2% component, would be both a brilliant marketing ploy and a way to strengthen relationships to all the cryptocurrency exchanges. And Bitcoin volatility is decreasing over time as the ecosystem grows and matures and major institutional platforms like Fidelity and Bakkt/ICE come on board.

Once Libra volumes explode, it will put pressure on non $ € £ ¥ central banks to add to their reserves, and even consider Bitcoin as an additional component, a digital gold, within their reserve holdings. The Bank of England governor has made comments that his central bank might be willing to hold reserve balances directly from Libra’s Association, bypassing the commercial banking system.

World money?

Libra can’t be a path to world money; nation-states would never allow it. But it could be a viral path for Bitcoin to become a global reserve component for fiat currencies. This would be self-reinforcing for Bitcoin.

Because Libra and Bitcoin are so different, one is for spending, the other for saving, one is Corporate money, the other is Private money, they could end up very complementary, the Yin and Yang of cryptocurrency. And if you are wondering, Bitcoin is Yang, but that is a blog for the future.

This could be some kind of accommodation for all, for Corporate money, for Private money, and for Government money. Happiness for all, for a while, but it would be a metastable period. Corporate money and/or Private money seem to be ascendant. Time will tell, but the Bitcoin ever-tightening monetarily policy is relentless, and this acts as a strange attractor for value.

Daniel Jeffries writes in a recent blog about Libra: “they’ve started the planet down the path of ditching the dollar”. We tend to agree that competing currencies are ready to reduce the importance of the dollar. Libra might play an important role in that process. We also believe that Libra will facilitate the continued rise of Bitcoin.

Our full report on Libra is available for free download at orionx.net/research.

References

Librawhitepaper: https://libra.org/en-US/white-paper/

LibraBlockchaintechnicalpaper: https://developers.libra.org/docs/the-libra-blockchain-paper

DanielJeffriesblog: https://hackernoon.com/libra-a-cyberpunk-nightmare-in-the-midst-of-crypto-spring-5543b6f6e34b