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Brad here. Today’s post comes from Chris Stuart, a senior investment research analyst on our Investment Management and Research team. Over to you, Chris.
By now, you’ve probably heard rumblings of Facebook’s proposed cryptocurrency Libra. If not, and you’re a true glutton for punishment, the six-hour congressional testimony of Facebook executive and crypto head David Marcus should, at the very least, provide you with some cocktail party material.
For a quick recap, Facebook hopes to create a cross-border digital currency, built on a blockchain and supported by some of the most influential payment and consumer-facing companies in the world. These companies, which include Mastercard, Visa, PayPal, Uber, and eBay (among others), make up the Libra Association and would provide the backbone and oversight for the Libra currency and network.
A “stablecoin”?
Libra is designed to be a stable digital currency (often referred to as a stablecoin in the crypto world) and is supported by a basket of fiat currencies, including the U.S. dollar and the Japanese yen. The whole point of a stablecoin is to remove wild swings in pricing, allowing for a “sleep-at-night” currency that can be used for everyday transactions. Stablecoin goes against the grain of most cryptocurrencies such as bitcoin, which are backed by nothing and tend to be quite volatile. Some forms do exist in the current crypto framework, yet the most popular to date—Tether—has been embroiled in its own controversy.
Due to its inherent design for stability, Libra wouldn't be something that consumers (at least here in the U.S.) would invest in. It’s simply a stable currency and is meant to be just that: stable. It might be useful for an existing Facebook or Instagram user as a mechanism for peer-to-peer payments or for someone interested in trying out a cryptocurrency. But this isn’t the next bitcoin. Bitcoin is often viewed as an alternative store of value (like gold). Although it isn’t backed by anything per se, bitcoin does have a limited supply with opportunities for capital appreciation.
What are the risks?
The likelihood that Libra ever gets off the ground may be slim, as Facebook most certainly has a target on its back. U.S. regulators don’t like Facebook, and their concerns are twofold: (1) why would they allow a company to create a global cryptocurrency that might disrupt their own financial system, and (2) if we were going to hand over the keys to someone, why would it be Facebook, the company that can’t even protect our data? (Note that even Fed Chair Powell thinks that Libra could pose a systemic risk.)
The congressional hearing mentioned earlier is almost painful to watch (especially Senator Sherman’s assertion that an approval of Libra could be more dangerous than 9/11). Still, it brought up some additional points of contention that will likely be a thorn in Libra’s side. One, there are concerns surrounding the potential use of Libra as a means of payment for any underground activities, as well as how Facebook (or Libra) would be able to police such activities. Marcus alluded to some fancy AI tools created at Facebook and the use of normal screening mechanisms (notably Know Your Customer), but the perceived risk is going to be a major stumbling block.
What if Libra gets approved?
But let’s say Libra gets the go-ahead from U.S. regulators and most of the developed world gets on board. Then what? As noted many times in Mr. Marcus’s testimony, Libra’s sole intention for creating this cryptocurrency is to “fix the current system” and provide a way for frictionless, low-cost cross-border payments or money transfers for the unbanked. If you have relatives in China or India and are looking to avert some of the cross-border fees involved with such a transaction, Libra might ultimately be a good option for you. Facebook has said that it wants to make transfers as easy as sending a picture or a text message.
Others who live in developed nations who don’t make cross-border payments might not exactly be part of Libra’s so-called target demographic. But that doesn’t mean Libra might not become ingrained in your day-to-day activities. Facebook has the user base and capital to make Libra a very big deal. In the rosiest of scenarios, all merchant terminals would add a digital mechanism for accepting Libra. Your peer-to-peer payment for something you purchase on Facebook Marketplace might be done with Calibra (the Libra wallet) rather than Venmo. That ad you see on Instagram might direct you to a store that prefers Libra to other payment methods (due to lower fees).
What’s the benefit for consumers?
At this point, I can’t quite envision why Libra might be a better choice for a consumer versus any of the normal payment mechanisms. The Facebook ecosystem usage makes the most sense from a convenience perspective. If I’m a regular buyer and seller on Facebook Marketplace, Libra might offer the easiest way to send payments. Outside of the Facebook platforms? That’s where it gets trickier. What would be the benefit for me to use my Calibra wallet at Starbucks as opposed to all the other easy-to-use methods available? Like I said, it’s hard to say. It might just be that our hands are forced due to Libra being the cheaper payment mechanism for store owners.
Will Libra be a game changer?
The biggest players at risk in all of this include the payment networks such as Visa, Mastercard, Paypal (which owns Venmo), and Square (which owns Cash app). A blockchain-based stable currency like Libra could completely upend the payments space. From a cost perspective, Libra could reduce merchant fees significantly and lead to wider acceptance of Libra as a payment mechanism. There’s a reason that Visa, Mastercard, and Paypal want to be involved with the Libra Association. If anyone was going to flip your business upside down, wouldn’t you at least want a seat at the table?
As seen with the recent congressional hearings, Facebook doesn’t exactly have a friendly relationship with regulators—Senator Sherman even referred to Libra as “Zuck bucks.” In addition, Libra isn’t what bitcoin founder Satoshi Nakamoto envisioned when he wrote about bitcoin being a “peer-to-peer version of electronic cash” with no reliance on a financial intermediary. But perhaps Satoshi was going about this whole crypto thing in the wrong way. Maybe Bitcoin needed a company with the scale of Facebook to spearhead the launch of a truly global digital currency. Of course, it might never see the light of day. But in the grandest of scenarios, Libra becomes the currency of choice for a majority of the world’s population—something that has the potential to change the global monetary system forever.
