#libra #stablecoin #potentialforcatastrophe #potentialforgood
Yesterday, an association of 28 companies, most notably Facebook, Mastercard, Visa, Uber, Lyft, eBay, Vodafone, Coinbase, and Kiva, released a whitepaper for a new cryptocurrency called Libra (oddly enough, that translates to pound in Spanish).
The goal of this cryptocurrency, according to the whitepaper, is to facilitate payments between the billions of people that are unbanked in the world. While banking is not a new concept for most people in developed countries, in the rest of the world, it can be either too expensive or unavailable. Back in 2010, McKinsey had estimated 2.5 billion adults were unbanked. And even more recently, the FDIC estimated that 25% of households remained unbaked in the United States. According to Libra.org, they estimate 1.5 billion people are unbanked.
One of the interesting aspects of Libra, is that unlike other cryptocurrencies which are valued based on market speculation, Libra will be a stablecoin. Where coins, or tokens, like Bitcoin, Litecoin, Ethereum, etc. are valued based on market demand, hence their volatility, a stablecoin is tied to a fiat currency. This means the value of a stablecoin will change only as much as the fiat currency to which it is attached or pegged. For example, if you have a stablecoin that is based on the US Dollar, in theory, each stablecoin will be worth $1.00. And if the US dollar goes up/down in value against another currency (EUR), so does your stablecoin.
Stablecoins are not a new concept. There are several stablecoins in the market, like Tether (usdt) and Coinbase’s USD Coin (usdc). The former was introduced back in 2014 as Realcoin, and was renamed to tether. Tether is no longer available in the US. USDC was introduced late 2018 and remains active.
Libra, unlike those stablecoins, will be pegged to the value of an initial investment of assets, known as the reserve. This reserve, and its intrinsic value, will dictate the number of coins, or tokens, of Libra that are initially created. Afterwards, more Libra coins will be created through authorized exchanges for fiat currency (I assume local fiat currency). As the number of Libra coins grow, so will the reserve. Similarly, every Libra coin withdrawn from the blockchain will reduce the value of the reserve.
To me, this is the most interesting aspects of Libra, the potential for the reserve to make (or lose) money in the real world. According to the whitepaper, the assets of the reserve will be invested in low-volatility assets like government bonds and bank deposits. On the surface this sounds like a good idea and in theory it is. However, at scale, the gain of a 0.5% is huge and I can see human greed playing a part in bad decision making.
This cryptocurrency and its reserve have huge potential. Imagine if half of Facebook users purchased only 1 Libra each, that’s 1 billion Libras or around $1 billion in reserve. Imagine the assets of the reserve were invested in low-volatility assets, as originally noted, with a conservative yield of 1%. That would result in $10 million. $10 million for the companies in the association is not much, I realize this.
However, take this mental exercise one step further and let us imagine what would happen if instead of 1 Libra, users had hundreds (even thousands) of Libras in their digital wallets. If Libras work well enough, there would be little incentive for users to exchange them into fiat currency. If the project is successful, it would be conceivable that users would just keep their money as Libras and use it to buy and pay for everyday items. If on average, your 1 billion users had 1000 Libras, the reserve would be worth $1 trillion and that 1%, low-volatility investment, would yield $10 billion. I don’t care who you are, but $10 billion is a lot of money. At this scale, the difference in investments that yield 1% vs 1.5% is in the multiple-billions of dollars. And this assumes only a fraction of Facebook users and with each user only maintaining 1000 Libras in their wallet.
Of course, the promise of friction-less and inexpensive transactions has huge positive potential for developing countries as well. Micro loans would be much easier than they are now. Entrepreneurs in those countries could themselves take advantage of the scale of internet in the form of investors and customers. And even for developed countries there would be immediate benefits. Have you ever tried to wire money from the US to Europe or vice versa? It can be very expensive and certainly not timely (think multiple days). The possibilities for positive change are endless.
And yet we know companies are driven by profit, what is there to keep these companies from investing in AAA-rated investments like housing bonds in 2008? Do you remember what happened in 2008? Multiply that by 10 or more 🙂
