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Libra, the potential ‘Swiss-based financial system that is too big to fail’

Jacob Pouncey

Cryptocurrency analyst, Saxo Bank

Summary:  In June of this year, Facebook announced its long-anticipated blockchain project. The project titled “Libra” involves many moving parts. This piece will briefly describe these components and their implications on the global financial system.


The Libra Network is a project by Facebook to launch a means of value transfer that is faster and more convenient than traditional methods. These features are similar to some of the early selling points for cryptocurrencies such as Bitcoin. The project consists of four parts, The Libra stable coin, the Libra Association, the Calibra wallet, and the little-discussed governance and investment token.

Source: libra.org

The Libra stable coin is meant to be a digitally native currency that lives on the Libra Network. The value of the token is pegged to a basket of currencies (Libra Reserve) that includes USD, GBP, JPY, and EUR. The value is pegged to multiple currencies to ensure lower volatility when compared to the user’s domestic currency vs. traditional cryptocurrencies. The Libra Network and Libra stable coin will be governed by the Libra Association, which is a Swiss-based non-profit. The non-profit launched with 28 members that include Visa, Mastercard, Uber, and Spotify, to name a few. However, Visa recently confirmed that all the members have only signed non-binding Letters of Intent with Facebook. The association hopes to grow to 100 governing members. Since the announcement, Facebook received hundreds of requests from entities looking to join the association.

The benefits of joining the association include a role in governing the network, which could become the most significant payment platform globally. In addition to the governance right firms in the association are compensated for running the network in the form of interest from the low-yielding, highly liquid securities and bank deposits backing the Libra token. The share of the interest is directly proportional to a respective firm’s investment in the Libra Association. This share is rumored to be represented by investment tokens that live on the Libra Network. This token is often not talked about concerning the project and represents one of the least known aspects of the entire initiative.

The Calibra wallet is the digital asset wallet created by Facebook, which will integrate it into its suite of apps (Messenger, WhatsApp, Instagram, etc.). It is likely that at launch it will be the most used wallet if not the only wallet available for the Libra Network. This wallet is where much of the KYC and AML aspects are likely implemented as the network has no KYC features baked into the protocol. The wallet is where the largest privacy concerns arise for the social media giant.

Implications

If successful, this could mean a huge revenue boost to Facebook, anywhere between USD 3-19bn in a few years (based on the user monetization numbers from Google Play or the Apple app store). Facebook will also open the world of digital assets to those who might not have interacted with the industry. This exposure will bring greater awareness to the industry, ultimately boosting liquidity. Facebook could bring hundreds of millions of people into the global economy overnight by giving them access to financial services. The success of the Libra association could create one of the largest money market funds in the world, similar to Alipay’s Yu’e Bao. Also, it could lead to a new unit of account for global trade.

For central banks, this could challenge their monetary policies, especially if their domestic currency is not in or pegged to a currency in Libra's basket. For instance, India has already said it will not allow Libra to operate in the country. A country where WhatsApp has a high penetration rate. If citizens of a country begin exchanging local currency for Libra, it could lead to destabilization of the economy. For traditional banks, their cut of the global remittance and payments market could be dramatically reduced.

Head of Calibra, David Marcus’ recent testimony to congress suggests that Calibra is the American answer to Alipay and WeChat. He states, “that if America does not lead innovation in the digital currency and payments area, others will.” Alarmingly, Facebook through its Calibra wallet could become the largest shadow bank in the world and collect financial information on billions of users.

Regulation is the largest stumbling block for the success of Libra. Due to the centralized nature of the Libra Association, regulators have direct access to operators of the network and can regulate them to oblivion, unlike more decentralized networks such as Bitcoin or Ethereum. Countries that ban Libra inside their territories will require wallet providers to geoblock access to users in order to prevent the illegal use of the Libra network. This will stifle adoption and ubiquity of the Libra network. However, Facebook and its partners have the resources to lobby for favorable regulation. Whether or not they will get that regulation remains to be seen.

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