Last week, Facebook announced that it was part of a consortium planning to launch a new cryptocurrency. Libra is a cryptocurrency but it’s not like any of the others already available. Unlike the majority of other cryptocurrencies, it has the support of major financial institutions, marketplaces and other backers. It has great potential – it’s just too bad Facebook seems to have lead role and made the announcement.
There is a significant problem in today’s financial world. As the economy becomes increasingly globalised, it’s becoming extremely complex. Take the purchase of something like a smartphone. Depending on which country you’re in and the release date, the price can vary significantly when you take into fluctuating account rates, hedging strategies and fees imposed by banks and others on foreign exchange transactions.
There’s also the issue of how the banking sector works. In simple terms, banks do two things; the hold money in trust for us and then lend us money. While banking revenue from fees and services have increased, a major part of their income comes from the differential in the interest they pay on savings versus what they charge for lending. And the nature of the banking system means many people are excluded.
One of the ways many of these challenges could be addressed is through a single global currency.
Much of the focus given to Libra over the last week has been on Facebook’s track record – would you trust a company with a poor reputation for personal data protection with your finances? But would you be more likely to use a currency that might potentially work anywhere in the world and that doesn’t rely on foreign exchange? And that’s really where Libra is pitching its value. Instead of relying on fiat currencies issued by governments, Libra could be a way of facilitating transactions.
Fiat currencies, like the Australian dollar, only have value because we exchange them for goods and services. The value we attach to a dollar is all about what we can buy with it. A dollar in your wallet is of no value unless you can use it. Cryptocurrencies are no different. The real value of Bitcoin (not the perceived value we see on cryptocurrency exchanges) is based on what we can do with it. So, when someone buys a Lamborghini with Bitcoin, it establishes the real value of the coin.
Libra is still little more than an idea or concept. Sure, there’s a flashy website complete with a white paper describing Libra and why it will be awesome. But Prodeum also had a nice website and whitepaper before disappearing with millions of investor dollars leaving a website with just the word ‘penis’.
But Libra is backed by some established businesses like Visa and Mastercard – companies that will have done due diligence and, I think, take a very conservative approach to how Libra is used. While the backing of some major venture capitalist funds and online marketplaces is interesting, it’s the inclusion on these two entities that I think warrants giving Libra some serious attention.
When you combine Libra with low-cost smartphones with strong hardware encryption – something that will become commoditised over the coming years – you suddenly have a payments system that can be used by anyone and anywhere without the need for a bank to play middleman. You receive funds for services using Libra, with all the transactions stored on a blockchain – which is really a decentralised ledger – and pay for them using the same pool of Libra coins.
The integration of Visa and Mastercard gives you a connection to the existing payments world. That’s important as it’s doubtful that Libra, or some other universal payments system that works outside the worlds of traditional banking and finance, will supplant fiat currencies and foreign exchange for many years.
Many of the people who support Bitcoin, Ethereum and other cryptocurrencies talk about a future where the exchange of value between us will be outside the control of banks and governments. Frankly, I think that’s unlikely to happen. The vast majority of cryptocurrencies today exist without any real integration to banks. Even Ripple, which is pitched as a solution to foreign exchange challenges, doesn’t have support from the biggest banks in the world.
Some governments, like Venezuela with its Petro, have dabbled with cryptocurrencies. But nothing has come close to having a platform with the potential of broad adoption. Libra may not do that. But it could.
It’s impossible to discuss Libra without confronting the elephant in the room; Facebook.
I think the involvement of Facebook at this early stage is a big black mark. If Visa and Mastercard had made a joint announcement rather than leaving it to Facebook, Libra would have far greater credibility. The plan is for the current list of 20 foundation partners to expand to about 100 with each member having a single vote. So, Facebook’s role in this is no greater than Stripe, Uber or Vodafone. But having Facebook take a lead role was a mistake in my view – something I mentioned in last week’s Vertical Hold podcast.
Will Libra work? I’d like to think the world will move to a single currency at some point. But governments have little interest to do this as they want to maintain control of the issuing of fiat currency and the banking sector want to keep collecting foreign exchange fees and making money by playing off lending and saving interest rates. There’s also the issue of trust to deal with.
The volatility of cryptocurrency markets today will have many people feeling wary. And with criminal elements enjoying the relative anonymity of cryptocurrency for the drug trade, money laundering and other nefarious activities its reputation isn’t exactly stellar. But regulators around the world are stepping up and putting various protections in place.
I think Libra has great potential. But Facebook’s lead in the announcement makes me cautious. It could facilitate a payments system that is more inclusive to people who traditionally have been ignored by traditional banking and reduce transaction costs. But it also means we will placing a lot of trust in a relatively small number of corporate entities.