How Facebook Coin (Libra) can help billions of people by not being a stablecoin
Disclaimer: I have no inside knowledge of Facebook’s plans and I’ve made so many assumptions that even Facebook not doing a Stablecoin I’m probably wrong in many aspects. I do not own Facebook shares and this is not an investment recommendation.
Following the conversation by Raul, Ted Livingston, Ross Sandler, Lance Ng, Hunain Naseer, Melis, Mohammad Musharraf, Michael K. Spencer, and others, I’d like to share my view on why and how Facebook could help billions of people with their finances by issuing a “complete” cryptocurrency and not a stablecoin.
In fact, I do believe ‘Facebookcoin’ (let’s call it FBC) is going to be a stablecoin, or a coin pegged to a fiat currency like the US dollar, at first. Only because that’s a relatively simple way to start testing blockchain and see the first batch of users interacting with it. But I think it will evolve into a more complete cryptocurrency, that can become the de facto internet’s money. I will explain why.
Edit: When I wrote this article the name of the project wasn't public. Now everyone knows what's Facebook's Libra. When I write Facebookcoin or FBC, I meant Libra.
The myth around volatility
A lot of people criticizes bitcoin (BTC) and other cryptocurrencies for being too volatile against fiat currencies (USD, EUR, etc), saying that you cannot really use BTC as your to-go money to pay for goods and services daily because the price varies too much. It’s an everlasting debate, but indeed, it’s hard to use BTC when everything else is priced in dollars and the BTC price fluctuates that much.
(Although, it’s interesting to notice that, in perspective, BTC price has been consistently going up, therefore being a good investment for many people. Two conclusions: 1- many BTC investors prefer not to spend their bitcoins, therefore saving more for the future — Gresham’s law. 2- Volatility is not bad at all if the price goes up more than down.)
On the other hand, people are used to the volatility of the fiat currencies against themselves. If you live in Europe and is going to spend some time in Thailand, you may experience some daily fluctuations when buying and using Thai Bahts during your trip, and that’s fine. Companies that import and export goods are very used to the volatility of the different currencies they deal with. Not to mention the volatility of commodities and other raw materials.
My assumption is that FBC don’t need to be a 100% stable cryptocurrency to be used by people, but needs to maintain its fluctuation to some “manageable” level. Preferably a slow appreciation in value (against ‘fiats’) on the long-term, from which users would benefit when holding it, making then richer over time. And to address that, there are interesting approaches other than the ‘stablecoin’ pegged to the dollar. The hard question, of course, is knowing the right option. I will explore a few ideas, but before that, I’d like to address the REAL problems FBC can solve.
What are the real world’s problems and inefficiencies that FBC can address?
The unbanked: 1.7 billions of people don’t have access to bank accounts and financial services, although 2/3 of them own mobile phones (and therefore a Facebook account). For these people, just being able to save money and make payments and transactions cheaply is a great value proposition and will enable them to start creating more wealth in their lives than ever before.
The banked: Being born in Brazil, I know from personal experience how difficult things can get when you cannot trust your own currency with your savings. Brazil has gone through different currency changes (I’m 32 and there have been 6 official currencies since I was born), monetary instabilities and hyperinflation periods. The poor suffer the most but middle and upper classes are very affected as well. Being able to buy and safely store other currencies, assets, and access international investments and financial products is still an enormous privilege to very few people in the world. FBC could change that.
The globalization of financial services: Since modern nation-state society, people have been tied to their official local currency and the financial services offered in their local markets. Until BTC, you had very few options other than trusting your government, your country’s central bank and your bank’s investment and financial products. I’d say most people agree that governments and central banks are not the most trusted institutions in the world. And a little bit of competition would be welcome.
On a practical aspect, even now, if you are a Brazilian citizen and want to buy stocks in NASDAQ, invest in real estate in Europe or enter an IPO in Japan, you are going to have a hard time to open accounts, transfer money, sign contracts and you will pay a lot of fees during the investment process. Not to mention accessing loans, mortgages, leasing, insurances and other financial products that are simply geographically-restricted. A global, easy-to-use and safe to store cryptocurrency (which BTC isn’t) will facilitate the true globalization of financial services.
Inflation and purchasing power: Emperors, kings, central banks and governments have used their monopoly power over currency emission to finance wars and other government expenses, always at the expense of the population’s savings. Sometimes as direct confiscations, but in general through taxes and inflation (the worst kind of taxation).
Even for developed countries, inflation is a huge problem. In the US, according to the CPI, prices in 2016 are 2,757.23% higher than average prices in 1900. The dollar experienced an average inflation rate of ~3% per year during this long period. In other words, $1 in 1900 is equivalent in purchasing power to $28.57 in 2016, a difference of $27.57 over 116 years.
As most of you know, BTC is the first kind of modern currency that you don’t need to trust a central authority monetary policy, instead, you can trust it’s open source supply algorithm and it’s p2p network. You only understand bitcoin’s power after you understand how powerful central banks and governments are because of their monopoly over our money.
In 1976, Friedrich Hayek wrote Denationalization of Money, in which he advocated the establishment of competitively issued private currencies. I think Facebook could be the first contender to the monopoly of the central banks and FBC could become the internet’s money for most use cases and make tons of money for the company and for its users. (In any scenario, I believe BTC will still maintain it’s use as an ultimate store of value, a kind of e-gold).
In other words, if Facebook issues a stablecoin, it will be only making incremental improvements to the current financial paradigm, helping more people accessing the US dollar and the current financial system, but it will not offer a significantly better value proposition to its users.
How a non-stablecoin FBC could be?
One of the most interesting characteristics of cryptocurrencies is that you can code monetary policy into its open source code. And this code can only be changed by the governance model established into the code as well. If Facebook can implement a good model, and develop a cryptocurrency that will be used by its 2.7B users, FBC can become as used and trusted as the USD or the EUR. In times of Quantitative Easing, maybe even more trusted. Facebook could simply deliver a better product than central banks and governments.
What would a good FBC be?
At this point, I’m writing absolutely just for fun, don’t take anything seriously! This is just what I’d do if I was designing FBC. There’s no information or indication that Facebook is even thinking any of this.
Central banks have different options for monetary policy. Starting that they can print and/or borrow money by issuing government bonds and they can set different exchange rate regimes, like the clean float (where it’s currency trades freely against other currencies), the dirty float (the CB intervenes with the market usually by buying or selling its own currency), the crawling peg and the target zone (where the CB sets a preferred range of fluctuation), the fixed exchange rate and the currency board (similar to what a crypto stablecoin would be, Hong Kong Dollars being the classic case).
For cryptocurrencies, things get trickier. If you want your users to trust your crypto, you must code it with a good monetary policy and a good governance model. This is tricky for Facebook but I think the incentives are that they set up a very good model, otherwise the crypto community could fork FBC to a better model, anyways.
For the total supply, FBC could go for a similar approach to the BTC, having a limited total supply to be reached in many years, or could go for a fixed inflation rate, like 1–3% a year. Imho, I’d go for the second because that could help to adjust the price to the current fiat currencies. Regarding the consensus algorithm, although PoS hasn’t been used for that long in the crypto world, I think FBC could go that way and reward users that stake their FBC. That are many other very important characteristics that I don’t want to explore because I’m not a blockchain expert and what really interests me is how Facebook could roll the whole plan out in a way that it can compete with central banks, help billions of people and make a lot of money on the way.
“Smart people are looking for something better. We’re talking Simoleons — the smart, hip new currency of the Metaverse.” — Neal Stephenson, 1995.
How could Facebook roll that out?
Here I am in my psychedelic trip of speculation.
How I could see that happening:
- Facebook creates FBC as a distributed, public and open-source cryptocurrency. No PoW mining, but a smart distribution strategy.
- Facebook sells part of the FBC created to big investors: big tech companies, funds, and central banks would buy.
- Facebook uses the fundraising money to fund a FBC Foundation to act independently as a central bank for FBC with the goal of maintaining its long-term stability while being its governance body. During FBC creation, a big part of the coins are given to the Foundation and are unlocked yearly so the Foundation can use the money raised initially and its treasury to intervene in the market as a central bank to better stabilize the currency.
- Facebook and the other big investors are part of the Foundation board and recommend the independent executive team. Therefore, Facebook is only one of the ‘supernodes’ of the network and does not control directly the decisions of FBC Foundation. The independent executive team is similar to an independent central bank’s team.
- Facebook airdrops 10–20% of the coins to its 2.7B users.
- Facebook, exchanges, and gateways can easily provide liquidity to users that want to exchange FBC to fiat currencies or buy more.
- Facebook can accept ads payments FBC with a discount in its own platform. Other players will follow. Maybe small countries would adopt FBC as its official currency.
How could Facebook make money out of it?
- Being the issuer of FBC, Facebook could keep a significant amount of the coins. This coins could be designed to be locked as default and a small amount be unlocked yearly. Facebook could decide to keep or sell at its own discretion but there’s a huge incentive to keep until the market cap is huge.
- Facebook can provide all kinds of financial services to its users and profit from a big range of revenue streams. Most people suck at managing their finances and, particularly, their investments. Facebook would turn itself into the most important fintech startup in the world and FBC can create a whole new paradigm for other fintechs. FBC Foundation would have a role in overviewing this new paradigm.
- The incentive, IMHO, is that an open and distributed ecosystem generates much more value in the FBC network. In which Facebook could profit billions of dollars just by selling their initial coins. There’s also an implicit incentive that Facebook goes in a more decentralized and open platform way than most people expect. That’s because blockchains can be forked. If Facebook chooses an overly centralized option. A group of people could just fork the original code and create a better FBC to the initial FBC users.
Let’s remember why bitcoin is powerful. Because it’s open source code where you can verify it’s total supply at any given time and it’s permissionless peer to peer transactions are very attractive characteristics. If Facebook is trying to build a better bitcoin it shouldn't be a stablecoin. That’s basically why I agree with others that believe Facebook can become (or create) a central bank.
FBC competitors are probably Telegram, Line, Kakao, Signal and other similar apps with their cryptocurrency projects that are going in an open source, distributed network and transparent governance direction. Telegram’s cryptocurrency GRAM (raised $1.7B in last year’s ICO) is probably the most important competitor to FBC at this point, not Tether or GeminiUSD.
Finally, the most obvious, what matters for people is holding a currency that maintains its value or appreciates consistently over time. If Facebook airdrops 10$ worth of FBC to its users and they see that their FBC is appreciating consistently compared to their local currencies and that they can use it to pay for groceries and split bills, they will very quickly adopt it as their preferred money.
Ps: all polite comments, opinions, and feedbacks are appreciated. Clap 50x if you enjoyed the reading.
