The World Needs a Globally Accepted Digital Currency
The global rise of cryptocurrencies demonstrated to the entire world how much demand there is for a globally accepted digital currency. In a single decade, cryptocurrencies have gone from an interesting thought experiment to an asset class with a total market cap of over $250 billion.
However, so far, no cryptocurrency has been able to reach mainstream adoption. Not a single cryptocurrency is used for the daily transaction needs of billions of consumers. The demand for existing cryptocurrencies comes primarily from investors and traders, not consumers.
Some of the largest social media networks have realized there are real opportunities in leveraging their existing multi-billion user bases to create a truly global cryptocurrency. In addition, there are significant economic synergies and new revenue streams that can be created by introducing global peer-to-peer digital payments.
The Global Adoption Of Cryptocurrencies Is Gaining Momentum
Some of the major players in social media and messaging apps have already announced plans to introduce their own cryptocurrencies.
In 2018, Telegram announced plans to build an entire crypto-based economy on top of its 400 million user base.
WeChat, a massive Chinese social media and a messaging app, has already implemented mobile payments denominated in cryptocurrencies.
Now, finally Facebook, the biggest social media network in the world, is going to announce its introduction of a brand-new cryptocurrency, called Libra, and a system of free peer-to-peer global payments. What might this mean for the global payment industry?
There are 2.5 billion users registered on Facebook, Instagram, and WhatsApp combined. The introduction of a new global cryptocurrency could create an entire borderless economy fueled by a critical mass of those 2.5 billion people and provide them with a range of digital payment services, allowing them to store value and make international payments in a single click.
This might make Facebook one of the world’s most powerful financial institutions.
In this article we’re going to discuss the overall fundamentals of the Libra project, the opportunities and threats it might create for Facebook, and, most importantly, evaluate the potential impact the Libra might have on Facebook’s revenue and profitability over the long-term. Based on our estimates, we also derive an implied fair value of Facebook’s share price today, and state the potential upside for investors.
Opportunity #1: Libra Could Take Over The Global Remittances Market
Remittances are one of the most significant unrealized use cases for crypto. In 2018, over $600 billion in remittances were made by foreign workers to their home countries. In emerging markets, remittances make up one of the largest financial inflows, and in some countries represent as much as 25 percent of GDP.
However, international cash transfers are expensive. The two most prominent companies in the industry — Western Union and MoneyGram — control what is effectively an oligopoly. These firms have a high degree of pricing power, which results in substantial profits. For example, in 2017, the weighted-average transfer fee charged by WU was 7.0%, while MoneyGram charged an average of 5.6%. In certain countries, the cost may be up to 30% of the principal amount.
Over the long run, Facebook’s Libra has the power to win a competitive edge with Western Union and MoneyGram by offering nearly zero-commission transfers, a familiar interface, and leveraging the power of its global user base of 2.5 billion people. This will create a much more efficient market for international money transfers with higher transactional volumes than before. Importantly, even charging a 1.0% fee on the half a trillion dollar international cash transfers market would create a $5 billion revenue stream for Facebook, while making traditional money transfer firms obsolete.
Opportunity #2: Libra Could Become A True Store of Value
Facebook’s Libra will become extremely important for the broad cryptocurrency industry.
One of the major factors holding back global cryptocurrency adoption is their high volatility. Highly volatile cryptocurrencies create uncertainty that damages investor trust, thereby undermining the efficiency of crypto markets. In particular, institutional investors tend to not invest in crypto due to high volatility risks and a lack of confidence that their capital won’t be lost.
A stablecoin eliminates volatility by remaining fully backed by a safe-haven asset, such as the US Dollar, or a basket of safe-haven assets, such as the SDRs of the IMF. Reportedly, Facebook’s Libra will be based on a basket of safe-haven currencies, creating a perfect hedge against volatility and macroeconomic risks.
Facebook’s stablecoin could become an essential asset in facilitating safe transactions with known values stored on the blockchain. Importantly, compared to existing stablecoins, Facebook’s stablecoin will have the advantage of increased transparency backed by independent audits of its currency reserves due to Facebook’s status as a public company.
Opportunity #3: Libra Could Become a New Reserve Currency
Libra has the potential to become a reserve currency in developing countries, much like the US dollar is today. For example, if Libra captures just a quarter of offshore banking and emerging market fiat currency reserves, then it becomes a $10 trillion asset, just by itself.
That would in fact exceed even the entire world’s supply of coins and banknotes, which currently total at $7.6 trillion. The impact on cryptocurrencies would likewise be immense. To put it into perspective, Bitcoin’s current market capitalization of $150 billion would amount to only 1.5% of Libra’s potential capitalization.
Opportunity #4: Libra Could Bank the 1.7 billion Unbanked
While remittances provide excellent opportunities for Facebook’s revenue growth, an even broader market with more significant opportunities might be the digitalization of cash-based developing economies.
According to research by the World Bank, there are 1.7 billion people globally that are not using banking services, and, in certain developing countries, most of the consumption expenditures are paid in cash.
However, given the world’s rapid proliferation of Internet and smartphones, the paradigm of physical banks and paper money may soon change. Previously cash-based economies may turn entirely digital, thus opening a new market and new opportunities for Facebook as a global digital bank.
Opportunity #5: Libra Could Create Unmatched Ad Targeting Capabilities for Facebook
Transaction fees aren’t the only, or even the most lucrative source of Facebook’s potential gains if Libra indeed becomes a global currency. The biggest opportunity for Facebook is instead tied to ads, which is its core service.
For an ad network, being able to see exactly where users spend their money is a big deal. For example, if a user ‘likes’ a post from Rolex, that doesn’t exactly mean they are or will become a Rolex customer. It’s simply brand recognition. However, if Facebook has access to transactional data from its users, it will have nearly perfect information on what drives purchasing decisions — putting it miles ahead of any other ad network.
Below, we discuss the potential threats the Facebook’s cryptocurrency might face during its implementation phase.
Threat #1: Regulation and Compliance
Reports have emerged that claim that Facebook has been in talks with the US Commodity Futures Trading Commission, the Bank of England, the Central Irish bank, and other major financial institutions. But if Facebook wants its new currency to work globally, it may potentially be facing regulatory pressure from every single country the service will be available in.
Those countries will want to collect taxes from Libra users, as well as comply with anti-money laundering and know-your-customer financial regulations. The regulatory burden on Libra will most likely be immense. However, Facebook seems to be trying to race ahead of the issues and has hired compliance experts from cryptocurrency exchanges to help smooth the process along.
Threat #2: Libra’s Global Acceptance by Merchants
Facebook will need to convince merchants outside its network to accept its new Libra. Previous currency experiments with Facebook Gifts and Facebook Credits have not panned out well, as there were precious few places to use them. However, Facebook has been in talks with Visa and MasterCard, though the substance of those talks is not yet known.
Threat #3: Libra’s Convertibility Into Fiat and Back
Another issue is the conversion of fiat — that is, national currency, to Facebook Libra. For remittances to work, senders will need to somehow change their fiat money to Libra. And then the receiver will need to change the Libra back to their local currency, possibly losing out in conversion as well.
But these are surmountable problems. In much of the world, Google and Apple Pay have been ubiquitous, and isn’t difficult to see how Facebook’s Libra can be added to that list. As for converting fiat into crypto, Facebook is reportedly planning to tackle that issue with ATM-like machines that will take fiat, and credit Libras to a user’s account. Facebook has also been in talks with several crypto exchanges, which would facilitate selling Libra for fiat.
Forecasted Revenue and Net Profit
If the crypto-based economy in Facebook is successfully developed and adopted by its global user base, Libra could generate for Facebook Inc. an incremental net revenue of up to $12.5 billion and a net operating profit of up to $5.0 billion.
To estimate the effect on revenue that Facebook may get from introducing its cryptocurrency, we’ve analyzed the most comparable companies in the following two industries: Digital credit card payments and cash transfers.
The two most comparable companies in the first category are VISA and MasterCard, which are the biggest credit card payment processors in the world.
Another two companies involved in the mobile payments industry, and whose financial results are relevant to Libra are WeChat and Google Pay. WeChat is the most comparable messenger to Facebook Messenger and already has mobile payment functionality.
These companies — VISA, MasterCard, and the mobile payment segments of WeChat and Google Pay, have comparable business models and therefore produce very similar financial results (on a relative basis).
We found that the average revenue per credit card / account in FY2017 was $5.7, $6.8, $5.6, and $6.0 for VISA, MasterCard, WeChat, and Google Pay, respectively. And the average fee charged per transaction in was 0.11%, 0.14%, and 0.06% for VISA, MasterCard, and WeChat, respectively.
The second category includes Western Union and MoneyGram, the two biggest global cash transfer providers, which generated an average of $32 in revenue per transfer in 2017. Their average fee per transaction was 6.3%. They charge a higher cost because most of their transfers are international, and the average amount per transfer is much higher compared to credit cards.
Exhibit 1: Global Credit Card & Digital Payments
If the Facebook Coin is successfully developed and adopted by its global user base, Facebook Inc. has the potential to become a large international financial institution providing the following set of services:
- Digital payments for products and services
- Digital transfers (peer-to-peer)
- The mark-up on currency exchange transactions,
- Bill payments,
- Micro-lending, and
- Perfect ad targeting as a service for merchants
Based on the data we presented, we can safely assume that Facebook will be able to charge at least $6.1 per user per year from mobile payment products and services. This could generate an incremental net revenue of up to $12.5 billion and a net profit of up to $5.0 billion, based on Facebook’s current net profit margin.
Libra is a Catalyst for Facebook’s Share Price Increase by 15–20%
In FY 2018, the fully diluted EPS for Facebook was $7.57.
Assuming Facebook will be able to achieve the forecasted amounts in three years, the present value of a $5.0 billion net profit in three years is equivalent to $3.7 billion today, discounted at the Facebook’s WACC of 10.4%. $3.7 billion is equivalent to $1.27 per share, increasing the fully diluted EPS value for FY2018 to $8.84.
Assuming the P/E multiple for Facebook will not change over the next three years, the implied upside for Facebook’s share price is at least 17%.
However, that is a conservative estimate. Libra synergy with Facebook core ad business will most likely create a much higher effect than forecasted. Additionally, many effects of Facebook’s transformation into a global bank are difficult to foresee, as specific implementation details of the Libra payment system are presently unknown.
Libra is set to become the principal cryptocurrency of the Facebook social media network and will be used to make peer-to-peer digital payments, setting the company down a path to becoming one of the world’s most powerful financial institutions.
Currently, Facebook generates its revenue primarily from advertising. However, introduction of Libra creates the potential to increase Facebook’s revenue at least by $12.5 billion and net profit by $5.0 billion within the next 2–3 years, supplementing the existing advertising revenue with fees and interest income from digital payments.
This offers a chance for social media networks like Facebook to minimize their reliance on advertising. The advertising-based internet economy has long been under criticism, and the launch of Libra could give Facebook the ability to embrace an entirely new monetization model.
Ultimately, Facebook’s Libra is a big bet that Facebook can beat the obstacles in its way, and bring the promise of cryptocurrency — borderless digital transactions with minimal fees — to the masses.
- Alex Sovpel, Director of Research at Monfex | LinkedIn
This report is for information purposes only and should not be considered a solicitation to buy or sell any cryptocurrency or cryptocurrency product. Monfex accepts no responsibility for any consequences resulting from the use of this material. Any person acting on this trade idea does so entirely at their own risk.