Project Libra
Facebook unveiled its much-anticipated whitepaper for Libra today.
The hype surrounding this event has been building up for weeks now since Facebook announced their cryptocurrency plans in May. There is a lot to digest about this announcement, but the potential applications make the report worth reading.
In the whitepaper, Libra is described as an improved payment process option aimed at consumers. Financially underserved and those without banking infrastructure have been forced to pay high transfer fees in the past. Libra aims to eliminate this for users of the global coin. Given that there are still 1.7 billion people without a bank account, there is huge opportunity here.
Additionally, although not directly stated in the whitepaper, you can assume that Facebook will allow users of their multiple social media platforms (Instagram, WhatsApp, etc.) to use Libra as a payment option for e-commerce. The TAM on this opportunity is huge as well as half the world currently has a social media profile under the Facebook umbrella.
Libra does not plan to act as other more notable cryptocurrencies with severe volatility. Instead, it is meant to operate as a stable coin backed by multiple assets. Bitcoin, on the other hand, floats and the market determines the price. The majority of the collateralized assets for Libra will be low in volatility such as T-bills in attempt to stabilize the asset price. This is noteworthy because lack of stability has been one of the reasons institutional money has largely avoided crypto. If Libra is able to properly stabilize, this project could attract institutional money which in turn would benefit the overall cryptocurrency space.
Personally, I am still hesitant on the Libra project for a number of reasons.
For one, the idea of cryptocurrencies and distributed ledger technology is to decentralize the source. Libra has a centralized head with a past full of scandal and privacy misuse. Additionally, Libra operates on a permission blockchain, so Facebook has the ability to overrule the system and validate transactions. This should be a red flag to some.
Another concern should be whether this project is some sort of an PR fix for Zuckerberg and Co. I don’t need to go into detail, but the problems for Facebook have been widely documented over the past two years. Libra offers a way to get the general public to overlook faults of the past and focus on the future. The first page of the whitepaper goes into detail about the problem and opportunity Libra is trying to solve; more specifically, it discusses the opportunity for Facebook to use its global platform of users to enter the payments space for the billions of people without financial representation. This is a good narrative for Facebook to take as it allows them to publicly express a desired value add they can bring to consumers that would help and not harm. For a company in need of good press, this is it.
Lastly, something to monitor for Facebook as company should be the reserve requirements necessary to operate as a stable coin. Presumably as adoption scales and demand for Libra grows, supply must follow suit. In order for Libra to remain “stable”, it must increase its collateral; Facebook has no other stabilization control mechanism other than increasing the “money” supply. They can only do this by buying more low-volatility treasuries and debt to act as collateral. Investors of FB should monitor the company debt load and balance sheet alterations as Libra scales.
Despite some of my concerns, I also have reasons to be excited.
Smart money has gone towards this project. PayPal, a16z, Visa, Uber are just a few of the dozens of companies that have partnered with Facebook on this. As I touched on earlier, this offers the chance for more institutional interest and money to enter into the crypto market. By now most adults on Earth have a smartphone, and Libra allows them to rely on their phone rather than existing infrastructure for financial decisions. This has global implications and aims to make the lives better for the underserved.
Although it is too early to tell the consequences, Zuckerberg is taking a calculated risk to continue building his empire. Jeff Bezos describes some of his biggest successes as going down blind alleys that others are too scared to venture down. This is essentially what Facebook has done by being one of the first institutional movers into the crypto space. If wrong, Facebook reaches the end of the alley and must retreat. If right, the alley opens up into a broad avenue.
