Is Establishing Libra a Liberal Act?
Will the new first of its kind crypto that supported by Corporate further disrupt the financial industry?
Last week, Facebook (FB) released its plan for “Libra crypto”. The company unveiled a consortium to create an open-source digital currency called Libra, set to launch in the first half of next year, which would allow consumers to send money around the world easily and for free.
So far there are over 28 partners, including payment networks like Visa and Mastercard; Fintech firms like PayPal, Coinbase and Stripe; Venture Capitals like Thrive and Andreessen Horowitz; Software services like eBay, Lyft, Uber, and Spotify. The unprecedented new financial infrastructure is looking forward to establishing an ecosystem with corporates who shared a common vision.
Differences between Libra and Bitcoin
The advent of Bitcoin — the first and the largest cryptocurrency has attracted public attention. After the crypto crash of bitcoin, a lot of virtual currencies are developed with features distinct itself with bitcoin. Comparing Libra to Bitcoin, there are huge differences among functionality, availability, and opportunities.
1. Data Structure
What some people really like about Bitcoin — but hated by most governmental sectors — is the anonymous nature of the transactions, and the potential for moving money between people and between nations with complete secrecy. In most of the cryptocurrency networks, most transactions are represented by an address with 26–35 alphanumeric characters in the open-sourced network under the “hash trees” system where the verification work was carried by a data service provider (Miner). Therefore the entire transaction would only involve two stakeholders who are the receiver and the sender.
Libra is different. The Libra Blockchain is running under “single tree” data structure, where transactions can only occur with the central authorized nodes, and with a permanent record being generated at all times. This defeats one of the biggest advantages of cryptocurrency — the nature of anonymous. Therefore it adds risk to individuals who carry Libra because transactions can be easily tracked by a central node.
Bitcoin has a capacity of 21 million where the Libra has no limit within its capacity. Which made those two coins become completely different, Bitcoin’s value heavily relies on trading volume and its scarcity whereas Libra’s purpose was to stabilize its value as the same as 1 US Dollar. To do this, Facebook is looking forward to peg the dollar with major international currencies, for instance, the United States Dollar, Yen, and Euros.
The nature of Bitcoin and Libra has yet diff to a great extent because Bitcoin is perceived as a high-risk investment with great default risk and Libra is aiming to replace national currencies we made. As a result, they complete in a different space in the financial market, for Libra instead of completing with bitcoins, Facebook would have to execute the biggest problems with marketing — to gain trust from the general public and market themselves as a better place for savings than traditional banks.
Adopting blockchain technology under a name of one of the most influential companies has enabled them to bridge with general public easier by integrating the financial ecosystem into their social system and create a more inclusive trusted financial system:
- It is built on a secure, scalable, and reliable blockchain;
- It is backed by a reserve of securities designed to give it intrinsic value.
- It is governed by the independent Libra Association tasked with evolving the ecosystem.
Being able to resolve one of the most concerned factors about safety and fluctuation, Libra has envisioned to bring Venmo-like features into a higher level where the monetary transaction can be carried with extraordinary mobility and convenience without being provisioned by the government
Most cryptocurrencies failed to claim themselves as a currency because, under a decentralized network, the price is not backed by any assets with stable intrinsic value like gold.
Risk & Catalysts
Actual Differences with Depositary Banks
Perhaps you might think what’s the difference between Facebook and Depositary Banks. They shared a similar business model where they provide money-saving options and conduct transactions, every $1 you put into your bank account, the asset manager will invest the $1 into securities and investment.
Let’s say you have exchanged $10 as $10 Libra from Facebook, Facebook will reinvest the $10 into securities while you can purchase online services and transfer money to another country without any extra fees. Once you have taken an Uber ride, Uber will receive $10 worth of Libra and convert them into $USD. The actual difference between purchasing Libra and putting money into a savings account would be the foregone interest income. In any depositary banks’ savings account, you are able to receive a compounded interest income (1% to 1.6%) over time where Libra Association will absorb the interest income as fees and development cost.
Therefore, Facebook did not really “Reinvent” money. Forcing a decentralized system into our economy will not bring any incremental social benefits to society.
Although Facebook has declared that they would be running the Libra ecosystem alone, it does not mean they are not vulnerable to antitrust concerns.
Speaking of most corporates and governmental institutions, Commerce Corporates shall never overlap with Financial Institutions because of the controversial arguments of privacy disclosure and competition regulatory conflicts. If there’s a company that generates revenue through making advertisements and it is the same company that you put your money into it. It will violate the fairness of an economic competition yet sharpening a monopoly environment like what Alibaba and Alipay did in China.
Facebook itself had controversies among issues about personal information disclosure and tracking users activities which had led to a loss of public trust. In the future, they would have to obligate more responsibilities regarding data protection and consumer protection.
- In order to evaluate Facebook (FB) further on, analysts would have to conduct sum-of-its-parts financial analysis where Social Media and Banking context should be treated as a separate entity
- Upon to further announcement, Facebook was criticized by the Wall Street investors by its incapability to generate revenue and absorb funds.
- Libra Association tends to be the largest stakeholder within the regulation of Libra, data and consumer protection will often be overlooked by investors
- The trend of conglomerate corporates and M&A is growing rapidly since financial services have been disrupted seriously by open bank system and cryptocurrency. Facebook stands as the first company who attempts to integrate its trade-chain from social communication to advertising to payment systems.
- Cryptocurrency has been more matured and widely accepted by corporates, there are restaurants and retailers that accept cryptocurrency as payment methods, Asset management in Crypto and Crypto Index funds have also arisen in the investment industry, recently accounting firms (PwC & KPMG) have developed blockchain tools to aid its crypto audit service.