Facebook (FB, Financial)'s new cryptocurrency, libra, if it catches on, is going to produce major winners and losers. Though not quite a cryptocurrency proper, it could end up becoming a successful global digital payment system.
The Libra White Paper was released this week, and while much of the structure of the new coin remains vague as the infrastructure has yet to be set up completely, the overall skeleton of the ecosystem does provide clues as to who ultimately wins and loses if libra succeeds.
Libra is meant to combine the ease of transaction afforded by blockchain with the purchasing power stability of major global fiat currencies. It’s primarily a stablecoin like Tether, except instead of being backed by U.S. dollars alone, it will be backed by a basket of currencies and with short-term government debt securities.
The white paper does not say the exact mix of currencies and short-term debt securities that will back the libra, but it does say that investments will be limited to short-term debt from stable governments with low probability of default that also have a low probability of high inflation. Questions can certainly be raised as to whether these actually exists anymore, given the astronomical debt levels and negative interest rates of so many countries considered stable (Japan, Switzerland, Europe generally, the U.S. and so forth) but be that as it may, libra will ultimately be backed by currencies generally considered stable. As long as they remain that way, so will libra.
The crypto crowd generally mistrusts fiat currencies though, so could libra possibly appeal to the hard-money crowd looking for protection against inflation? Potentially yes, eventually, though not at the outset. The white paper does leave open the possibility that in the event of some sort of global currency or debt crisis, the value of ;ibra could be backed with hard assets like gold or other commodities. Here is the relevant passage:
"The association may occasionally change the composition of the basket in response to significant changes in market conditions (e.g., to respond to an economic crisis in one of the represented regions), but the goal will always be value preservation. Further, such a change would require exceptional circumstances and a supermajority vote by the association's council."
Backing by gold is discussed, bringing up the possibility that a committee could decide to include hard assets if necessary:
"[Libra’s] approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold."
Winners
If libra catches on, the obvious winners will be, first and foremost, consumers. The white paper doesn’t say anything explicit about fees, but they will almost certainly be lower than the current fee structure from credit cards and banks as they stand now. The 1.7 billion people who do not have access to a bank will also benefit, and this demographic is explicitly mentioned as a target market.
Beyond users of libra themselves, another group of winners will be the payment processors involved in the project, specifically Mastercard (MA, Financial), Paypal (PYPL, Financial), Naspers (OTCPK:NPSNY) and Visa (V, Financial). These are all libra founding partners and stand to gain from any transaction fees plus dividends earned on interest accrued from the reserve. If the unbanked end up using libra as well, this will introduce a whole new market for these processors that they have never before had any access to.
Losers
The losers if libra becomes a mainstream form of payment will be unbacked cryptocurrencies like bitcoin, and bank stocks primarily.
The effect on bitcoin should be obvious, though the cryptocurrency sector doesn’t seem to have caught on yet. The libra white paper is essentially a repudiation of bitcoin and other unbacked cryptocurrencies for being unstable and therefore unusable as a form of payment. If people are using libra as a form of payment, that means they are not using bitcoin as such, and this will remove a major plank of bitcoin’s value proposition — that is, its potential to be used as payment rather than strictly as a speculative investment vehicle.
Right now, bitcoin is still just a speculative investment, but the pretense that it could one day be used as a form of payment keeps people in the speculation game. If libra is the coin that brings blockchain payment systems into the mainstream, other cryptocurrencies will likely lose much of their value.
Bank stocks could also get hit. The libra reserve doesn’t have to move from bank account to bank account. It can simply sit in the accounts where it is held indefinitely, and banks will lose out on transaction fees they would otherwise get for the transfer of currency. In that sense, libra would function as a giant clearinghouse, stripping banks of transaction volume and income. Libra tokens become shares in a group of bank accounts where money is no longer actually transferred.
There is a more important but obscure downside to libra though. If people are using libra instead of fiat currencies directly, then this will restrict the amount of loans that banks can make. How so? Bank loans are stacked on top of the fiat reserve carried in deposit accounts, and if people hold their currency in the form of libra, the reserve of which is only held at static bank accounts, then deposits in the wider banking system are liable to shrink, especially if employers start paying their workers in libra. Loan volume could contract in proportion to libra’s popularity, ultimately affecting the business cycle itself.
Disclosure: Long Facebook.
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