Libra: The future of money?

“Sending money should be as easy as sending photos,” were Mark Zuckerberg’s words at Facebook’s annual developer conference at the end of April 2019. With that vision, Facebook is pursuing its ambition to create a global currency.

Project Libra, Facebook’s ambitious blockchain initiative to disrupt the global financial industry will be launching in 2020. Although Libra is a cryptocurrency, it is fundamentally different from most traded cryptocurrencies, including Bitcoin. While we recognise the theoretical benefits Libra has to offer, especially in emerging markets, the digital currency will first have to overcome various technical challenges and vigorous regulatory hurdles.

The Libra Association, located in Geneva Switzerland, will govern the Libra Blockchain. Although Facebook has done all the legwork of setting up the Association, the social media giant will be just one out of an initial 28 founding members with equal voting rights. Even though this project may be seen as overly ambitious, Libra has been able to attract the interest of major companies, including PayPal, Uber, and Visa to actively participate as validators.

TERMS EXPLAINED: Validators, Stablecoin, Fiat

Libra and Bitcoin: two very different beasts

Libra, unlike many other cryptos, will be fully backed by a reserve of real assets, hence resembling a stablecoin.  To provoide a brief overview, we discuss some of the main features and advantages of the new Libra coin.

1) Price stability
Cryptocurrencies can be subject to extreme volatility,  making them an unlikely payment option for a regular customer. Libra was built to be a stable currency, reflecting the price of an underlying basket of the world’s most stable fiat currencies and short-term government bonds.

2) Financial inclusion
The World Bank predicts that 1.7 billion people in the world have no access to bank accounts. The network can aid people in receiving remittances, accessing healthcare and education.

3) Store of value
Libra has the potential to provide access to safe-haven currencies for residents of high inflation countries. The Chart below explains how the average annual local inflation rate is linked to the extent to which the performance of US Treasuries in local currencies is a result of currency depreciation.

Libra may have the ability to partially reduce currency fluctuations and uncertainty.

Source: Bloomberg Finance L.P., Julius Baer

The hurdles of Libra

Libra’s successful launch is far from certain. Before becoming the global currency it aspires to be, challenging legislative and technical obstacles need to be overcome and a damaged reputation must be repaired.

1) Sceptical governments
Following the announcement of the Libra coin, several governments have expressed their concerns. French Finance Minister, Bruno Le Maire declared: “It can’t and must not happen.” On top of that, the Indian government will purportedly impose a Libra ban. If not regulated properly, Libra could impair monetary policies, encourage illicit activities and wound financial stability.

2) Damaged reputation
Facebook has had its fair share of privacy scandals in the past two years, e.g. the Cambridge Analytica scandal for which it received a USD 5 billion fine. This led to a severe lack of trust in Facebook’s business model and management. Ultimately, people need to have faith in institutions whenever they deal with centralised monetary solutions.

3) Technical stumbling blocks
For now, the Libra currency is built on top of permissioned blockchain, meaning a selected group of validators have the authority to confirm transactions. The blockchain hopes to gradually move to a proof-of-stake consensus after launch, making it permissionless. The problem?  Libra has not developed this technology yet.

Final word

Libra has the potential to disrupt the financial industry and modify the way we interact with money. Still, Libra will have to battle fierce regulatory scrutiny and technical hurdles to achieve its promised launch in 2020. Moreover, Facebook will have to regain trust among its customer base to spur demand.

We believe that Libra is not in direct competition with Bitcoin and central banks. Rather, it will compete with payment solutions, particularly those that active in the in the emerging markets.

 

This article is a summary of our latest Next Generation report: ‘Libra – the future of money?’ 

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