Blockchain technology is continuously being compared to internet-technology. Facebook, a company with about 2.3 billion users has decided to launch its own blockchain-based currency called Libra. This is a fairly bold move and a lot of thoughts come to mind. When the internet was launched to the public in the 1990s no single company on earth had this many clients or users. In fact, in the history of humanity nobody, not even the largest countries, had this many users for a new currency. This is a unique move in the history of humanity.
Here are a few thoughts about this bold move.
Who is a partner and who is not?
At this time it appears that is a consortium of credible investors and companies will adopt, use and help run the currency. This consortium is formed of various types of companies :
- Payment companies which are the most at risk from being disrupted by blockchain based payments. These are Visa, Mastercard, PayPal, PAYU, Mercado Pago, Stripe, etc.
- Venture Capital investors: USV Union Square Ventures, Ribbit Capital, Thrive Capital, Andreessen Horowitz, Creative Destruction Lab, etc.
- Consumer companies: eBay, Spotify, Iliad, Vodafone,
- Transportation: Lyft, Uber, etc.
- Crypto Exchanges, custodians and wallets: Coinbase, Xapo, Bison Trails, Anchorage, etc.
- And of course Facebook itself with its Facebook Marketplace for used items, Messenger, WhatsApp, and Instagram.
This various set of participants pretty much guarantee that most of the 2.3 billion humans who are on Facebook will have multiple monthly opportunities to use Libra.
Crypto payments vs credit card payments
Unlike making payments with credit cards, using cryptocurrencies is cheaper, faster, no-recourse and doesn’t require having a bank account or a credit relationship anywhere. Therefore merchants should prefer crypto payments. We expect that online sellers on eBay will prefer Libra to PayPal or other payment types.
Companies like Spotify who’s income is nearly 100% received via credit cards probably stand to save a few percentage points by adopting crypto payments instead. Spotify 2019 revenue is expected to be about 7 billion USD. If Libra saves the company 1% vs credit card payments, this means a $70 million difference which will flow directly to the companies’ bottom line as a profit.
We, therefore, expect the companies in this consortium to aggressively promote payment via the Libra. Once a user will have a Libra balance and will have become familiar with using Libra we expect users will then ask non-participating companies to pay via Libra.
We can even imagine landlords, or small shops will also be fast adopters benefiting from receiving rent payments via Libra which will be fast, easy, cheap and non-recurse. For example, 7% of the US population doesn’t have a bank account and they will be able to make online and electronic payments using Libra. Worldwide 2.5 billion people don’t have a bank account.
Who is not part of the consortium and why?
The other interesting part of the consortium is who is not part of it:
- Google with its worldwide Android footprint is not part of the consortium. Google with Android is probably the only other company who has a similar client based worldwide to rival Facebook.
- Amazon is also probably another worldwide company who stands to win from solving a lot of supply chain and customer exchange risk by using a world-wide cryptocurrency.
The fact that these two companies are not part of the consortium makes us think that they either do not believe in the success of the Libra or they are working on their own version. Once Libra is successful they will likely change their mind. Or these companies are already working on a Libra competitor.
We hope that especially Google and probably also Amazon are already working on a cryptocurrency of their own in order to remain competitive worldwide. They wouldn’t want to miss the boat as Microsoft did on mobile for example.
Talking about Microsoft and Apple. Microsoft is mostly a b2b company at this time and we believe it has no particular edge at launching their own currency and should instead join an existing consortium, either lead by Facebook or maybe Google or Amazon.
In a similar way, Apple is just a consumer product company, specialized in electronics and working on services, and in the same way, while they have a large customer set, of course, they don’t rival in size Android or Facebook.
The first real worldwide currency and its politics
Fiat currencies are a 2nd generation currency after gold was the 1st and crypto became the 3rd generation currency.
Fiat, and not gold, is used by governments/states to finance themselves. Most countries aren’t profitable and they finance themselves through inflation and through the printing of their own currency. They also finance themselves through devaluations on the exchange markets.
Other countries like the United States have such a pervasive currency, the US dollar, that they were able to obtain a quasi-monopoly on the interbank electronic payment system SWIFT. Also, the USD is used as a reserve currency, together with Gold, by many countries.
Therefore countries use their currency as a financing mean and a political/influence and power leverage.
Having a new worldwide currency that is not controlled by a politically selected government (democratic, oligarchic, etc.) but by executives in for-profit corporations is new.
In general, corporations are pressured by shareholders to optimize for profit. What does this mean for Libra? It probably means that there will be a lot of pressure for Libra to accumulate as much value as possible. Therefore we expect that Libra will tend to increase in value over time directly or indirectly.
We also expect that as some countries have adopted the US Dollar as a currency instead of their own (example: Ecuador) because of its stability, some countries will probably also adopt the Libra as their currency.
And in addition countries like Iran, China, Russia and others who have been combatting the hegemony of the US Dollar will also support the adoption and usage of the Libra as an alternative to the US Dollar.
Libra’s inflation, monetary mass, and valuation
To the best of my knowledge, no Libra valuation mechanism has been made public so far in detail. We know that Libra will be “backed by a basket of fiat currencies and other investments, where each consortium member plays an equal part”. That is very vague.
In human history so far, no pegged currency has ever held its peg forever. 100% of all currency pegs have broken at some point. Why does one peg a currency? Usually, governments will peg a currency in order to fight an ongoing market trend going against the government’s or countries’ interest. (Obviously, if the market trend was going in the opposite direction the government would be happy and wouldn’t combat it). However, the markets always have more money, patience, and strength than any government. And governments, with their power to create and modify laws, have more power than all private companies. If in human history no government-imposed peg has ever held against the market trend I doubt any private company consortium will be able to hold any crypto-currency peg against market trends.
We have seen with Bitcoin and other popular cryptocurrencies that large volatility makes it impossible for a crypto-token to be used as a currency.
Therefore it is expected that the Libra consortium will engineer a market trend that will support the value of the Libra. However who says market trend also says not-entirely in control. Therefore we expect the Libra value to float against the main world currencies in a free-like market within some reasonable range of a few percentages per month.
The latest example of common large scale currency is the adoption of the Euro by a group of countries in Europe. Also in 2014-15 and on we have also seen during the Euro crisis how the Central European Bank had to intervene (with their own Quantitative Easing) to stabilize the currency (and the solvency of some of the member countries).
We, therefore, expect a similar Libra mechanism with a central-bank like authority, which will be able to print more Libra and which will be able to bail-out the Libra consortium participants as long as a majority of their internal operations are conducted in Libra.
Therefore we imagine a world where companies like Spotify, Facebook, etc. will earn Libra, will pay their vendors in Libra and will pay their payroll in Libra. And if the company is having trouble it will then petition the Libra consortium to “print” more Libra.
However, this would mean that fiat currency will become less relevant and governments will lose a lot of their financing power. A government without money is a powerless government. We wonder if this would be the first step towards a human society that will not be segregated by countries competing with each other but will instead be run by companies competing with each other.
We can imagine a world with the Libra currency competing with Google’s own currency. Perhaps once a given company has at least 100 million users they will work on forming a consortium and starting their own currency?
Who will not use Libra vs Bitcoin
On one side of the coin, some people believe Libra will spread the adoption of cryptocurrencies in the same way America Online ( AOL) eased the adoption of the internet.
On the other side Bitcoin, at its origin, was created to prevent any organization or organizations, government(s) or private company(ies) from controlling the currency. Libra, while not being controlled by governments is still controlled, so far, by a consortium of tens of companies. In this regard, Libra is similar to the US Dollar controlled by the 12 FOMC voting members. Therefore is Libra just another currency with the drawbacks and advantages of being centralized?
However, we can also look at Libra as the first country-size currency that is from the beginning built on the blockchain with its native strengths ( low cost, speed, non-recourse, engineered for electronic payments, etc.) in addition of the usual centralized fiat currencies strengths.
We, therefore,expect that people will continue using Bitcoin (and the other blockchain networks) and Libra side by side. And each of them will be used for different needs. When one wants to avoid financial censorship, and run away from an oppressor one will continue using Bitcoin. And when one wants to buy coffee one will just use Libra. Will anybody still use US Dollars in 100 years? That is a good question we die to find out.