Facebook Libra is status quo’s girlfriend

Libra will be disrupting one status quo to create another.

Heard David Marcus (VP Facebook Messaging products) this morning saying “If you are to compare Libra with traditional cryptocurrencies (including bitcoin), they are investment vehicles or assets rather than being great medium of exchange. However, the cryptocurrency Libra has been designed as very high quality form of digital money, and a great medium of exchange. You can use it for everyday payments, cross border payments and micro transactions”

And this statement is only partially true. There are more than 2200 crypto currencies right now being traded on more than 18,000 markets. The crypto market cap right now is 285 billion U.S. Dollars with 57% bitcoin dominance. Despite that, these currencies failed mass adoption test. They didn’t get to mainstream. Why? There are few reasons behind this:

1. Scam reputation: Crypto theft, scam and frauds amounted to $1.2 billion in first quarter of 2019.
2. Investors don’t really understand what it is. For traders, there are less fundamentals and more technicals. Technicals are based on speculations. Influencers are playing major role here. Pump and Dump groups are not helping either.
3. Cryptos are shrouded in mystery. It takes a startup many years from seed funding to IPO (Initial Public offering). In last few years, all it took for a crypto project was to publish white paper, launch ICO (Initial coin offering), gather lot of money, land itself in exchanges and become beneficiary of lot of speculations!
4. Most of them do not have institutional backing such as Facebook. They are not able to create the same noise that Facebook can.
5. Traditional cryptos are volatile. Barring tether (USDT), they are not pegged by fiat currencies.They are volatile. Imagine, someone paying 5 bucks for Starbucks coffee. By the time Starbucks converts it back into U.S. Dollars, it becomes 4 dollars. Why would Starbucks increase their risk of doing business? These giants are sometimes criticized for not rapid adoption, but why would you increase inherent business risk by adding one more payment channel.

Enters Libra

So Facebook assessed this situation and announced to launch Libra through a non profit (CaLibra) which will be governed by 100 partners, one of them being Facebook. Each partner will have 1% say. They will contribute $10 million each to make the initial fund size $1 billion. For now, Libra has been launched in collaboration with 27 partners, most significant of them are Paypal, Stripe, Master card, Visa and Uber.

Most importantly, Libra does not position itself to disrupt global financial system (status quo), it projects itself as easier way to transfer digital payments by focusing on under-served populations. Libra will not be pegged to one fiat currency, it will be pegged to basket of currencies and the volatility will be the exchange rate differentials included in this basket.

Should they have designed the product:

Imagine you have to make this decision as Facebook CEO. Our customers count is staggering 2.4 billion. The annual global remittance has touched 600 billion U.S. Dollars. Out of that, companies such as Western Union and others get 50 billion U.S. dollars just to manage transfers. They delay payments for few days and make further money out of this. That’s insane. Lot of problems for consumers. Furthermore, If people use credit cards, they charge up to 4% of transaction fees. The current exorbitant transaction fees structure requires massive disruption. Someone has to make payments free or cheap. The industry is calling for someone to disrupt it upside down. The 2200 cryptos didn’t solve this problem, until now.

So what are Facebook options? Launch something which looks like cryptocurrency, which will charge much lesser fees and becomes immediately available to 2.4 billion people across the globe. If they peg this to few stable currencies, it will be a stable currency and it can be mass adopted. They can create a new revenue stream from the interest money.

But Will people trust Facebook? They had privacy issues before! Their solution? Lets get others tech giants with us since they all need contemporary payment solutions. Lets ask a non profit to manage the whole show, so it does not look like one status quo being killed in favor of creating new status quo.

How does Libra work:

1. You give your fiat currency to Facebook (or other partners) and they will give you Libra tokens.
2. Buy services with Libra tokens on Facebook and from other partners.
3. Hold Libra tokens in CaLibra or other digital wallets.

So How Facebook is going to benefit from Libra:

1. Lets do numbers. Facebook’s advertising revenue in 2018 was 55 billion U.S. Dollars. Imagine, Libra getting 10% of this industry in couple of years. That is 5.5 billion U.S. Dollars. I am going to compare it with Tether and Ripple. Tether is pegged by FIAT as well, Ripple is one close alternate to Libra. And I will come to it later why.Tether to date has market cap of 3.5 billion U.S. Dollars. So Libra can have more market cap than Tether in one year or two. Ripple to date has market cap of 18 billion U.S. Dollars. So Libra can be quarter the size of Ripple in couple of years.In larger context, the Facebook advertising has been growing 50% YoY. In 2015, it stood at 17 billion U.S. Dollars. The numbers in following years read 26 billion, 39 billion and 55 billion U.S. Dollars. Extrapolating this trend, Facebook ad revenue will touch 100 billion U.S. dollars in next few years. Libra is all set to gain from this situation.
2. This is their opportunity to tell Congress that People trust us. Giving money is most powerful way to trust someone. When people can put money in something which did not have great track record of privacy (Remember: Cambridge analytica?), they will have a point to prove.
3. This will generate lot of money for partners. Remember it is pegged to FIAT. Whatever money we will put in, it will be stored in FIAT and the markup will be used to pay back to investors.
4. Facebook has two major applications: Whatsapp and Facebook messenger. Without a doubt, billions of people use these apps. How about putting transactions into these apps? May be ordering uber via these apps, Uber is one of 27 partners. Facebook is keeping cards closer to chest. We dont know yet. But this is going to happen most likely.

So what is the catch here? Libra vs Bitcoin?

1. Bitcoin runs on trustless system. You will have to trust Facebook.
2. Bitcoin is Digital gold while Libra is Digital dollar. Bitcoin is an asset and Libra is exchange medium.
3. Libra is stable, Bitcoin is volatile.
4. Bitcoin is peer to peer. Libra is consortium to peers.

Is Libra a Cryptocurrency:

1. It is not decentralized. The consortium is central authority which can control rules of game.
2. It is not censorship resistant. Bitcoin and Ethereum does not ask for permission from governments. Facebook and other 99 partners does not have the same leverage.
3. It is not an optimal solution.
4. It will not stand values of cypherpunk movement.

But since it runs on blockchain, it is cryptocurrency’ish.

Is Libra any good? How things look like from here? Here are some of my predictions:

1. Guessing future from partners list, there are no banks right now. So Facebook definitely plans to go after banks. They are going to disrupt the status quo. One can argue that they will create a new status quo held by tech giants and current payment providers.
2. One can also argue about trust issues with Facebook. What if the consortium partners have limited access to our money spending patterns? I am afraid a situation like Cambridge analytica will occur at some point.
3. Also, there are no Google, Amazon, Apple and others in current partners list. Are we going to witness competition for Libra from these players? Most likely yes.
4. For current crypto market, Libra will bring bad news for alt coins while established coins with higher market cap right now will most likely benefit from it. Many alt coins will see reduced market cap.
5. Libra is next iteration of Paypal and Venmo. More players, lesser transaction fees. Easier cross border payments.

To conclude, Being different from cryptos does not mean its bad choice to have Libras. Libra can be an entry point for people into cryptocurrency. It will be AOL moment for cryptocurrencies. We might be standing at watershed moment where Zuckerbucks will become new norm. Historically, all major cryptos have worked well to garnering more attention for crypto industry. Lets wait and see if Libra does the same. Hopefully it does. As of today, crypto market cap is 286 billion U.S. dollars. To put into perspective, NYSE market cap is 22.45 trillion U.S. Dollars. We have a long way to go.