When crypto currencies first appeared they were met with widespread skepticism from people familiar with traditional banking and investment, myself included. If you’re a savvy Futures or Forex trader, your first reaction to a new asset should always be exploring the fundamentals. Examining its unique characteristics, supply, interest rates and other objective metrics should help you appraise the given products relative value. In the case of bitcoin and its counterparts, their underlying value is directly linked to how confident people are in their worth. That’s not something conventional evaluation methods are suited to assess. The unreal volatility of crypto currency prices definitely suggests that most people have difficulty pricing them. Erratic assets offer great opportunities for speculators, however, they’re completely unsuitable for use as an alternative currency. The primary purpose and function of the global banking system is to maintain stable prices. Economic systems can only be based on means of payment that are both predictable and accountable. The first generation of crypto currencies failed to meet these requirements. Their creation couldn’t produce any significant breakthrough so they were subsequently relegated to a fringe role.
Although crypto currencies didn’t become mainstream, their debut marks the potential beginning of a process that could fundamentally reshape the financial landscape. The billions of dollars being invested in them is undeniable proof of their appeal and it certainly caught the attention of the major banks as well. A while back we saw countless headlines about how Bank of America or Barclays were realistically considering launching their own crypto currencies. In the end nothing really came of it, possibly because they only treated it as a side experiment rather than a new direction for their main business. Banks are intimately familiar with the advantages of unchecked territory, since they themselves constantly have to deal with strict oversight from regulatory bodies. The cumbersome bureaucratic structure they developed as a result is also what’s holding them back from taking initiative. Time waits for no one, and it was inevitable that while the banking sector was paralyzed by paperwork an outsider would come along to take the first step. The face of innovation is once again Facebook, who announced the implementation of their Libra blockchain in 2020.
The first notable aspect that sets the Libra apart is the number of its backers. It’s publicly known that the Libra will be managed by a council of 27 companies that include household names like Visa, Mastercard, eBay, Booking and PayPal. This also answers the first and most important question of where you can spend your Libra. The inclusion of two major credit card networks almost guarantees that it’ll see widespread application, perhaps even replacing conventional currencies at some point in the future.
The responsibility of handling accounts would fall to Facebook, assuming they can design a legally compliant, easy to use system for people to manage their balance. Considering they currently have almost two billion users, successfully implementing it means they could quickly acquire the World’s largest customer base of any financial services provider. It would allow them to achieve, in a matter of months, the outcome banks couldn’t accomplish even with their centuries of experience. Furthermore they could do it without having to open a single branch or the need to sink a fortune into marketing, by simply converting existing user profiles into current accounts. According to the white paper detailing Libra’s operation, Facebook plans to continue its current free to use business model, meaning they wouldn’t charge any account management fees in the future. The document further details that they don’t plan on having any transaction fees on transfers between Facebook accounts either. Users could effectively make payments immediately with no added costs. Companies that previously mainly used Facebook for marketing could appear on the global market through a simple registration process. Their product prices, marketing costs and profits would all be measured in Libra of course. It’s highly convenient for users as well, since they wouldn’t have to worry about various currency conversion rates. The only one they’d have to know is how much Libra their own currency is worth.
The above description should illustrate that while these solutions aren’t particularly difficult to implement on a technical level, it still presents banks with a tough challenge. Charging customers with account management fees, transaction fees and currency conversion commissions is a cornerstone of the modern banking industry. If the Libra can fulfill its promises, then banks will need to step up as well. They would need to lower most of their above mentioned fees to near zero to remain competitive, thus drastically reducing their profits. The potential loss of customers and revenue could be so severe that many financial institutions would be faced with a real existential crisis.
One of the goals the white paper outlines, is giving online account management and global market access to the people for whom conventional bank accounts were previously unavailable. Think of people in parts of Africa and Asia where less than 10% of the population has bank accounts. Regions with low population density, especially rural areas, rarely have established bank networks. On the other hand many of them do have internet access and that’s all Libra needs.
It’s a promising concept, however, there are still a number of issues that need to be worked out before it can be implemented in practice. Would companies pay their taxes in Libra? How can private individuals purchase Libra if there are no banks nearby? While there’s no clear answer to these questions yet, there’s an even more pressing matter that needs to be addressed first: what makes it more stable than the already existing crypro currencies?
The answer to that last question can be summed up in a single word: “stablecoin.” Rather than depend on consumer confidence alone, the Libra would be backed by a more stable asset, similarly to how national currencies used to be backed by gold. The idea is to guarantee its value with underlying assets such as short-term government securities and liquid bank deposits. Although so far there are no details as to what the exact ratios are, it’s a very forward-looking concept. We know for a fact that there is no asset less volatile than short-term government securities. Linking the Libra’s value to them directly should make it stable enough to not experience the same degree volatility we’re used to seeing in other crypto currencies. In theory this would also make it suitable for playing the role of an intermediate currency.
Despite the countless questions Libra’s management still needs to answer, there’s no doubt that it’s an undertaking of global significance. Banks are unable to react to the upcoming changes and even regulatory bodies only barely suspect that they may have to intervene sooner or later. It’s not just the revenue of commercial banks at risk either. A successful crypto currency could call into question what reason national currencies have to exist. A currency banked by a consortium of corporations wouldn’t be tied to a single country or central bank. It could reach across borders and even continents, completely free from the oversight and jurisdiction of any national authorities. If it does take off, its use could spread at a rate that countries are simply not yet prepared to deal with. Consequently many governments would lose considerable control over the supply and flow of capital. It may even limit the influence they have over the lives of their citizens. Threatening the power structure of the world’s political establishments also brings with it the potential for countless conflicts. Whether or not Facebook succeeds in its crypto revolution will remain to be seen, however, when two billion people are involved it unquestionably deserves everyone’s attention.
