Our Thoughts on Libra
Last week we saw the biggest announcement in crypto since the Bitcoin Whitepaper. We are clearly not trying to downplay the enormity of this announcement – it is huge. A consortium of companies, led by Facebook, introduced the world to Libra – a cryptocurrency backed by a reserve of fiat currencies and government bonds.
As your trusted source on everything crypto, we have cut through the noise to distill the possible implications of the Libra announcement. While the project is not without concerns, we think it will be an enormous boost for crypto assets.
Let’s start with some of the positives.
Slowly but surely, more and more people are coming into crypto. We regularly monitor metrics like transaction count and unique addresses, where increasing numbers suggest more people are using crypto assets. With Libra, this is set to accelerate, rapidly. The Libra Association includes companies like Uber, Stripe, Booking.com, Visa, Spotify and of course Facebook. The number of users connected to these members has been estimated at over 4 billion. In comparison, the number of blockchain wallets worldwide has been estimated at 35 million. Libra will serve as an on-ramp to crypto assets. Users might start with Libra and as they become familiar with wallets and crypto transactions, migrate to other crypto assets. We are not suggesting that every Facebook user will use Libra or migrate to other crypto assets, but when you compare 4 billion to 35 million, there only needs to be a tiny conversion rate to make a colossal impact.
The Libra Association has enormous ambition. In practical terms, the goal is to send money as simply as we send a message – instantly and borderless. This will allow users to easily send, receive and store money – a “simple global currency and financial infrastructure that empowers billions of people.” The Whitepaper cites ambition to help the 1.7 billion people in the world that are still unbanked. Financial exclusion breeds poverty, which breeds civil unrest and in extreme cases, terrorism and war. Libra believes that “global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.”
How is Libra better placed to achieve this than existing crypto assets, including Bitcoin?
There are a few reasons why Bitcoin has been slow to be adopted as a Medium of Exchange. First, it is volatile. Second, user adoption has been slow – it is hard to use Bitcoin if your friends and network do not use Bitcoin. Lastly, there is a lack of infrastructure that allows users to pay with and merchants to accept crypto payments. Merchants need additional infrastructure to receive Bitcoin payments and to convert receipts into fiat currency. While there are a number of companies trying to solve this problem, they are all middlemen charging middleman rates, up to 3% either to the customer or the merchant. Why pay with crypto if the fees are higher than existing options like Mastercard or Visa?
The members of the Libra Association can attract the adoption necessary to build the infrastructure. It is a problem of economies of scale. The Libra Association is raising funds to tackle this infrastructure problem and in our view, will be much more likely to succeed than any existing crypto asset or middleman.
JP Morgan, Fidelity, Yale, Harvard, New York Stock Exchange, Goldman Sachs and now Facebook, Uber, Mastercard, Visa and Vodafone. These are just some of the names that are now actively involved in crypto assets. The addition of the Libra Association founding members adds more credibility to crypto. This is having a direct effect on investors We are seeing this first hand as we talk to potential investors that take comfort from their involvement.
If you still think crypto is nothing more than magical internet money, it’s time to wake up.
The user experience associated with many crypto assets is still poor. Facebook, Uber and eBay all know a thing or two about user experience. They also know that user experience can be the difference in creating and distributing a successful product. Libra will be seamless, beautiful, easy to use. Our grandparents will be able to use, send, store and receive crypto assets as easily as they can receive a text message.
Collaboration with Regulators
The Libra Association is actively talking with regulators. As regulators develop a better understanding of crypto assets, we see this as a step forward in the push for widespread crypto regulation.
While there are a number of positives about Libra, there are a few concerns.
Facebook and privacy. Two words that by themselves evoke mixed responses. When put together, the response is uniformly negative. Facebook has a terrible track record when it comes to privacy. Facebook already has control of vast amounts of our personal data, allowing it to provide a wonderful service to marketers around the world. It is unclear whether it is using Libra to go after our financial data. The cynicists argue that Libra is an attempt to capture our financial data and use this data to Facebook’s advantage. By combining our personal and financial data, Facebook will make even more money from marketers looking to target their advertising. The optimists focus on Facebook’s global inclusionary mission, described above. The Libra Whitepaper is short on detail. It proclaims it will “evaluate new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact.” We retain a healthy skepticism and put the burden of proof on Libra to convince us that transactions and financial data will remain private.
Libra is centralised, not decentralised. Decentralisation is a fundamental property of valuable crypto assets. The most valuable crypto assets are decentralised. While it is an improvement over fiat currency that Libra is not centralised in one actor’s hands, it is not the same as being truly decentralised. Libra will start as a permissioned blockchain and start transferring to a permissionless, decentralised blockchain within five years. We won’t hold our breath.
When there’s someone in charge, an interested party – a policymaker, a banker, a regulator, a shareholder – can lean on them to make changes.
Michael J Casey, CoinDesk
Libra will be backed by a reserve of fiat currencies and short-term treasury bonds. “The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value.” While we see it as an improvement that Libra is not backed by one fiat currency, rather a basket, let’s not pretend they have intrinsic value. A major reason for the introduction and development of crypto assets was in retaliation to the devaluing of fiat currencies globally, which still persists today. An appreciation for crypto assets often starts by realising that fiat currencies do not have any intrinsic value. The claim that the Libra has intrinsic value is nothing more than marketing spiel.
In addition to the intrinsic value claim mentioned above, there is clearly a degree of marketing freedom within the Libra Whitepaper. Another example is the promise of pseudonymous transactions and anti-money laundering compliance. These are intrinsically opposed. The Libra Association is trying to appease regulators who require AML compliance and crypto purists who value privacy. The presence of marketing speak, like these examples, makes us question the veracity of other claims in the paper.
The Lord of the Coins
Will this be the “One Coin to Rule them All?”
A potential negative is Libra could squash a wide range of other crypto assets. Will Bitcoin lose its appeal as users take a preference to Libra?
We have previously discussed how we divide crypto assets into key verticals – money, privacy, smart contracts, decentralised finance, Web 3.0. It is impossible to optimise crypto, including Libra, across all of these verticals.
Libra poses the greatest threat to the money vertical, specifically as a Medium of Exchange and stablecoins. We do not think Bitcoin will be challenged as “digital gold,” a decentralised, censorship resistant, deflationary, store of value. We do think the Medium of Exchange crypto assets (eg: Litecoin, Bitcoin SV) will be challenged. We think users will prefer Libra over alternatives as it is likely to be accepted more widely and easier to use. Libra will also challenge stablecoins. Tether, USDC, Pax Coin, Gemini, DAI all stand to be tested as Libra enters the market as an alternative stablecoin.
From a humble whitepaper released to a small mailing list in 2008, to one of the largest technology companies in the world releasing its own version, it is clear crypto assets have come a long way in the last ten years.
We at Apollo Capital are very excited to see the developments over the next ten years.