The day the blockchain and crypto worlds changed forever.
On June 18th 2019 Facebook announced Libra and changed the blockchain and crypto worlds forever. Libra generated huge attention from the press and regulators, but while it offers no technological innovation and no governance innovation, its potential scale could drive the policy of sovereign nations.
What is Libra?
Libra refers to the currency that will be managed by the Swiss based Libra Foundation currently comprised of twenty one companies. Any group of companies could create a consortium currency, but it is the distribution via Facebook’s Calibra wallet which will be installed in Facebook’s Messenger and WhatsAapp chat applications that drives this project. The Calibra wallet will be the only wallet native to Messenger and WhatsApp and no other crypto currencies will be supported by the wallet. Facebook will be just one of 100 members of the Libra council, but even if it were not on the council, its Calibra wallet is so central to the success of Libra that Facebook will have dominant influence over the Libra Association.
From millions to billions
Facebook’s Messenger and WhatsApp combined user base is three billion; almost half of the population of the planet. To put that in perspective, while there are about 50 million blockchain accounts, most are inactive and many users have multiple accounts so the current number of unique blockchain users is less than five million. Facebook’s scale would dramatically change the landscape, and the Calibra wallet will be the dominant wallet within hours of being released.
Why trust Facebook with your financial information?
Some pundits claim that people will not trust Facebook with their financial information, but if necessary, Facebook could drive Calibra adoption by paying people in Libra for their use of Facebook. Users could wake up one morning to find an ‘indicative’ wallet in Messenger and WhatsApp and after every post, every share, every like, the indicative balance would increase as Facebook contributed Libra to the wallet. At some point, the balance would be sufficient for many to go to through the required KYC (‘know your customer’) questions to actually gain access to the wallet to begin using the Libra currency. And merchants would see the growing Libra balances and quickly establish their own accounts to accept Libra for purchases.
Obtaining users’ bankable identity
Driving adoption this way would be expensive, but it would be worth it for Facebook to obtain each user’s bankable identity. Currently only your email is required to sign up for Facebook, and while over time Facebook collects a vast amount of information about you, they do not have your bankable identity. Facebook has tried to enter payments four times in the past, and they know it is the most lucrative remaining monetization of their user base; David Marcus has publicly said that Calibra will offer financial products with the help of partners.
Potential value of $500 billion+
Ant Financial, the parent company of Alipay has one billion users and is worth $150 billion because of the wide variety of financial products it sells to its users: loans, money market funds, mortgages etc. Facebook has three times the number of users of Alipay so using the same metrics, the Calibra wallet would add $500 billion to Facebooks valuation, doubling its market capitalization. And given that the average Facebook user is wealthier than an Alipay user, it could add far more than $500 billion.
Does Facebook really care about the unbanked?
Facebook claims their goal with Libra is to help the un-banked but this claim quickly falls apart under scrutiny. Fifty percent of the worlds un-banked live in China, India, Pakistan, Mexico, Nigeria and Pakistan. All of those countries except Mexico currently do not allow crypto currencies. For the counties that do allow crypto currencies, the un-banked are largely uneducated and live on less than $2 a day. Besides the unaffordable expense of purchasing a smartphone and a data plan with that level of earnings, the education required to explain what a Libra is to this population is huge, and using Libra instead of a digitized USD, EUR, or other currency will slow adoption. If Facebook wanted to help the un-banked quickly why wouldn’t it allow other wallets access to Messenger and WhatsApp and why not allow multiple currencies access to the Calibra wallet instead of limiting it to just Libra?
The Libra Reserve could match JP Morgan’s deposit base
One potential reason to create Libra is to be able to deploy the assets of the Libra Reserve to help secure approval for Libra and Calibra in countries that don’t allow crypto currencies or are hostile to Libra. Dollars or euros that enter the Calibra wallet are transferred to the Libra Reserve in exchange for Libra which then are added to the Calibra wallet. In almost any scenario, the Libra Reserve grows to enormous scale very quickly. If every user contributed $450 to their Calibra wallet, the reserve would have $1.5 trillion — the size of JP Morgan’s, the largest American bank’s, deposit base. At that size, 1.5% interest would generate $20 billion, or $200 million for each of the 100 Libra Association members. Libra will not pay interest to its users because doing so would subject it to the Investment Company Act of 1940 which it clearly intends to avoid.
Quick path to $100 billion Libra Reserve
Getting to that asset size will take time, but at the end of 2019, Facebook will have approximately $55 billion in cash which could be a very healthy start for the Libra Reserve. In 2020, Facebook will generate over $80 billion in revenue; could it require all customers pay it in Libra? And then pay its suppliers in Libra? Very quickly we can see a $100 billion Libra Reserve without counting any user deposits or adoption.
What prevents the Libra from adopting a fractional reserve policy?
The Libra Reserve will use the funds to purchase the basket of assets that comprise the Libra coin, which currently includes dollars, euros, pounds, yen and the Swiss franc. However, the mandate of the Reserve is completely discretionary and permits investing in the assets of any ‘stable and reputable central bank’. If the Libra Reserve reaches a scale anywhere near $1.5 trillion, it will be the largest pool of discretionary assets in the globe by a significant margin. While the team has been adamant that the Libra will be backed ‘one for one’ with liquid central bank assets, what prevents the Libra Association from eventually succumbing to the temptation of adopting a fractional reserve policy?
Path to persuade India to change their anti-crypto (or anti Libra) policy
Facebook’s largest user base is in India which currently doesn’t allow crypto currencies, and it would make sense for the Libra Association to propose adding the Rupee to the basket of currencies. If it did so, the Libra Reserve would purchase $10 billion or $20 billion or $30 billion of Indian bonds. Would India then allow Libra? And would it not allow any other competing crypto currencies? India borrows about $20 billion each year so the Libra Reserve could easily purchase all of India’s external debt for more than a year.
Libra Reserve could ultimately influence government policy
The influence wouldn’t stop at emerging markets. At scale, if two thirds of the Libra Reserve held US Treasuries, it would be the largest non-government holder at $1 trillion, and the US government would pay a lot of attention to the interests of its largest creditor. Facebook wants its Calibra wallet to be widely adopted, and if it starts to manage very large assets, the Libra Reserve could influence government policy, initially by driving regulatory approval.
The world’s largest financial services company
If Libra launches as planned, and the Calibra wallet is widely deployed, Calibra and its partners will sell financial products to Calibra users, likely becoming the world’s largest financial services company. Congress has expressed concern about Calibra sharing user data with Facebook, but it is the reverse that is most likely. Imagine Calibra knowing you as well as Facebook, and being able to offer financial products based on that data. At every relevant moment of your life — a move, an engagement, a pregnancy, a new job — it can customize offers in ways your current bank can’t even fathom.
The power to rule over commerce
And what about who can use Libra? Facebook has policies on items that can and can’t be sold, and it has banned thousands of merchants with no real appeal possible. If Libra becomes widely used, Facebook will have the power to determine what can and can’t be sold for Libra and, even more importantly, who is permitted to have a Calibra wallet. Absent regulation, Facebook will be able to shut anyone out of this vast propriety financial ecosystem for any reason and with what chance for appeal?
Will Libra launch separately from Facebook?
We shouldn’t be surprised if Libra launches in 2020 but without Facebook. Because of Libra’s dependence on the Calibra wallet, Facebook doesn’t need to be in the association to have dominant influence, and it really wants Libra to happen. Bowing out of Libra also would help appease regulators and ease the path for Facebook to launch its Calibra wallet. Maybe at first the wallet will hold other digital assets, but quickly it will hold Libra, and absent regulation, only Libra. And so we end up in exactly the same place: Marc Zuckerberg is king of the world.