What is Libra?
• Its website says it is ‘a simple global currency and financial infrastructure that empowers billions of people’. Initially its focus will be to function as a payment system. The main angle of Facebook’s pitch is that it will benefit the hundreds of millions who have a smart phone, but don’t have a bank account.
• Libra is a stablecoin. Unlike Bitcoin, it is designed to have a stable value rather than be a speculative asset. To achieve that stability it will be 100% backed by a reserve of real-world assets. For every Libra created, there will be a basket of bank deposits and short-term government securities – think US Treasury Bills – held in the Libra Reserve.
• Libra is not pegged to a single currency. This creates some price risk relative to the local fiat currency of the end-user.
• Libra ≠ Facebook. It will be governed by the independent Libra Association, which will have around 100 equal members. Facebook has done a lot of the initial work and it wrote the white paper, but will ultimately be only one of 100 equal members. Of course, the suspicion is that some members might turn out to be more equal than others.
• The Libra Association currently has 27 members across a range of sectors. Notable absentees are banks and the other big tech companies, though, and getting banks involved will be important for Libra’s success.
• Facebook’s involvement will be managed through a new and regulated subsidiary called Calibra. Calibra will not share its data with Facebook. Given Facebook’s track record, there is some scepticism on how firm that commitment will be in the long run.
• Libra has been designed to be secure, scalable, and adaptable for the future. As an example, Libra will be able to handle 1,000 transactions per second, compared with Bitcoin’s seven. For context, Visa can theoretically handle 24,000 transactions per second.
• Facebook wants Libra to launch in the first half of 2020. Given the considerable push-back against the project from various policymakers, this timeline seems likely to slip – potentially by a lot.
• How can you put money in and take it out? It will be easy if you have a bank account; you will just transfer money in and out. But if, like many emerging consumers, you don’t have a bank account, you’ll be able to top up or cash out at kiosks or in convenience stores, like topping up a pay-as-you-go phone.
• What do I need to get access? You’ll need a government-issued ID. To reach the unbanked, however, Libra will want to keep the required documentation to a minimum. This will be tricky to marry up with anti-money laundering and Know Your Customer requirements.
Will Libra tip the scales?
So now we know what Libra is, what is it good for? What’s the point?
Libra will be particularly attractive to consumers in countries where payments are expensive, there is no stable local currency, there are many cross-border transactions, and access to bank accounts remains patchy – which is to say, mainly consumers in emerging economies. That’s where its benefits are clearest. Facebook stresses that Libra will give access to payments to the hundreds of millions who own a smart phone, but don’t have a bank account.
The main consumer benefits, at least at the outset, will be the ability to transfer money globally in a secure and low-cost way. Remittances, a $500 billion global market, can cost up to 19% in some markets. Cross-border transactions can also take several days to complete.
Developed-market consumers can already transfer money online and in real time, but the experience of online services has shown that convenience tends to trump everything else. If one can make a payment with one or two taps from within a WhatsApp group, this may be far preferable to the dozens of taps required to change apps and complete the same transaction through a more traditional banking service.
Libra’s balancing act
For Facebook, the benefits of launching Libra are clear and break down into two categories.
• First, Libra could be a way to monetise Facebook’s networks. China’s Alipay, Tenpay and WeChat Pay have shown that payments can be a successful business model. Libra could also help make money from Facebook’s large but under-monetised user base in emerging markets.
• Second, Libra could ease the regulatory pressures on Facebook. Rather than leaving global payments to Chinese companies, it could be geopolitically attractive to the US to have a US-led challenger for this global payments market. This could in turn make life easier for Facebook with regulators. Furthermore, if Facebook can develop a revenue stream from Libra it could become less dependent on the increasingly sensitive model of monetising user data.
The benefits for the other Libra Association partners are diverse. For many, like incumbent payments firms – Mastercard and Visa, for example – the $10 million contribution buys a seat at the table, affording insight into the system and a voice in its direction.
Overall, though, we have to remember that Libra remains a white paper at this stage. A lot of the details are guaranteed to change between today and a possible launch date. But perhaps the more important point is that over the past few weeks, the debate on digital currencies has shifted from ‘if’ to ‘how and in which form’. Libra, or something like it, seems inevitable over the medium term.
We will follow up this article with a second blog on what Libra will mean for markets from our macro perspective.