Facebook recently announced its planned 2020 launch of a cryptocurrency it calls Libra. This is perhaps one of the single largest events in cryptocurrency history. Why? Because Facebook has the power and presence to massively disrupt a still-growing industry. This could single-handedly usher in a new wave of users and adoption. It has the resources and technical capabilities to build a truly scalable and functional blockchain ecosystem, the management experience to launch a new and nascent technology, and the clout to bring on the necessary partners to enable usage out of the gate.
In this article, I’ll explore how the future launch of Libra may have a positive impact on bitcoin demand. But first, let’s dive into the new cryptocurrency a bit.
Background
Libra belongs to a family of cryptocurrencies called “stable coins” and is backed 1:1 against a basket of stabilized assets (more on that later). It is also fast: Though no estimates are given for settlement times, Facebook is imposing strict throughput, financial reliability and security requirements for validator nodes.
Due to its permissioned blockchain structure (albeit at the expense of significant distribution and decentralization), it is expected to be capable of supporting 1,000 transaction per second (TPS). Compare that to seven TPS for Bitcoin and 20 TPS for Ethereum, and you can quickly see just how scalable Libra is designed to be.
Most current stable coins are pegged to a single fiat asset, such as USD. Libra is not pegged to a single fiat asset but instead is “backed by a collection of low-volatility assets, such as bank deposits and short-term government securities….” This is important, as Libra has the potential to be more stable than many local currencies, especially those used in high-conflict regions, a challenging political climate, or with historically high-inflation rates such as the Bolivar.
This method in which Libra is backed gives it intrinsic value. But more importantly, the reliability of price stability can be used for daily purchases of goods and services without the risk of significant price change. This also means that it has functional value as both a method of payment as well a store value for savings. It is also important to note that there’s likely minimal room for speculation on Libra’s future price growth potential. Since it is designed to be stable, it is assumed to not appreciate in value like bitcoin or other speculative cryptocurrencies.
Implications For Bitcoin
Initially, Libra is acquired by end users by exchanging their local fiat for Libra. This can be performed through ATMs placed in local markets, participating merchants or through Facebook’s Calibra Wallet. From there, Libra can be transferred to vendors or merchants to pay for goods and services, or to friends and family as a form of remittance. Most importantly, Libra is designed to support an open ecosystem, such that it can be transferred to and supported by “a competitive network of exchanges,” where users can exchange it for bitcoin and other cryptocurrencies. Libra also supports several hallmark benefits of blockchain technology, such as the ability to create wallets and send/receive it without supplying any personally identifiable information.
Libra’s vision is to provide a fast and low-cost method of value transfer to the unbanked or to those who traditionally pay more for financial services as a result of having less money. In order to do this, it will need to create a vast network of fiat-to-Libra onramps so that it can convert locally used fiat in the many countries it plans to operate in, to Libra. At the moment, this process is exclusively being handled by cryptocurrency exchanges, and the options, while growing, are still limited.
However, as Facebook and the emerging collective of well-capitalized businesses in the Libra Association continue to push for usage and adoption, a new wave of previously untapped consumer capital is expected to make its way into the cryptocurrency markets. Even if just a fraction of Libra holders exchange it for bitcoin or other cryptocurrencies, there is significant potential for new demand, as Libra is expected to gain adoption from an entirely new base of users. Think of it as a “gateway cryptocurrency” that will help familiarize a new population of users with digital currencies such as bitcoin and other cryptocurrencies.
Challenges
Facebook has taken on the monumental effort of building an initial consortium of founding members, including payments heavyweights Stripe, PayPal, Mastercard and Visa. However, to date, no single bank has signed on. Critical to Libra’s adoption is a vast and diverse fiat-to-Libra onramp. Banks have their part in this, as all cryptocurrencies must initially be purchased in fiat. While a specific association with Libra is not necessary to accomplish this, cooperation and support by banking entities are absolutely critical.
Beyond this, there are markets where banks are few-and-far-between or otherwise difficult to access by low-income households. In these markets, it may be exceptionally difficult to convert an individual’s cash-based wages to the digital representation of value that is Libra. This is a problem that has existed for decades and is not new and unique to Libra. However, it has yet to be solved at scale and presents a very real challenge. Still, it seems that the Libra Association is the single most powerful and influential consortium of companies that has been challenged with the task of solving this, and as a result, this author is hopeful.
