Will cryptocurrency win followers after Facebook’s Libra goes live?

Facebook expects to roll out its cryptocurrency, Libra, by next year with the aim of creating a global currency and financial infrastructure that empowers billions of people.

The focus for Libra Association – the consortium that is overseeing the implementation of its eponymous cryptocurrency – in the near-term is the 1.7 billion of the world’s population (Facebook estimate) that is “underbanked”, a figure that is skewed towards emerging markets. Libra’s idea is to create an “internet of money” – where transfers will be as simple as sending a text message. Libra aims to be the first mainstream global cryptocurrency. However, the project is in its very early stages and its evolution remains uncertain.

Despite the hype around other cryptocurrencies such as Bitcoin and a series of fraudulent coin offerings, the US Congress, Securities and Exchange Commission, Federal Reserve and other regulators are yet to set out or create any regulation or oversight for virtual money. The creation of Libra will, we believe, act as a catalyst to the first steps in creating a framework that will legitimise and democratise the use of blockchain technology.

Libra

The Libra Association is an independent, non-profit company based in Geneva. It looks to be one of the most advanced efforts to create a currency that could be widely used for money transfer, e-commerce and payments.

Libra’s main objectives are to provide access to financial services and cheap capital; create low-cost money movement in a global, open and instant manner; and build a trusted decentralised form of governance.

Libra currently has 27 partners, including MasterCard, Visa and PayPal, plus major merchants such as Spotify, eBay, Vodafone and Booking. com. The partners will each manage a node in the Libra network, which will allow the control and processing of the digital coin to be diversified. These partnerships will enable Libra to work, trust, proliferate and monetise (potentially advertising as earnings) and also offer a means to spend the currency. Each Libra partner is investing a minimum of $10m to secure the coin. An important factor is that Facebook does not have voting control over Libra and the partners will work together on the development of the cryptocurrency.

Calibra

Calibra is the digital wallet for Libra and will be available via Facebook Messenger, WhatsApp and as a standalone. It is set up as an independent, regulated subsidiary to ensure the separation of social and financial data.

Calibra’s goal is to provide financial services that enable people to access and participate in the Libra network. By bringing financial services to a broader community, the hope is it will spur more e-commerce from small businesses on platforms of Facebook and members of the consortium such as Spotify and Uber, driving more advertisement and direct sales.

Not another Bitcoin

Since inception, cryptocurrencies have been very volatile with mixed success and have lacked a broad network effect of users. With the backing of Facebook, the network effect differentiates Libra from Bitcoin and Ethereum in four key areas:

Scale: It will include billions of accounts with high transaction volumes, low latency (speed of real-time access), and an efficient high capacity storage system (instantly scalable on Facebook). This will address a global audience with a blockchain that is an open source.

Stability: Volatility is one of the main criticisms of Bitcoin. Libra coin is a “stablecoin” backed by a reserve of assets (a basket of bank deposits and treasuries from high-quality central banks), designed to give Libra intrinsic value and governed by the independent Libra Association.

Security: The protocol will provide a common infrastructure for processing transactions, maintaining accounts and ensuring exchange across services and organisations. This lowers barriers to entry and switching costs, and allows experimentation of new business models and financial applications. No single entity has control over the ecosystem.

Flexibility: Libra will use the new “Move” programming language, which is designed to write code easily to fulfil the author’s intent and lessen the risk of bugs and security incidents to prevent assets being cloned.

We do not view Libra as a near-term game changer for Facebook. Monetisation, regulation and competition details are still vague. For example, Facebook acquired WhatsApp in 2014 and monetisation is still nascent, so Libra will be a long-term opportunity and not a material near-term earnings driver.

However, we believe that given time, Libra Association has the potential to transform Facebook into a broader platform company and create different advertising models for the internet. Being regarded as a platform company would ultimately lead to a higher valuation for Facebook.

Financial regulation and oversight is necessary to take cryptocurrency to the next level. The social media company is bringing stability and some standardisation to cryptocurrencies which will open up more specific usages.

Could Libra be to cryptocurrency what AOL was to the internet? To us, the absence of Google and Amazon from Libra’s partners list is notable. It will be interesting to see if they try to launch alternatives, or join this association.

Alison Porter is a portfolio manager in the Global Technology Team at Janus Henderson Investors, which is a member of The Gulf Bond and Sukuk Association