June 27, 2019—Facebook’s June 18 announcement about the launch of Libra, a proposed new cryptocurrency, has sparked a renewed interest in the digital currency world. Libra is intended to be a new form of digital money that can be used to make purchases or transfer funds, domestically and globally, at a very low cost, using just a mobile phone. Bitcoin and other cryptocurrencies, also created with the original intent of becoming a new form of digital money, skyrocketed in value in 2017, drawing the attention of investors across the globe. They have since faded from mainstream financial media headlines, after having suffered a sharp plunge in value in over the course of 2018 due to myriad factors, including fraudulent activity and hacking incidents (with bitcoin falling by close to 80% in 2018 from its 2017 peak)[1].

As we noted in our 2017 primer “The ABCs of Bitcoin,” we were excited about the prospects of blockchain, the technology underpinning bitcoin and other cryptocurrencies, but did not believe that bitcoin should be included in a long-term investment portfolio at the time, given that its many drawbacks outweighed its potential benefits. Our assessment of the pros and cons of bitcoin as an investment still stand, as the key underlying problems with bitcoin as an investment remain unchanged.

One of these key shortcomings was bitcoin’s failure to truly become a form of money. As a refresher, money typically plays three key roles in an economy. It can be used 1) as a “medium of exchange,” (as a form of payment for goods and services); 2) as a “unit of account” (as a direct measure of the value of goods and services); and 3) as a “store of value” (allowing individuals the ability to defer purchases of goods and services to a future date). Bitcoin has so far failed to gain widespread adoption, making it unusable in the broader economy as a medium of exchange. In contrast, bitcoin has been used as a store of value, but arguably a poor one, given its wild fluctuations in price. Bitcoin has little intrinsic value because it does not have any physical asset backing its value, nor does it have significant demand driven by use as a medium of exchange. Instead, its value has been driven largely by speculation about expectations of future demand, which has made bitcoin a fairly unstable store of value. Its volatile price means that it cannot reliably be used as a unit of account either, further hindering its use as a payment for everyday transactions. As a result, bitcoin has not become viable form of money in the broader economy so far.

While it is still too early to make an assessment about the feasibility of Libra as a durable form of payment and potential investment for the future, the advent of Libra highlights that the cryptocurrency phenomenon is not likely to disappear, and developments in the space are worthwhile for investors to keep abreast of. Even if cryptocurrencies may not yet be ready for a place in a long-term investor’s portfolio, they could continue to evolve until they are, and have the potential to transform the payments system as we know it.

Below we provide a brief overview of what Libra is, and compare Libra to bitcoin (given that bitcoin is the oldest, best known, and largest cryptocurrency by market cap). Based on its whitepaper, Libra does appear in principle to address a number of the shortcomings that bitcoin and many other cryptocurrencies have as an alternate form of money. However, Libra also brings with it many of its own potential drawbacks, along with a host of questions that remain to be answered.

Check out Libra’s profile: What is it all about?

Libra’s name hints at its grand ambitions. The name Libra refers to a unit of weight (and precursor to the pound) used by the ancient Romans, who were famed for their pursuit of world domination. Similarly, Libra’s scope is global, and it is intended to be a new digital currency that will be stable in value, and allow for frictionless, secure, and speedy payments across the world, all with lower transaction costs relative to the current payment systems in place. One of Libra’s stated goals is to “empower billions of people” by providing financial market access for the massive number of individuals (1.7 billion adults according to Facebook) who do not have a traditional bank account. It is to be built on open-source (public, non-proprietary) code, which would allow for anyone to build applications to use Libra, and would also allow for collaboration of multiple entities (developers, researchers, corporations, individuals) to help address design and security issues (similar to the way many other cryptocurrencies, such as bitcoin, are built). In theory, making payments to companies for products or transferring funds to friends across the globe (or just next door) with Libra would be as easy as “friending” someone on Facebook, with just the simple click of a button.

Facebook will not be alone in this new venture. It has recruited 28 other members (see Figure 1) to form the Libra Association, an independent, not-for profit organization, headquartered in Geneva, Switzerland, to govern and operate Libra. Its membership includes a number of corporations, nonprofits, multilateral organizations, and academic institutions from a variety of industries, and is targeted to reach a total of 100 members by the time of its expected launch in the first half of 2020. Two-thirds of members will be needed to make major decisions. Notable current members include Mastercard, Visa, and Paypal from the payments industry; Uber, Lyft, Spotify, and eBay from the tech/marketplace industries; Coinbase from the blockchain industry; and Andreessen Horowitz and Union Square Ventures from the venture capital industry.

Facebook itself will be a member as well, but will transition its leadership role by the end of 2019 to Calibra, a separate regulated entity formed to represent Facebook’s interests, while keeping operations with Libra separate from that of Facebook to avoid conflict of interest issues due to the potential interaction of social and financial data of customers. Conspicuously absent from membership thus far are any names from the banking industry, which will be significantly impacted and likely needed to be an important part of the Libra ecosystem, if it is to take off.

Figure 1: Libra Association current members


Source: Libra White Paper

Data as of: June 18, 2019.

What makes Libra stand out from the pack?: Existing cryptocurrency pitfalls and Libra’s promises

The stated purpose of Libra is very much in line with many of the original intentions behind the creation of bitcoin and the cornucopia of other cryptocurrencies that have been created in its wake. However, unlike bitcoin (and many of its crypto-cousins), this new digital currency promises that it will have some key differentiating factors.

Existing cryptocurrency pitfall #1: Lack of intrinsic value

Libra’s promise: The Libra Reserve would provide physical asset backing for Libra’s value

Libra promises to have inherent value because it plans to be backed by a basket of low volatility reserve assets, called the Libra Reserve. For every Libra created, the traditional currency used to purchase that Libra will be put into the Libra Reserve, and converted into a basket of bank deposits and short-term government securities in currencies from a selection of a number of “stable and reputable” central banks. While one unit of Libra will not necessarily convert into the same amount of a user’s local currency over time, the basket of currencies will be chosen to keep fluctuations in value minimal. Digital currencies with a link to underlying assets like this are often referred to as “stablecoins,” and are typically defined by lower price volatility as a result. This would, in theory, solve one of bitcoin’s key drawbacks– its lack of intrinsic value (due to both the absence of physical backing by assets and lack of widespread adoption), which contributed to its sharp fluctuations in value. This in turn hampered bitcoin’s ability to be used as a medium of exchange in daily transactions for payment of goods and services. It is difficult for both merchants and customers to make and receive payments in a currency where its value fluctuates wildly from day to day, let alone minute to minute, because it makes it difficult to for merchants to put a price on products and makes it difficult for customers to know how much they can purchase on a consistent basis. The backing of Libra’s value by reserve assets could be instrumental in supporting Libra’s use for transactional purposes, in contrast to bitcoin and other similar cryptocurrencies which have ended up being primarily used as speculative stores of value because of their volatile price swings.

Existing cryptocurrency pitfall #2:  Lack of mainstream adoption

Libra’s promise: Libra Association members would provide massive potential user base

Libra could tackle the challenge of mainstream adoption by customers and merchants in a number of other ways as well. Facebook’s platform would provide a massive potential built-in user base of 2.4 billion individuals. Ease of access to the new digital currency would help clear a major hurdle faced by bitcoin, where potential users have to research and find out how to set up accounts to be able to convert existing traditional currencies to digital currency. With Libra, functionality would be built directly into Facebook (along with Messenger, WhatsApp, and Instagram), making it very easy for individuals to get access to Libra, in an environment they are already familiar with. Current partner firms in the Libra Association, such as Uber, Lyft, Mastercard, Visa, and Paypal, also have massive user networks that could add to Facebook’s user base and raise Libra’s profile and customer comfort with the new digital currency. In addition, each member of the Libra Association will be required to pay a $10 million one-off membership fee, which would be used in part to pay merchants to offer discounts for customers who pay for their products using Libra. Much like Amazon’s initial strategy of onboarding new users through low prices, this strategy of discounts could also lure otherwise crypto-shy customers to try Libra; and hopefully become return customers if their first time experience is positive.

Existing cryptocurrency pitfall #3:  High transaction costs

Libra’s promise: The Libra Association would use interest on Libra Reserve assets to defray transaction costs

Libra also plans to maintain low transaction costs, by using interest from the reserve assets backing Libra to defray these transaction costs.Though one of bitcoin’s promises was to provide low cost digital payments relative to traditional payment providers like credit card companies, in reality, it was not able to live up to its original intentions. Traditional credit card companies can charge anywhere between 1.0%-2.5% of transaction value, plus a fixed fee, which can often make the fee expense of large volumes of smaller transactions particularly burdensome for retailers. International payments can often have transaction fees of 5-9% of payment value, which can mean that individuals making remittance payments back to home countries, for example, can lose a significant portion of income just to cover transaction fees. Bitcoin transaction fees have fluctuated widely, based on the speed with which an individual would like a transaction confirmed (higher transaction fees can be paid to speed up transaction confirmation times), but have spiked as high as $37.50 per transaction on average at their peak back in December 2017, compared to $2.22 currently[2].

Existing cryptocurrency pitfall #4:  Slow transaction processing times

Libra’s promise:  Blockchain technology being built from the ground up to significantly improve transaction

Another benefit Libra promises to bring to the cryptocurrency world is the ability to handle large numbers of transactions with speedy transaction times. Libra’s whitepaper states that the system is expected to be able to process 1,000 transactions per second. This would be a significant improvement compared to bitcoin’s snail’s pace of 7 transactions per second, but still short of Visa’s transaction processing capabilities, where estimates for transactions per second range from 1,600 to 24,000.

Existing cryptocurrency pitfall #5:  Trying to disrupt/circumvent the current payment system

Libra’s promise:  Cooperate with regulators and existing payment system participants

Libra’s promise to aim for cooperation with regulators is another key distinction from other cryptocurrencies. While bitcoin and its other crypto peers had the stated purpose of disrupting the current payment system, Libra explicitly attempts to work with and embrace it. In our view, this is a plus, because it is unlikely that cryptocurrencies will be able to circumvent regulation given their potential for broader financial market disruption. Libra will theoretically be backed by the value of financial market assets around the globe, raising questions about financial stability that central banks and regulators cannot afford to ignore. Though Libra promises to allow for pseudonymous transactions (the ability to keep one’s identity separate from financial transactions), like bitcoin and many other cryptocurrencies do, the white paper also notes a commitment to working with regulators to prevent money laundering. This should, in theory, help keep illicit activity (which played a large part in staining the reputation of many existing cryptocurrencies) at bay. At the most recent FOMC press conference in June, Chair Powell confirmed that Facebook has been in contact with the Fed. While the Fed doesn’t have direct authority over cryptocurrencies, they come into the Fed’s world through its oversight of consumer protection and money laundering. He also noted that the Fed would have high expectations with respect to safety and soundness of Libra’s plans, in line with recent comments from the Bank of England’s Governor Carney.


Not all sunshine and roses just yet: Markets will need to get to know Libra better

While Libra is potentially setting itself up to improve upon many of the faults of bitcoin and many other current cryptocurrencies, it still faces a daunting list of challenges. We highlight just some of the key hurdles below, and we would expect new difficulties to arise as the process of taking Libra from concept to reality moves forward.

  1. Security is a key area of concern for all cryptocurrencies, and particularly with Libra, given Facebook’s past track record with privacy of data and its role in being used as part of the 2016 election interference efforts by foreign entities. The Libra blockchain system will supposedly be robust as it is being built from the ground up, with the flaws of existing cryptocurrencies in mind. However, security and hacking issues typically lie not within the blockchain, but rather at the level of wallets and exchanges. Wallets and exchanges are not regulated, so they are not guaranteed like bank deposits are. Security breaches of wallets and exchanges thus result in the total loss of one’s cryptocurrency holdings in most cases. There has been some speculation that Facebook may guarantee the value of Libra wallets on its own platform in the case of hacking issues, but details on this front have yet to be outlined.
  2. Questions about global financial stability are real as well. The benefit of Libra’s value being backed by a basket of low volatility instruments raises issues about arbitrage and how regulators would coordinate to provide a “bailout” if Libra were to become a significant enough portion of the financial system, given the global nature of the assets that are expected to back the currency, and private-firm nature of Libra’s beneficiaries. Transaction costs might help to defer some arbitrage activity, but again, further details on reserve asset management will be needed to understand the implications for broader financial market stability. In addition, if the reserve fund were to become large enough, the impact it could have on currency and bond markets (given that it plans to invest in short-term debt instruments and bank deposits) could be significant depending on the Libra Association’s choice of currencies and instruments for investment of reserve assets.
  3. Some of Libra’s technical features mean that it will be less decentralized compared to bitcoin and some other cryptocurrencies, at least to start off. One of these features is that Libra will start off as what is called a “permissioned” blockchain, meaning that only certain authorized entities (in Libra’s case, it will be the members of the Libra Association) will be a part of the blockchain. This is in contrast to a “permissionless” blockchain system used by bitcoin, where anyone that meets the technical requirements to participate in the blockchain can do so. The white paper suggests that the intention is for the system to move toward a permissionless state within five years, but there will be a number of operational challenges it will need to address in order to transition, so it is not yet clear whether this transition will be feasible, and what this would mean for the operational viability of the currency going forward.
  4. Questions could be raised about how much users of Libra are benefiting from the new cryptocurrency, relative to the Libra Association. The whitepaper notes that the Libra Association’s founding members will receive dividends from interest payments on the reserve assets, whereas Libra’s users will not receive interest on reserves. Presumably users benefit from the convenience of transacting in Libra. However, this raises larger questions about the power that the Libra Association has both over user data, and assets backing Libra (and therefore Libra’s value). Further details around how the reserve assets will be managed will be key for determining Libra’s viability. Thus far, customers have been fairly lax with ceding privacy in exchange for convenience, but it is not clear that this will extend to the sphere of cryptocurrency. In addition, while Libra users should be shielded from large swings in value given the diversification of reserve assets, users will still be exposed to some currency risk depending on fluctuations of users’ home currencies relative to the basket. The level of transparency about the Libra Association’s future operations will be very important.
  5. Libra’s commitment to working with regulators also suggests that Libra’s current 2020 targeted launch date is fairly aggressive, as getting central banks and a variety of regulators, not just in the U.S. but also across the globe, to come to consensus on views in the relatively new space of cryptocurrency will not be an easy process, and could take much longer than envisioned.
  6. The success of Libra may be a positive for individuals and merchants whose transaction costs are lower, or for those who were previously unable to transact in the financial system. However, it could have some very disruptive impacts for, and strong push back from, the banking sector (among others that could be heavily impacted, such as the payments industry). Paring back lucrative transaction fees could hit banks, though this is a fairly limited portion of bank profits.  A significant level of adoption of Libra as a medium of exchange could lead to shrinking bank deposits, depending on how the Libra Reserve allocates its funds between bank deposits and short-term government securities. The banking industry could marshal a strong lobbying effort to push lawmakers to challenge Libra’s ability to become a reality.

Core Narrative

Libra’s arrival into the digital currency space is notable because of Facebook’s potential to use its massive existing platform to bring cryptocurrency use into the mainstream (along with other key Libra Association members like Uber, Lyft, PayPal, Mastercard, and Visa). While many of Libra’s differentiating features could possibly give the new digital currency a chance to succeed where existing cryptocurrencies have failed, there are still a multitude of hurdles Libra will have to overcome that could make or break its success, as it is still just an idea on paper. And there are a host of questions still unanswered, that will need to be clarified as the process moves forward. The emergence of further details on plans for the currency, and its adoption and performance over time, will be crucial for further evaluation of whether Libra’s aspirations to become a global medium of exchange are feasible, and more broadly, whether it can become an alternate form of money.

Regardless of the outcome, the fact that major market players are becoming involved in cryptocurrency underscores the fact that that digital currencies are likely to remain a part of the financial landscape of the future, and should not be ignored. Though there have been recent suggestions in the media that some Libra Association members have joined reluctantly, the fact that they have joined despite their reservations underscores the idea that companies realize the importance of being a part of the conversation, and of not being left behind, in the cryptocurrency space. Even if Libra does not achieve its goals, it has the potential to make big strides going forward given the institutions involved in the project. And, cryptocurrencies of the future are likely to build on the experience of Libra’s successes and failures.  Though we do not believe cryptocurrencies currently have a place in a portfolio seeking risk-adjusted returns, we believe they are worth watching, as they have to power to transform how companies and individuals transact with money on a daily basis, and could possibly evolve over time to find a place in investment portfolios.

[1] Bitcoin’s price has been on the rise again in 2019, with a number of reasons suggested for its climb, including increased institutional demand in the bitcoin futures market, in addition to potential front running of bitcoin purchases ahead of the upcoming “halving” of rewards for bitcoin miners in May 2020, which will have the net effect of dampening the supply of bitcoin, in turn boosting its price.

[2] https://bitcoinfees.info/



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