I’ve been doing investment management long enough that it’s only logical that I begin to transition into horoscopes and fortune telling so here we go. Just kidding of course. Libra is not a strangely opaque reference to a kind of scammy pseudoscience. It’s a reference to Facebook’s new kind of money, which, err, hopefully won’t be based on a kind of scammy pseudoscience….
1) What is Libra? Libra is what Facebook is calling their new cryptocurrency. Here’s a short primer on it from Facebook. In essence, Libra is structured to be a fully reserved payment tool that will operate as a form of stablecoin (meaning it will always settle at par, $1). So, Facebook will take in $1 of deposits from Joe Schmo and issue Joe 1 Libra and Joe can use his Libra account just like his deposit account.¹ Facebook and its consortium of investors will hold that deposit in reserve as safe assets that are readily available for liquidity transformation where needed that will settle at par.
As I said a few years ago, this sort of “coin” was inevitable. Crypto needed a viable stablecoin. But as I explained last year, par conversion is really, really difficult to achieve. Many coin issuers have tried and failed because, quite frankly, it doesn’t work under a decentralized framework. You needed full reserve backing and a centralized platform of sort that is backed by creditworthy entities. That’s exactly what this is.
2) What is unique about Libra? There’s all sorts of fancy blockchain backend technology and claims about being “decentralized”, but it’s really not. In fact, I don’t even see this as a cryptocurrency. It’s just a deposit taking entity with a ledger and payment processing tool attached to it. And we should be clear about this – Libra is very much a centralized entity backed by the credit quality of its consortium.
It’s kind of like a money market fund that won’t pay interest. If JP Morgan had issued this “coin” everyone would have said “wow, big deal, you made a really complex money market fund, cool. NOT.” But Facebook rolled this out with all sorts of buzzwords and claims about “reinventing money” so people actually think they’re reinventing money. Except they’re not.
But what is unique about Libra is that Facebook has a massive network and scope to apply to this asset. So, you have a payment system that can be accessed by anyone with a WhatsApp, Facebook, Instagram, etc account that gives them immediate liquidity. That’s pretty cool because it means that millions of people in lesser developed countries can essentially access a stable currency for payment processing. In that sense Libra is like Bitcoin, but even better because the network is so expansive and the “coin” is stable.
3) Is Libra actually a game changer? There are grand claims from Facebook about how Libra will completely transform money and finance. But I don’t see that being the case. It’s basically an overly complex deposit account. I have no need for something like that. But there are millions of people around the world who would love access to what is basically synthetic Euros or USDs or whatever. So, like Bitcoin, Libra has enormous utility for emerging markets and lesser developed financial systems. But the question is how will regulators respond. Libra probably isn’t a security by SEC standards, but Calibra, the issuer, certainly sounds like a bank to me. So I am guessing the SEC could require Calibra to file as a bank holding company since they take in deposits and operate as a payment processor.
As for emerging market economies – who knows? I could see a situation where demand for Libra in emerging economies puts downward pressure on foreign exchange rates and regulators clamp down on its usage. But we won’t know for sure until we see it in action.
Anyhow, that’s your horoscope reading on Libra. Since you’re probably reading this in a developed economy it is just as useless to you as an actual horoscope.
¹ – Joe Schmo just called me laughing hysterically about the idea of trusting Facebook with his money. I see his point.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.