Libra Coin: Worth Investing Or Just Another Crypto?

Libra is a cryptocurrency created by Facebook, designed to be a simple, low-fee stablecoin to be used around the world. It was envisioned to be digital money on your phone, which could be used to pay for any purchase where the cryptocurrency is supported. Users of the social media platform would be able to send the digital coin to one another, and they would also be able to use it to make purchases both through Facebook and across the internet more broadly. However, there are concerns about the impact on central bank monetary policy and the possibility that a run on Libra could trigger another financial crisis. So, is Libra a good investment?

Libra's potential risks and regulatory challenges

Libra is a cryptocurrency created by Facebook, designed to be a simple, low-fee stablecoin to be used around the world. However, it faced several potential risks and regulatory challenges that may have hindered its success and adoption.

One of the primary concerns with Libra was its potential impact on financial stability and monetary policy. While Libra was designed to be a stablecoin backed by a basket of major global currencies, there was a risk that in the event of a run on one or more of those currencies, Libra's stability could be affected. This could lead to people losing money and potentially requiring central bank intervention. Regulators were also concerned about the use of cryptocurrencies for money laundering and terrorist financing, which is a common issue in the crypto space.

Another issue with Libra was its closed-loop system. It could only be spent on things available for sale through Facebook and its associated apps. While Facebook intended to promote adoption by encouraging businesses to accept Libra, it was not a major sales platform like Amazon or Alibaba. This limited its usefulness as a currency and meant that it would need to replace sovereign currencies for transactions to become widely adopted.

Facebook's data privacy practices and intentions with Libra also raised concerns. Facebook's business model has long been centred around harvesting and monetising user data, and there were worries that Libra was a way for Facebook to gain access to even more personal data through its role in setting the standard for global digital identities. This, combined with the involvement of other large regulated organisations, gave governments and regulators a clear target to express concerns about money laundering, consumer privacy, capital control circumvention, and other financial risks.

Additionally, Libra faced the challenge of complying with KYC/AML requirements, especially in developing countries where it aimed to provide financial inclusion for the unbanked. Without complying with these requirements, Libra could not legally operate, and even if it did, it might still face barriers to adoption in these markets due to governments' preferences for sovereign currencies.

Libra's impact on the established financial system

Facebook's Libra cryptocurrency has the potential to significantly impact the established financial system. One of the primary ways it could do this is by reducing the number of unbanked people. Facebook has stated that one of Libra's major goals is to reach the current unbanked population, estimated at around 31% of the world's population, or 1.7 billion people. By providing these individuals with financial access, Facebook hopes to save them money and help them take advantage of opportunities typically available only to those with bank accounts.

Another way Libra could impact the financial system is by increasing the number of non-cash transactions. Currently, 85% of global transactions are conducted in cash. Libra, as a digital currency, would encourage the use of non-cash payments, potentially reducing fraud and making it easier to trace transactions. This could also speed up transaction times, with digital currencies often completing cross-border transactions in a fraction of the time compared to traditional methods.

Libra could also disrupt the fees associated with international transactions, which can deter cross-border buying and selling. As a digital currency, Libra would not incur separate international fees, making border transactions seamless and encouraging cross-border trade.

Furthermore, Libra has the potential to change the key players in the financial industry. If successful, Libra could demonstrate that tech and private companies can become key players in the financial sector, challenging the dominance of major financial institutions and central banks, particularly in developing countries. This increased competition could force banks to become more appealing to clients by reducing their fees.

Finally, Libra may impact data privacy within the financial system. While Facebook has stated that Libra will have strong respect for privacy, there are concerns that Facebook and the Libra Association may not be able to handle data privacy as effectively as traditional financial institutions. However, if implemented correctly, Libra could potentially improve data privacy in financing.

Libra's viability as a medium of exchange

Libra, the cryptocurrency launched by Facebook, was envisioned as a simple, low-fee medium of exchange worldwide. It was intended to be digital money on people's phones, which could be used to pay for any purchase where the cryptocurrency was supported.

Libra was designed to be a stablecoin, meaning that it would be pegged to a basket of assets, including major currencies and government debt instruments. This would give the cryptocurrency stability and guaranteed intrinsic value. The value of a Libra was meant to remain largely stable, making it a good medium of exchange. Merchants could be confident that they wouldn't be paid a Libra today that would be worth less tomorrow.

Facebook also intended to make Libra accessible to the unbanked, particularly in developing countries. It aimed to provide better, cheaper, and more open access to financial services for all. By charging much cheaper fees than other money-sending services, utilizing blockchain technology, and holding the value of the currency stable, the Libra initiative wanted to address the high cost of moving money in developing countries.

However, there were concerns about Libra's viability as a medium of exchange. Firstly, it was noted that Libra would only be spendable on things available for sale through Facebook and its associated apps. This "closed-loop" system limited the usefulness of Libra as a medium of exchange. Additionally, there were concerns about whether landlords, utility companies, and grocery stores would accept Libra, as well as the potential for FX risk if the values of the currencies in the basket changed.

In conclusion, while Libra was designed to be a stable and accessible medium of exchange, there were questions about its viability due to the closed-loop system and limited acceptance by merchants.

Facebook's role in the Libra Association

Facebook's stated goal for Libra is to create a global digital currency that promotes financial inclusion, particularly for the unbanked. Libra is designed to be a "stablecoin", pegged to a basket of global currencies, including the US dollar, Euro, and Yen, to minimise the volatility that has plagued other cryptocurrencies. Facebook also emphasises the potential for Libra to reduce transaction fees, which could benefit both consumers and businesses.

To build support for the Libra project, Facebook enlisted financial backing from a range of companies across various industries, including heavyweights such as Mastercard and PayPal. These corporate backers became the founding members of the Libra Association, each investing a minimum of $10 million. Facebook's plan was to have 100 founding members, including diverse businesses, nonprofit and multilateral organisations, and academic institutions. However, the association faced significant opposition and scrutiny from regulators and lawmakers, particularly around concerns related to privacy, financial stability, and potential conflicts of interest.

In response to these concerns, Facebook has emphasised that it will not have control over the Libra Association and that its role in the governance of the association will be equal to that of its peers. Each member, including Facebook, will have only one vote in the Libra Association council. Additionally, Facebook created a subsidiary company, Calibra, to handle its crypto dealings and protect users' privacy by keeping their Libra payments separate from their Facebook data.

Despite Facebook's assertions, experts and lawmakers have questioned the level of influence Facebook will have over the Libra Association. This is due to the close personal, professional, and financial ties between Facebook and many of the founding members, as well as Facebook's key role in the development and promotion of the Libra project. Additionally, there are concerns about the potential concentration of power and the impact on traditional financial systems if Libra becomes widely adopted, given Facebook's massive global user base.

In conclusion, while Facebook has officially distanced itself from the Libra Association and portrayed itself as just one member among equals, the company's extensive involvement in the project and its connections to other members raise questions about the level of influence it will ultimately have over the governance and direction of the association.

Libra's potential for financial inclusion

Libra is a cryptocurrency announced by Facebook in 2019, which will allow users to send money to each other and make purchases through Facebook and across the internet. One of Libra's key objectives is to reach the 1.7 billion adults who are outside the formal financial system by reducing transaction fees to zero or close to zero.

Libra has the potential to reach between 370 and 800 million unbanked people by providing access to financial services, cheap capital, and the open, instant, and low-cost movement of money. However, there are several challenges that may limit its intended reach, particularly during its first years of operation.

Firstly, while Libra aims to be a global service, it is not available in certain countries, including India, Zimbabwe, Iran, and China, where either cryptocurrencies are banned or Facebook is blocked. These countries are home to over 423 million financially excluded adults, which will significantly impact the scope of Libra's financial inclusion efforts.

Secondly, while Facebook believes in a decentralised and portable digital solution, it appears that all new customers will need to provide a government-issued ID as part of the initial verification process. An additional 350 million adults cite a lack of documentation as their main reason for being unbanked, which will exclude them from using Libra.

Thirdly, access to the internet and smartphones are preconditions to using Libra. While an additional 1.4 billion people are expected to start using mobile internet in the next seven years, the connectivity gap will remain high in many developing countries. This will further reduce the number of financially excluded adults who can be served by Libra.

To achieve its financial inclusion objectives, Libra will need to address these challenges and build a widespread agent network to allow customers to easily access their digital funds. It will also need to establish partnerships with governments to capture the opportunity of cash digitisation programmes and ensure its long-term success.

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