Facebook's new cryptocurrency: Virgo thinks Libra could be a game changer

August 2, 2019 James Virgo

           

Facebook introduced the world to its new “stablecoin" cryptocurrency called Libra. It's a fascinating development that has a lot of people intrigued—and many others up in arms.

It might end up going nowhere; regulators and central banks aren't terribly impressed by Facebook's efforts to create this new global currency. That said, if the proposition does make it through development and regulatory hurdles to become a real thing, it could dramatically change how people pay for things in the future.

Real backing is the difference

Unlike other cryptos which have no collateral backing them, Facebook, through the newly created Libra Association, says its new currency will be fully backed by a reserve of real assets including bank deposits and short-term government securities from stable central banks. In comparison, Bitcoin value is derived from the demand (and speculation) for the set number of Bitcoins available.

The Association says these assets are what differentiate Libra from other existing cryptos. Interest earned on the reserve assets, they add, will be used to cover the costs of the system, ensure low transaction fees and pay dividends to investors who purchased investment tokens to jump start the ecosystem.

Investment tokens are available to founding members of the Association who operate the network. A minimum $10-million investment is required to become a founding member. Each $10-million investment entitles the investor to one vote on the Libra Association's council.

Big name backers of Libra

The Libra Association was created to promote, develop and expand the network, to manage the reserve assets, and perhaps most important for Libra's success, to help Facebook (with its history of data control and privacy issues) distance itself from its creation.

Facebook and the Association hope to have approximately 100 founding members in place by the target launch in the first half of 2020. Those already on board include Visa and Mastercard, technology and marketplace companies like Uber, telecommunication firms like the Vodafone Group, blockchain companies, venture capitalists, academics and nonprofit organizations like Kiva and Women's World Banking.

Skeptics, central banks and regulators

Privacy issues aside, what makes Libra development worrisome for many is that Facebook is trying to create a new fiat currency which isn't regulated or managed by any central bank. Governments would not have the opportunity to manage inflation or set monetary policy concerning the Libra because the global currency is or would be nation-less (The Libra Association is based in Switzerland however).

If Libra were to take off, it could also cut into bank reserves, creating a host of other problems. Although it claims it will work with regulators (and there are a lot of them—so many that it seems impractical that developers would be able to meet every demand), Facebook is clearly pushing the envelope.

There are two approaches they could take. They could follow Uber's lead, simply enter the market and figure out the regulatory aspects afterwards, but what we've heard is that Facebook is willing to work with regulators to make sure they're onside before Libra is launched. Time will tell.

Libra's uses in the future?

Although it may be difficult to envision widespread use of Libra for day-to-day transactions, the same could be said about credit cards in the 1970s. With over 900,000 small businesses operating on Facebook's platform and over 2-billion individual users worldwide, there is a lot of potential for Facebook to bring cryptocurrencies to the masses.

The coins are not yet in circulation and there are deep trust issues surrounding its launch, but familiarity with the would-be currency is already high—Libra is already second only to Bitcoin in recognition.

For users, despite the fact that the new currency is asset-backed, and thus able to hold its value more consistently compared to other cryptos, Libra balances aren't insured the way regular bank balances are. Libra does not pay interest on your holdings and users do not receive a return from the reserve. As a payment method (low fees!), Libra is an interesting tool, but as it stands right now, it's not an investment vehicle or a place you'd want to park large sums of money.

Disruptive innovations create opportunities and risks

There are many formidable hoops to jump through before Libra goes live. Among other things, governments and policy makers could crack down on the development to the point that it won't work, but Facebook is a formidable proponent.

Introducing Libra is a fascinating development for the company. Whether the launch is successful or not, it shines the spotlight on a company that is trying to leverage its existing global platform to create another potential source of significant revenue. The company has already developed Calibra, a digital wallet designed to work with Libra.

If Libra is successful, there will be other winners and losers. The portfolio of the future may not look like today's portfolio at all. There will be wide-spread implications for Facebook, for the payments industry and banking in general among others.

We believe that disruptive innovations like Libra are a good argument and opportunity for active portfolio managers. Some companies which exist today may build off of the network and benefit while others will become obsolete.

This is a common theme in investing. If you were an investor in the late 1990's, there were great opportunities to invest in a burgeoning internet through companies like Amazon. On the flip side, you might've found yourself stuck holding the now-defunct Blockbuster Entertainment (once considered a core portfolio holding).

Just like policy makers, investment managers will be following Facebook and Libra developments closely and making decisions accordingly.

Although Facebook, Libra and other cryptos are not part of our active portfolios at this time (Facebook is a holding in the MDPIM S&P 500 Index Pool), we will continue to monitor developments to ensure that we are mitigating any related risks and making the most of available opportunities. For more information, please contact your MD Advisor.

About the Author

James Virgo, CFA, CFP, MBA, is Vice President and National Lead with MD Private Investment Counsel at MD Financial Management. He oversees the practice of investment counselling and delivery of investment advice across MD PIC.

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