Facebook’s Libra: Potential to Increase Demand for Bitcoin

Face­book has recent­ly announced its planned 2020 launch of a cryp­tocur­ren­cy it calls Libra. This is per­haps one of the sin­gle largest events in cryp­tocur­ren­cy his­to­ry – Face­book has the pow­er and pres­ence to mas­sive­ly dis­rupt a still-grow­ing indus­try. It can sin­gle-hand­ed­ly ush­er in a new wave users and adop­tion, has the resources and tech­ni­cal capa­bil­i­ties to build a tru­ly scal­able and func­tion­al blockchain ecosys­tem, the man­age­ment expe­ri­ence to launch a new and nascent tech­nol­o­gy, and the clout to bring on the nec­es­sary part­ners to enable usage out of the gate.

This arti­cle explores how the future launch of Libra may have a pos­i­tive impact on bit­coin demand. But first, let’s explore a bit about the new cryptocurrency.

Libra belongs to a fam­i­ly of cryp­tocur­ren­cies called “sta­ble coins” and is backed 1:1 against a bas­ket of sta­bi­lized assets – more on that lat­er. It is also fast, though no esti­mates are giv­en for set­tle­ment times, Face­book is impos­ing strict through­put, finan­cial, reli­a­bil­i­ty and secu­ri­ty require­ments for val­ida­tor nodes. Due to its per­mis­sioned blockchain struc­ture (albeit at the expense of sig­nif­i­cant dis­tri­b­u­tion and decen­tral­iza­tion) it is expect­ed to be capa­ble of sup­port­ing 1,000 trans­ac­tion per sec­ond (tps). Com­pare that to 7 tps for Bit­coin and 15tps for Ethereum, and you can quick­ly see just how scal­able Libra is designed to be.

Most cur­rent sta­ble­coins are pegged to a sin­gle fiat asset, such as USD. Libra is not pegged to a sin­gle fiat asset, but instead is backed by a col­lec­tion of low-volatil­i­ty assets, such as bank deposits and short-term gov­ern­ment secu­ri­ties. This is impor­tant, as Libra has the poten­tial to be more sta­ble than many local cur­ren­cies, espe­cial­ly those used in high-con­flict regions, a chal­leng­ing polit­i­cal cli­mate, or with his­tor­i­cal­ly high infla­tion rates such as the Bolivar.

This method in which Libra is backed gives it intrin­sic val­ue, but more impor­tant­ly, the reli­a­bil­i­ty of price sta­bil­i­ty so that it can be used for dai­ly pur­chas­es of goods and ser­vices with­out the risk of sig­nif­i­cant price change. This also means that it has func­tion­al val­ue as both a method of pay­ment, as well a store val­ue for sav­ings. It is also impor­tant to note that there’s like­ly min­i­mal room for spec­u­la­tion on Libra’s future price growth poten­tial – since it is designed to be sta­ble, it is assumed to not appre­ci­ate in val­ue like bit­coin or oth­er spec­u­la­tive cryptocurrencies.

Ini­tial­ly, Libra is acquired by end-users by exchang­ing their local fiat for Libra. This can be per­formed through ATM’s placed in local mar­kets or through Facebook’s Cal­i­bra Wal­let. From there Libra can be trans­ferred to ven­dors or mer­chants, to pay for goods and ser­vices, or to friends and fam­i­ly as a form of remit­tance. Most impor­tant­ly, Libra is designed to sup­port an open ecosys­tem, such that it can be trans­ferred to and sup­port­ed by “a com­pet­i­tive net­work of exchanges,” where users can exchange it for bit­coin and oth­er cryp­tocur­ren­cies. Libra also sup­ports sev­er­al hall­mark ben­e­fits of blockchain tech­nol­o­gy, such as the abil­i­ty to cre­ate wal­lets and send/receive it with­out sup­ply­ing any per­son­al­ly iden­ti­fi­able information.

Libra’s vision is to pro­vide a fast and low-cost method of val­ue trans­fer to the unbanked or to those who tra­di­tion­al­ly pay more for finan­cial ser­vices as a result of hav­ing less mon­ey. In order to do this, it will need to cre­ate a vast net­work of fiat-to-Libra onramps, so that it can con­vert local­ly used fiat in the many coun­tries it plans to oper­ate in, to Libra. At the moment, this process is exclu­sive­ly being han­dled by cryp­tocur­ren­cy exchanges, and the options, while grow­ing, are still lim­it­ed. How­ev­er, as Face­book and the expand­ing col­lec­tive of well-cap­i­tal­ized busi­ness­es in the Libra Asso­ci­a­tion con­tin­ues to push for usage and adop­tion – a new wave of pre­vi­ous­ly untapped con­sumer cap­i­tal is expect­ed to make its way into the cryp­tocur­ren­cy mar­kets. Even if just a frac­tion of Libra hold­ers exchange it for bit­coin or oth­er cryp­tocur­ren­cies, there is sig­nif­i­cant poten­tial for new demand, as Libra is expect­ed to gain adop­tion from an entire­ly new base of users. Think of Libra as a “gate­way cryp­tocur­ren­cy” that will help famil­iar­ize a new pop­u­la­tion of users to dig­i­tal currencies.

Face­book has tak­en on the mon­u­men­tal effort of build­ing an ini­tial con­sor­tium of found­ing mem­bers, includ­ing pay­ments heavy­weights, Stripe, Pay­Pal, Mas­ter­card and Visa. How­ev­er, to date, no sin­gle bank has signed on. Crit­i­cal to Libra’s adop­tion is a vast and diverse fiat-to-Libra onramp. Banks have their part in this, as all cryp­tocur­ren­cies must ini­tial­ly be pur­chased in fiat. While spe­cif­ic asso­ci­a­tion with Libra is not nec­es­sary to accom­plish this, coop­er­a­tion and sup­port by bank­ing enti­ties is absolute­ly critical.

Beyond this, there are mar­kets where banks are few-and-far between or oth­er­wise dif­fi­cult to access by low income house­holds. In these mar­kets, it may be excep­tion­al­ly dif­fi­cult to con­vert an individual’s cash-based wages to the dig­i­tal rep­re­sen­ta­tion of val­ue that is Libra. This is a prob­lem that has exist­ed for decades and is not new and unique to Libra. How­ev­er, it has yet to be solved at scale, and presents a very real chal­lenge. Still, it seems that the Libra Asso­ci­a­tion is the sin­gle most pow­er­ful and influ­en­tial con­sor­tium of com­pa­nies that has been chal­lenged with the task of solv­ing this, and as a result, this author is hopeful.