Market Analysis: Libra – the hype versus the reality

By 21/08/2019

Market Analysis: Libra – the hype versus the reality

Facebook expects to launch its cryptocurrency, Libra, in 2020. The aim is to create a simple global currency and financial infrastructure that empowers billions of people. The focus for Libra in the near term is on the 1.7 billion of the global population (Facebook estimate) that is ‘under-banked’, which is skewed towards the emerging markets. The idea is the creation of an ‘internet of money’ – where transferring money will be as simple as sending a text message. Libra aims to be the world’s first mainstream cryptocurrency. However, the project is in its very early stages and its evolution remains uncertain.

Despite the hype around Bitcoin and a series of fraudulent coin offerings, the US Congress, Securities and Exchange Commission, Federal Reserve and other regulators have, to date, not set out or created any tools for regulation or oversight of cryptocurrencies. The creation of Libra will, we believe, act as a catalyst to the first steps in creating a framework that will legitimise and democratise the use of blockchain technology.

The Libra Association – a partnership
The Libra Association is an independent, not-for-profit company that will be based in Geneva. Libra looks to be one of the most advanced efforts to create a currency that could be widely used for money transfer, ecommerce and payments.

Libra’s main objectives are:

Providing a means to access financial services and access cheap capital

Creating low cost money movement in a global, open and instant manner

Create a trusted decentralised form of governance

Libra currently has 27 partners  including MasterCard, Visa, and PayPal, plus major merchants such as Spotify, eBay, Vodafone and The partners will each manage a node in the Libra network, which allows the control and processing to be diversified. These partnerships will enable Libra to work, trust, proliferate and monetise (advertising a potential source of earnings) and also offer a means to spend the currency. Each Libra partner is investing a minimum of US$10m to help secure the currency.  An important feature is that Facebook does not have voting control over Libra as the partners will work together on the development of the cryptocurrency.

Calibra – a new Facebook subsidiary
Calibra is the digital wallet for Libra and will be available via FB Messenger, WhatsApp and as a standalone. Crucially, it is set up as an independent, regulated subsidiary to ensure the separation of social and financial data.

Calibra’s goal is to provide financial services that enable people to access and participate in the Libra network, including the underbanked sections of community. By bringing services to a broader community the hope is that this will spur more ecommerce from small business on the platform, driving more advertisement sales.

Libra is not just another Bitcoin
Since inception, cryptocurrencies have been very volatile with mixed success and have lacked a broad network effect of users. With the backing of Facebook – most likely first with Facebook’s WhatsApp and Messenger, the network effect differentiates Libra from Bitcoin and Ethereum in four key areas:

Scale: includes billions of accounts with high transaction volumes, low latency (near real-time access), and an efficient high capacity storage system (instantly scalable on the Facebook platform) addressing a global audience with a blockchain that is open source.

Stability: volatility is one of the main criticisms of Bitcoin. Libra coin is a ‘stablecoin’ backed by a reserve of assets (a basket of bank deposits and treasuries from high quality central banks) designed to give Libra intrinsic value and governed by the independent Libra Association.

Security: for funds, financial and personal data. The protocol will provide a common infrastructure for processing transactions, maintaining accounts and ensuring interoperability across services and organisations. This lowers barriers to entry and switching costs and allows experimentation of new types of business models and financial applications. No single entity has control over the ecosystem.

Flexibility: to power the ecosystem and future innovation in financial services. Libra will use the new ‘Move’ programming language, which is designed to be easier to write code that fulfils the author’s intent and lessens the risk of bugs and security incidents to prevent assets being cloned.

What does this mean for Facebook as an investment?
We do not view Libra as a significant near term game-changer for Facebook. Monetisation, regulation and competition details are still vague. For example, Facebook acquired WhatsApp in 2014 and monetisation is still nascent, so Libra will be a long-term opportunity and not a material near-term earnings driver.

However, we believe that given time, the creation of the Libra Association has the potential to transform Facebook into a broader platform company and create different advertising models for the internet. Being regarded as a platform company would ultimately lead to a higher valuation for Facebook.

Financial regulation and oversight is necessary to take cryptocurrency to the next level. Facebook is bringing stability and some standardisation to cryptocurrencies which will open up more specific usages. Could Libra be to cryptocurrency what AOL was to the internet? Or what IOs (internet operating systems) and apps were to mobile?

To us, the absence of Google and Amazon from Libra’s partners list is notable. It will be interesting to see if the two companies try to launch alternatives or ultimately step into this association. Watch this space!
Alison Porter is a portfolio manager in the UK-based Global Technology Team at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

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