The story of cryptocurrencies is one of astronomical growth, with cryptocurrency being the best-performing asset classes over many years. In just over ten years, according to Coinmarketcap cryptocurrency has developed into an industry with over $200 billions in market capitalisation, and with the current pace of technological innovation, the cryptocurrency industry is only set to grow further.
While cryptocurrencies are getting criticised for being volatile, stablecoins are getting more attention thanks to their ability to store value and avoid volatility. Currently, stablecoins represent the fastest-growing market within the cryptocurrency space, with several major coins being launched such as Tether, TrueUSD, and more. Stablecoins will expand within this growing cryptocurrency market, but they will also capture market shares in the remittance and payment industries, going beyond speculative investors.
What is making the stablecoin developments even more exciting, is that big tech is joining the party. Facebook recently announced their new Libra project, a stablecoin set to launch in 2020. The larger goal of Libra is to transform the global economy. In conjunction with other companies and partners that make up the Libra Association – including payment companies, technology companies, marketplaces, and venture capitalist firms – Libra has the potential to become the future of stablecoins and money. However, there is definitely a reason to question how decentralised Libra truly is and if it can even be considered a cryptocurrency in the first place.
Libra is a stablecoin that will let users transfer money between Facebook’s platforms counting some of the most used internet services out there with Instagram, Facebook Messenger and WhatsApp. To get started, users can exchange their fiat currency (USD, EUR, CNY, etc) for Libra coins, which will be stored on the Calibra wallet. Hence, users buy Libra with fiat currency or at grocery and convenience stores and load Libra onto their digital wallets. A user only needs to verify themselves using a photo ID and they will be able to use Libra to transfer money between Facebook’s applications, as well as pay for products and services offered by other Libra Association members such as Uber or Lyft.
Libra’s value as a stablecoin is maintained by pegging the value of a Libra to a basket of the most popular fiat currencies including the aforementioned as well as the Euro and Yen. This way even if one fiat currency loses its value Libra will remain stable.
Calibra will be as a separate company to Facebook which will be dedicated to the Libra currency and their foreway into other cryptocurrencies. This means that Calibra stores financial data from users that is kept separate from their personal data on Facebook, Instagram and other Facebook services. The separation from Facebook also means that Facebook will not be able to use the data from Libra users for ad targeting or to sell to marketers.
While one of the hallmarks of cryptocurrency is the fact that it is decentralized, Libra is in fact very centralized. Facebook has faced issues with user privacy and data leaks in recent years, so Libra has been under heavy skepticism about its ties to Facebook. As a response, Facebook announced that you don’t need to trust them in order to trust Libra, they are two separate entities. How separate they are remains to be seen, but The Libra Association gives a few hints.
The Libra Association
The Libra Association, headquartered in Switzerland, is a 28 member group of companies including the likes of Visa, PayPal, Andersen Horowitz, Ebay and others to control Libra along with Facebook. While Facebook is the major developer and initiator behind the project, they only have 1 representative and thus 1 vote as part of the Libra council.
Each member of the Libra Association has paid at least $10M for their membership seat and the voting power on the future of Libra on the council. This council also controls the Libra Reserve, where all of the money used to exchange for Libra coins is kept. The Libra Association members will then be able to earn interest from money kept in the reserve after operating and technology costs are accounted for. The interest each member of the association will receive will be proportional to the initial investment each member has made.
Future of Cryptocurrency and Stablecoins
The hype surrounding Libra has been a catalyst, which has seen cryptocurrency markets surge again as Bitcoin rallied to its highest prices in over a year. Other cryptocurrencies have not managed the same surge as bitcoin but that doesn’t mean there hasn’t been renewed interest in the cryptocurrency markets. The attention surrounding Libra has definitely been the cause of this and it’s likely that this will continue even after the launch of Libra in 2020.
While Libra is a stablecoin and won’t have the price fluctuations associated with Bitcoin and other cryptocurrencies, this doesn’t automatically mean that the other cryptocurrencies will suddenly disappear. In fact, Libra is likely to lead to more widespread adoption of cryptocurrency. Given Facebook’s reach and the potential power of Libra, it means that more and more people will begin to learn about cryptocurrencies and the fundamentals behind them.
Many would argue that Libra could also achieve what Bitcoin couldn’t in terms of being a payment method. Transaction speeds are much faster at around 1000 transactions per second, compared to Bitcoin’s 7 transactions per second, meaning the Libra is likely to be better as a payment method compared to other cryptocurrencies. This could see other cryptocurrencies be fully embraced as an alternative store of value, especially if other merchants embrace the Libra.
While Libra is yet to launch, it has the potential to essentially wipe out all other stablecoins currently in existence. There have been dozens of stablecoins launched in the last year but most of the transaction volume has gone to Tether (USDT). However, Tether has had its fair share of controversy as well. The Hong Kong-based company behind Tether and Bitfiniex was accused by the New York Attorney General’s Office of taking from the dollar reserve to cover funds which went missing. This has put into question whether or not USDT really has the USD in the reserve to back up the USDT in circulation. Given the vast user base of Facebook (around 2.4 billion users) and the financial powerhouses associated with Libra, it is unlikely that the Libra Reserve will face similar issues.
The purpose behind a stablecoin is to reduce and even eradicate the volatility associated with other cryptocurrencies such as Bitcoin and Ethereum. Instability is the main reason why cryptocurrencies have not seen mass adoption as a payment method yet. Stablecoins solve that by tying its value to fiat currency. In the case of Tether, for example, it is tied to the USD. However, despite the dominance of Tether or the existence of other stablecoins like TrueUSD and DAI, stablecoins haven’t quite caught on as a means of paying for everyday items by the average user.
Libra by its makeup solves this problem. Payment platforms such as Stripe and PayPal are members of the Libra association. These platforms already allow users to transfer fiat currencies easily. Libra will function more like one of these payment platforms than another cryptocurrency, and will also be able to perform these transactions over the blockchain at a faster pace than most current transactions. The introduction of Libra and its ease of use will make wide scale adoption easier. As more companies potentially joins the Libra Association, this will also increase the use-cases for Libra among association members. Any stablecoin wishing to compete with Libra will have a lot of work on its hands.
Power of Facebook
One issue that Libra faces is that it is not truly decentralised but part of a centralised Libra Association. Given the potential reach of Libra considering the platforms involved, some may wonder if this will make Facebook too powerful. Facebook has already had issues with privacy and due to the potential reach of Libra and the power it will bring, congress is looking to slow Libra in its tracks. Facebook, WhatsApp and Instagram went down for a few hours on July 3rd and caused the world distress. Imagine what could happen if they controlled a worldwide payment system which was integrated into everything we own. This is definitely something which has been raised in the US Congress and by finance ministers around the world, and they are looking to halt Facebook from moving ahead in the currently unregulated cryptocurrency industry.
During the recent hearings regarding the cryptocurrency on July 16 and 17 some of the concerns raised by the United States House of Representatives Financial Services Committee included their Facebook’s issues with privacy and Russian hackers and enforcement of AML laws compiled by Cointelegraph . Their concerns center around the fact that Facebook could hold too much power and information given their issues in the past and that Libra could ultimately threaten the power of the US dollar and other fiat currencies, let alone other stablecoins!
The announcement of Libra has already made waves and had an impact on cryptocurrency markets, but we’re likely to see more twists and turns before it’s officially launched in 2020. Facebook’s new stablecoin has the potential to replace all current stablecoins given the large user base of Facebook and the reach of the other members of the Libra Association. That potential has even seen US lawmakers worry about the impact Libra could have on the US Dollar. One thing is for sure, Libra will leave its mark on the cryptocurrency industry one way or another, and it will be exciting to follow the latest developments, which we here at Blockbasis certainly will!