At first glance, Facebook’s Libra cryptocurrency doesn’t add up .
On its face, it’s a non-speculative token which uses enough decentralization to form it difficult if not impossible for Facebook to profit off it because the company does from its social media platform.
But in crypto, there’s always an upside to the people that launch a replacement protocol, within the event the protocol succeeds and even in many cases for simply having started development of the project.
This article deals specifically and exclusively thereupon upside, admittedly handwaving aside many other potential issues with the protocol, to be addressed elsewhere.
It’s important to understand that Facebook is really launching two cryptocurrencies: the one everyone’s talking about (Libra) and therefore the one available only to Facebook and its corporate partners (the Libra investment token).
The former are going to be backed by a basket of fiat currencies and cash equivalents, which suggests that for each dollar of Libra alive , there’ll be (in theory) a “dollar” worth of real-world assets which that token could also be exchanged for under certain conditions.
As a traditional user, you’d get $100 worth of Libra by spending $100. Your Libra can (again, in theory) be used across a spread of platforms or sent to an approved friend.
The Libra Association (a Swiss not-for-profit) puts your $100 into a spread of low-risk, short-term investments like U.S. Treasury bills. As of Dominion Day , the one-month T-bill was yielding 2.125 percent on an annualized basis, therefore the association would earn $2 and alter on your $100 Libra purchase.
What happens thereto money?
Those funds are controlled and spent by the Libra Association. consistent with the white book , funds are used first to fund the operation of the network with the rest being divided among the Libra Investment Token holders consistent with their holdings, with policies determined by the association.
The association itself is formed from holders of the Libra investment token who invested a minimum of $10 million, also as “special impact groups” selected by the association to possess a vote but who don’t need to buy the investment token.
From the white paper:
“How will the reserve be invested? Users of Libra don’t receive a return from the reserve. The reserve are going to be invested in low-risk assets which will yield interest over time. The revenue from this interest will first attend support the operating expenses of the association — to fund investments within the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that’s covered, a part of the remaining returns will attend pay dividends to early investors within the Libra Investment Token for his or her initial contributions. Because the assets within the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and therefore the reserve grows substantially in size.” [Emphasis added]
Early investors are primarily large technology and VC companies, for whom $10 million isn’t actually an enormous investment.
The big numbers inherit play once you check out what success, big or small, would appear as if for the investors, at which point suddenly the project is sensible .
Size of the pie
To take stock Libra’s potential market, let’s check out the U.S. funds as tracked by the Federal Reserve System .
In January 2019, M1 (which includes cash, coins, and money in checking accounts) stood at $3.7 trillion, during a country of about 329 million people. This compares against M2 at quite $14 trillion, which is everything in M1 plus savings accounts, market funds, certificates of deposit and other bank deposits.
Assume that after a few of years Libra has achieved adoption adequate to 10 percent of M1. We’ll also assume that by this point Libra has sold $1 billion worth of the investment token which it costs $1 billion a year to run the network and manage the fund’s investments. And we’ll assume T-bill rates hold constant.
After those expenses, Libra would be generating almost $7 billion of interest per annum , with a yearly return on investment (ROI) of 688.51 percent.
Remember, it’s the investment token holders who are reaping this return, not the Libra currency holders, who earn no interest on their collateral. the previous group, in aggregate, have put during a much smaller amount of cash than the latter – which is why they get such eye-popping yields from a portfolio of low-risk instruments.
Over ten years, a hypothetical investment of $500 would return dividends of $34,425.35, assuming zero adoption beyond that initial 10 percent of M1. Of course, you can’t just invest $500, since the minimum threshold for investment tokens is $10 million – which, during this scenario, returns $688 million.
And that’s the conservative scenario.
The craziness here becomes even more apparent watching our “middle of the road” scenario, where we assume that Libra would see adoption like 15 percent of the more inclusive funds figure M2.
Yearly returns spike to 4,478 percent with $44.7 billion in net gain to investors. That hypothetical $500 investment returns $223,924.45 over 10 years and therefore the $10 million minimum investment nets $4.4 billion over 10 years – still assuming zero new adoption
Market share takeover
In our “Partial Global Adoption” scenario, we use 25 percent of U.S. M2 because the stand-in for 10 percent to fifteen percent of worldwide M2. Yearly returns surge to 7,530% with net returns of just over $75 billion. Returns for $500 would hypothetically be $376,540, while $10 million buy-in nets investors a cool $7.53 billion.
The Industrial and full service bank of China (ICBC) takes honors during a recent report because the largest bank within the world with a whopping $3.47 trillion in assets. Banks haven’t had a market share challenger to their centuries-old oligopoly so far .
If Libra grabs a 25 percent market share of the U.S. M2 funds , it might be the world’s “No. 1 bank.” It could achieve an equivalent thing with a way lower percentage than that of the worldwide funds .
It’s taken ICBC almost 35 years to succeed in global dominance and Libra could hack that timeline and be the fastest all-time to succeed in favorite .
The derivative opportunity
This is, of course, only the currency side of the chance . A longtime grail of cryptocurrency, to not speak of markets generally, has been the creation of a “trustless,” tokenized, collateralized assets and derivatives marketplace.
In any Libra success scenario, we will be assured that Libra-collateralized assets will quickly follow. Doing so exposes subsequent phase of the speculative opportunity with the potential for exponential returns far beyond the examples above.
Derivative, collateralized markets could represent many trillions of dollars of additional capital to the Libra system.
Supra-national digital currency
Libra is during a very possible way , different. To longtime bitcoin users and advocates, it’s both a gorgeous and terrifying thing.
Part of cryptocurrency’s promise is that the introduction of unstoppable competition in money. While governments have long maintained a tightly held monopoly on the issuance and management of regional and reserve currencies, that reality is essentially naturally of there being no better, pervasively accepted alternatives.
Libra could very quickly change all of that.
On a recent episode of Let’s Talk Bitcoin!, co-host Andreas M. Antonopoulos observed:
“…This makes [Libra] appear as if a sort of Neo-IMF [International Monetary Fund]. a replacement model for an IMF that’s supported consumer or retail banking, with reserves built up by consumers but which can give them the power to try to to things very almost like what the IMF does.
“If I’m a central banker, or if I’m a government politician or someone who works within the finance ministry of say, France or India, i might check out this and say ‘Dear God; at some point [Libra] are going to be ready to are available , not only take over our bonds, on the other hand hold us over a barrel’ and dictate to small countries, until eventually it can dictate to medium countries, then large countries…”
Facebook is, right now, the dominant player in social media with quite 2 billion users on a planet of around 7.7 billion. This enormous scale comes with incredible power and much of scrutiny. While its ability to carry the status in years and decades to return is an open question, few would doubt the depth of the company’s resources today, whether financial, technological or the sheer number of eyeballs served.
Libra looks like how to maximize Facebook’s dominance of today’s social media (and its partners’ industries) to kick-start a true , global network effect around a supra-national digital currency.
If even a fraction of Facebook’s user base converts to Libra, it’s on the trail to becoming the most important and most profitable “financial institution” (albeit decentralized) within the world.