For any companies, small, big or transnational, if you're buying into Facebook's Libra, then you are effectively giving it a blank cheque to effectively print money – specifically through the medium of its own dedicated cryptocurrency / stablecoin.
Upon a cursory look at the company's white paper – its Dedicated Proof of Stake Algorithm (DPoS) includes a range of pre-selected node validators, which consist of its founding members, all of which were only too willing to cough up the needed $10 million in order to take part in this system.
It's for this kind of reason that there is certainly a stake that these big companies have for being validators, Proof of Stake brings with it dividend yields for those that stake with the system. Ultimately, this means that there is a lot of profitability in doing so, not just in Libra's currency, but also in real money as well.
If you're a major business, in this case – if you dive more into the actual white paper – Libra is not as appealing as you'd like to think, and even less appealing to users than the Facebook hype would have you think.
Where do these profits come from for example? They actually originate from interest related to the already existing as backing for Libra's currency, which already exists in order to ensure there is stability where it relates to its value. Any interest is then diverted to any companies or founders that back the governing body behind Libra, while the actual holders of Libra, regardless of the quantity, earn nothing from ownership – this means that any founders basically serve as seignior age within the ecosystem – earning a profit in the same way as centralized banks would.
Ok, hypothetically, if one in ten of the worlds more than 1.7 billion (170 million people) unbanked individuals each held approximately 10 dollars worth of Libra, with half of the population of Facebook‘s existing user-base of 2.b billion users decide to sign up – each of these people putting in 50 dollars as well. Any backers would benefit from interest generated from more than 61 billion dollars in reserves.
Effectively, these same founders have effectively pledged to hold what amounts to a highly dull, yet safe portfolio of anything from global / government bonds and bank accounts, which may see these same founders earn 1 percent at best. Even while this sounds like a pretty mediocre number compared to what investors can make from more ‘sexy' investment avenues. Even with this being a boring number, this is still $600 million worth of interest per year.
If we go a litter further, and detract a further 100 million dollars as a ball-park figure as to what it costs in order to run the Libra system effectively, and let's go on to speculate that these 24 founding organizations were themselves by a further 100 organizations that help to bankoll further expansion of the network. What this would lead to is a further generation of 40 percent additional returns on their initial investment on an annual basis.
Where the whole ‘printing money' aspect of it becomes all the more real is the fact that, even if these interest rates were to go up by one or two percent, then these same returns would be far higher still.
But, hypotheticals are all well and good, but it's easy to get carried away with counting the money, it starts to evaporate in your hands. But even while this can be the case, the potential for Libra is already on full display. China, for example, there has been a veritable explosion in mobile payments as a system of rapid transactions in retail. We see this with the monumental and explosive expansion of companies like Baidu, Ant Financial and Tencent. All of which have helped to drive up mobile payments above 16 percent of GDP back in 2017 – according to research conducted by the Bank for International Settlements.
Even with this surprising surge in mind, this goes without counting payments that take place peer to peer, or between individuals. If, for example, Libra were able to swallow up 16 percent of Visa's transactions, then this one system would be responsible for processing transactions worth more than $1 trillion per year:
if we were to match the kind of speed seen from money like the US' and Libra would need to have a hold of a more than 200 billion dollar reserve, meaning that the same previously mentioned 1 percent interest rate would equate to more than 2 billion dollars in profits for affiliated companies supporting Libra. This effectively translates to nearly one third of Visa's total net income back in 2017. What makes Libra all the more interesting is the fact that among the solutions backers are Visa.
If we were to look at these same interest yields in a less optimistic light, things take a little more of a darker turn, for example. Should these same Facebook user choose to be more conservative in their investments – putting in only around 10 dollars per each one that dove into Libra – these same annual returns would only be 3 percent. And, if we were to go even further – and suggest that only a quarter of Facebook's billions of users choose to adopt the solution, the annual income simply would not go far enough to cover the underlying costs of supporting the system year on year.
Should regulators get involved in the equation too – as Mark Carney, the very outspoken Governor of the Bank of England, has explicitly stated that he would – these same costs would grow even more – with Visa's own costs equaling more than 5 billion dollars per year. these mathematics can get painful pretty fast.
Even if Libra proves successful at obtaining a break even volume of users and transactions, this would mean that Facebook, along with its range of backers may hopefully be able to obtain some kind of profit from the services that Libra provides to users online, or from the various fees that these brokers charge – as we see with services like Facebook's own conversion services known as Calibra.
Even so, if Libra is able to follow the invisible model that various banks throughout history, it would recognize that it can be far in a way more profitable than these same old-school banks have ever been thanks to its digitized setting. Libra is capable of taking more risks with its reserve as well as being capable of minting more new coins without reserve backing of any kind.
While Libra has gone on record stating that it will not be doing either and has an intrinsic voting structure, that it would ultimately require some kind of supermajority in order to change the previously hashed out rules. But we have to bear in mind that EOS set out its own constitution with block validators in a similar structure before repeatedly violating its own rules.
Even with this in mind, Libra's own voters have a rather strong incentive to change previously struck down rules once Libra is officially established and on the road.
Facebook‘s already huge volume of users means that it can help to market Libra to a truly enormous user-base. But while this is the case, this doesn't mean that its success is assured, and still has to undergo the acid test of trust; an especially challenging topic considering Facebooks own history with user data.
One of the other problems is the underlying cost of getting money in and out of the ecosystem through a network of ‘authorized re-sellers,' or verified exchanges. Coinbase, the San Francisco-based coin exchange giant, for example, charges a minimum of 1.49 percent on transactions, along with a further 0.5 percent as a spread on the rate it offers for any kind of money conversions that take place on its exchange between Bitcoin and any other kind of crypto. With this kind of model in mind for Coinbase, there's no reason why the same kind of pricing system couldn't work for Libra.
These underlying costs, overall, make it more of a challenge for individual users to justify the use of Libra as a cross border payments solution between individual users for domestic payments and transfers, even if this is a cheaper system compared to banking. Unless, of course, these same users intend to hold Libra regardless.
Even for these same users to use often inefficient and costly international transfers, these would still result in cheaper transactions in more classic currencies than compared to Libra, if you have to pay 2 percent in crypto exchange fees on the side.
For those living in developing countries, with less than ‘stable' native currencies, there is certainly an appeal to using an asset solution like Libra, especially where banks are few and far between as well. Much akin to the way Bitcoin does, Libra is designed in order to retain a base-line level of value by promising to hold onto only the safest kind of assets out there – in a similar way as a money market fund, meaning that the currency will move relatively parallel with the market surrounding bonds and deposits which are spread across a wide range of currencies.
While this reserve system is now as great as people may make it out to be, or even as Libra's own white paper may make it out to be for investors and users. But much like a conventional money market fund, Libra operates without capital and no deposit insurance of any kind, meaning that any drop in the value of its reserve would mean the value of Libra itself slides. Losses from internal issues such as fraud, mismanagement or default within the reserve means that the onus is on Libra holders, much unlike the kind of system banks have with conventional accounts or bank notes.
What makes this even worse is the fact that the founding companies of Libra have a terrible intrinsic structure for fostering incentive/ Should the reserve be able to run in spite of capital losses but still have a high cash yield, this still means that the losses will be tracked back to Libra losses, while profits would still find their way to the founders.
If you were to purchase an old bond that was issued when their annual yields were higher, which resulted in the price ending up above face value. This would generate a capital loss once it hit maturity offset by coupons well above more recent issues.
Are you among those that place their trust in Facebook and the multinational entities that make up its governing board and founding members?