Binance Report: Discuss what the impacts are from both a local and global perspective for Libra Facebook

By Selena On Apr 22, 2020

Facebook retreats on Libra, announcing the coin will now be offered as a series of stablecoins tied to fiat currencies, rather than a single coin. Facebook, which previously faced a global backlash over Libra, still has not been able to shake off criticism and lawmaker scrutiny despite scaling down the project.

Facebook’s initiative, with the Libra cryptocurrency at the center of the project, will have a significant impact on the financial industry and global economies from both a medium and long-term perspective. Backed by a basket of fiat currency-denominated assets in its initial release, Libra represents a first attempt at creating a world currency, on-chain or not, with everyday usage by billions of individuals and institutions across the globe.

A not-for-profit organization backs Libra called the Libra Association

Libra is backed by its reserve (“Libra Reserve”), which comprises of a basket of low-volatility assets structured to keep its value relatively stable.

However, Libra is not designed to be a stablecoin (as currently defined in the cryptocurrency world) with its value not pegged to a single fiat currency. Correctly, Libra will instead initially be backed by a basket of assets denominated across four fiat currencies: USD, GBP, EUR, and JPY.

While these fiat currencies are the first to be included, these are three critical criteria for any asset – fiat or not – that could be eligible in the long-term for inclusion into the Libra Reserve:

Individually uncorrelated: Only fiat currencies with free-float can be eligible; currencies that are tied/soft-pegged to each other would only be redundant in the Libra Reserve.
The Decision-making process should be tied to either public organizations (i.e., central banks) or an asset being freely accessible (e.g., commodities).
Quotability: Assets must be universally recognized across jurisdictions, to have programmatically-quotable value. For instance, Apple shares (AAPL) are only traded with a single quote currency: USD.

Still a number of question marks for Libra Facebook

There are still many questions for Libra. Hopefully, in the future, project developers will be able to find the right direction for this stablecoin project.

The financial institutions that will partake in this consortium
Further details on the staking rewards and costs & rewards of participation
How Facebook may try to utilize this project in tandem with its Internet.org initiative to allow access to the Libra network without internet access
What “Layer-2” dApps or tools may be built or incentivized to be built on Libra
How the network may provide priority settlement to human-generated peer-to-peer transactions over programmatic smart contracts that may congest or flood the network

Despite these uncertainties, Libra has already laid out an extensive and well-thought-out groundwork for blockchain technologies and cryptocurrencies to be adopted by traditional businesses and individuals alike.

The impacts both from a local and global perspective

In the short-term, Libra will be tested with the network being experimented through a testnet. This live sandbox will enable third-party developers and any existing institution to experiment with writing contracts and to get familiar with this new blockchain and its smart-contract interface. Based on the current list of initial participants, one of the most exciting exceptions is the absence of financial institutions.

The non-financial companies are less risk-averse than traditional financial companies and have greater incentive to disrupt the payments industry, with the added ability to execute at a faster, scalable pace. Financial institutions, like banks, are currently testing out blockchain networks with XRP/Ripple services and JPM Coin/Quorum6. For Facebook, Whatsapp, and Instagram users, Libra is likely to work its way into everyday apps, starting with the Calibra wallet interface.

Comparing JPM’s Quorum & Facebook’s Libra | Source: Binance Research

Although the mainnet release is expected in 2020, during this period, no competitor with Libra is likely to emerge as a serious competitor of the same size as the group of participants, which includes most of the largest companies in the fintech industry.

In the past, Facebook has always devoted a significant amount of its resources to providing infrastructure for the world.

Website authentication
Mobile development
Digital payments

Despite this initiative serving a long-term purpose for individuals and consumers worldwide, the Libra as an ecosystem and a cryptocurrency could also offer benefits for significant stakeholders and financial institutions worldwide. Potential applications include:

Raising capital in a single unit: For global companies wanting to raise money through a primary bond issuance, these companies could raise money in a “neutral currency” such as Libra instead of conducting multiple bond issuance in local currencies.
Settlement currency for global affairs: In cross-border affairs, a global (neutral) currency could turn useful to mitigate litigations between two parties across different jurisdictions, with different domestic currencies, etc.

Eventually, in the long-term, this initiative could hinder the growth of end-user payment implementations for blockchains, such as Bitcoin’s Lightning Network, unless Bitcoin were to be included as one of the reserve assets in the Libra basket of financial assets. However, from a store of value, Libra (and other similar initiatives) could lead to new channels to enter the industry and to invest in all cryptocurrencies, and digital assets, and these assets will continue to serve lots of functions which can cohabit with Libra. In short, Libra could further contribute to bridging the crypto assets and the off-chain economy in the long-term.

Conclusion

The magnitude of its success will vary significantly on how Libra can convince regulators and financial institutions to collaborate with the consortium in establishing an agile framework that satisfies the need for decentralized governance while being compliant with existing domestic and international regulations.

Other significant factors include the ability to scale the Libra user base and to build a trusted alliance of financial institutions that maintain custody of the collateral reserves and provide on/off-ramping functions (i.e., fiat currency deposit accounts). Furthermore, the ability of the Libra Foundation to operate independently of Facebook, in a similar manner as the real separation between monetary policy and fiscal policy that occurs in developed countries, will be a crucial factor for gaining the trust of the public.

Whether or not it turns out to be one of the most significant successes in the crypto-asset industry, Libra will likely contribute to bridging the gap between the right to access essential financial services and digitally-connected individuals that have remained unbanked across the globe.

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