Facebook’s Libra cryptocurrency: “Surprisingly ingenious”

Libra could make banking more accessible

RaboResearch economist Wim Boonstra calls Facebook’s new virtual currency “smart and well-conceived.” Unlike other cryptocurrencies already in use – like Bitcoin and Ethereum – Libra has the potential to become a stable digital payment solution.

The recent launch of the new Libra cryptocurrency developed by Facebook, PayPal, MasterCard and several other leading tech companies and financial services providers was met with a fair amount of criticism and skepticism. Having taken a closer look at the plans of Facebook & Co., RaboResearch Economist and Special Advisor Wim Boonstra is above all optimistic: “Libra is a surprisingly ingenious coin.”

As convenient as WhatsApp

The new, digital Libra currency will potentially enable one billion people who currently don’t hold a bank account but do have a smartphone to easily and securely save money, make purchases and transfer money to others. In fact, anyone will soon be able to transfer cash with the same ease and convenience as sending a WhatsApp message. Boonstra is excited by the idea, not least because of the ingenuity and sophistication of the Libra concept. He reviewed the plans behind the cryptocurrency for a RaboResearch special report published in June: “This has the potential to become huge.”

“Facebook’s Libra cryptocurrency is surprisingly ingenious”

- Wim Boonstra, RaboResearch

Boonstra starts by walking us through “Cryptocurrency 101”: “Digital currencies – also known as cryptocurrencies – such as Bitcoin often are not backed by anything and have no underlying value. This means they are used as a speculative investment tool, causing the currency to fluctuate sharply in value and making them unsuited as a payment method.” Libra operates on a different level, he says. “The new digital currency is tied to various strong government-issued currencies such as the dollar, the euro and the yen. The value of the Libra is a weighted average of all these currencies, which keeps it relatively stable. All this makes it a pretty smart payment solution.” Boonstra sees similarities with the ECU, the predecessor of the euro whose value was equal to the average of the values of its constituent currencies (i.e., the various European Member States). Another key factor: “Since Libra is backed by high-quality, short-term government bonds, you can always trade in your Libra for, say, euros or dollars.”

Demand-driven

Unlike Bitcoin, Libra coins do not need to be “mined”: more Libra coins will be circulated based on market demand – it’s as simple as that. In purchasing Libra, consumers also fill the “basket” of real-life currencies to which Libra is tied. The reverse occurs when people exchange their Libra for regular assets. Boonstra: “This means the size of the Libra circuit is completely demand-driven, while its value remains relatively stable.” Like Bitcoin, transactions involving Libra are based on blockchain technology, making payments both inexpensive and efficient.

It is when we consider Libra’s potential that it gets really interesting. Libra’s lofty ambition is to provide the 1.7 billion people worldwide without bank accounts with access to the financial system. “That is to say: offering them a solution to save money securely and inexpensively, or make purchases or transfers, without the need for banks to open actual physical branches in those areas.”

“People without bank access could save money securely”

- Wim Boonstra, RaboResearch

Consortium

Libra offers benefits even to those who do hold bank accounts, particularly if the current payment system is sluggish due to long payment processing times or costly due to steep transaction fees. The new virtual currency will also make it easier than ever to pay for purchases from online retailers. While consumers in the Netherlands already have access to user-friendly digital payment tools such as Tikkie and iDeal, many other countries have yet to introduce such convenient payment methods.

Boonstra thinks Facebook and the other members of the Libra consortium will have no trouble marketing the currency to the public. They have the combined resources, global reach and technological savvy required, not to mention a knack for identifying consumer needs.
“The consortium also happens to include several leading financial services providers, including MasterCard and Visa, and fintech companies such as PayPal. Then you’ve got the likes of Uber and Spotify, companies that have proven to be very astute when it comes to tapping into new markets. Vodafone is another valuable partner: they have previous experience in setting up a new mobile payment system in Africa.”

Lack of trust

The one downside is that some of these companies have experienced a lack of trust from consumers and policymakers. In particular, Libra’s driving force, Facebook, has a questionable reputation when it comes to protecting customers’ privacy and monetizing their data – both of which are essential where a digital payment system is concerned. “I’d say it’s perfectly understandable that this has been a sticking point,” Boonstra says. “Creating a system of this kind doesn’t come cheap, and the companies behind Libra have been fuzzy on how they intend to make money from it.” A possible revenue model would be the use of advertising – personalized or otherwise – and selling data that provides insights into our spending habits.

“Companies are fuzzy on how they intend to make money from Libra”

- Wim Boonstra, RaboResearch

Either way, speculation on the impact of Libra at this point remains just that, as the coin is not yet in circulation. However, given its (theoretically) solid basis and the stature of the companies backing the currency, Boonstra believes that, unlike all those previous cryptocurrencies, Libra has the potential to create a revolution in the financial industry.

So how will the Netherlands, and Rabobank, be affected by the new coin? Boonstra: “The Netherlands is blessed with a highly efficient and cost-effective payment system. Dutch banks can process thousands of payment transactions per second; we can use our ATM cards to make purchases in stores – including through contactless payment – and we’ve got the Tikkie system. We’re really ahead of the pack in this country when it comes to payments. All this means Libra is not likely to take the country by storm. That said, Rabobank will be watching very closely how other countries respond to Libra. It could be worth our while to become involved at some point, with a similar initiative or an alternative. But then I’m an economist, and these types of issues are not really in my wheelhouse.”

Libra is scheduled to be launched in the first half of 2020.