By Benjamin Gu
This report analyzes the Libra project from different business perspectives. The goal of this report is to help our clients better understand the Libra project and the opportunities it brings so as to make the right business decisions.
1.The Advantages and Opportunities of Libra
1.1. Achieve a fair coin minting mechanism
The coin minting mechanism of Bitcoin is a very fair one. Any individual or institution can obtain newly minted bitcoins by providing bookkeeping services. In the current financial society, however, the right to issue money is exclusively owned by governments. Governments obtain a large amount of wealth accumulated in the society through the money they issue. Ordinary individuals and organizations are deprived of the privilege of participating in this process. Libra now offers an opportunity to everyone to participate in the coin minting process and receive seigniorage accordingly.
In Libra’s design, each node on the network needs to commit $10 million of its own capital to participate in the Libra Association. The nodes are going to share the revenues from this network. Since the amount of stablecoins minted with starting members’ initial capital cannot meet the market demand, more capital will be needed to mint more stablecoins. Nodes and licensed brokers can use the DeFi method to attract more individuals to participate in this minting process. Individuals therefore can also receive seigniorage accordingly.
1.2. An opportunity to develop into a commodity currency
Libra stablecoin currently is based on collaterals in the form of fiat currencies and short term government bonds. It is therefore in essence a fiat currency. Even though it is pegged to a basket of fiat currencies, it is inevitably affected by the quality of its pegged currencies. Since the quality of a fiat currency is determined by its issuing government’s ability to manage its monetary policy, this quality is going to fluctuate at different time periods. For example, the United States government’s over expenditure for the Vietnam war led to the devaluation of dollar. However, once Libra is created, it will assume an unique identity of its own. It can gradually adjust its underling collateral and eventually change to a completely commodity-based currency. The values of the underlying commodity and the Libra stablecoin will then be based on market valuation. Establish a global financial market infrastructure.
1.3. Establish a global financial market infrastructure
The blockchain technology that supports the circulation of Bitcoin was later found to be more valuable than Bitcoin itself. The blockchain based infrastructure that supports the circulation of Libra stablecoin will very likely to be more valuable than the stablecoin.
One big opportunity of the Libra project is its supporting infrastructure. This infrastructure not only support the circulation of money, the simplest financial instrument, but also more complicated financial instruments such as stocks and account receivables using smart contracts. In consideration of the 2.7 billion Facebook users and all the users the Libra Association members bring to the network, a couple of financial killer apps on the network can develop this Libra infrastructure into a blockchain network that rivals Ethereum.
All public blockchains aspire to become the second Ethereum. But none of them has come even close to Ethereum. Fragmented markets, lack of killer apps and lack of institution supports are reasons for the current situation（See my article, So Many Public Chains, so Few Apps）.The Libra Association members can bring a large number of users to the Libra blockchain, as well as various financial apps. Such factors will boost the use of the Libra blockchain, making it much more widely adopted than Ethereum.
1.4. The match between the international nature of the social network and that of digital assets
Since the very beginning of crypto assets, it is international. Its birth and circulation are not confined by national borders. The nature of the Facebook social network is also international. Its 2.7 billion users are in most countries in this world. The two thus are very compatible. In the Facebook social network, people are already used to communicating with anyone in the world. It then would be a natural extension for them to exchange value with each other on a blockchain network. This will be very helpful to the Libra project to migrate users to its blockchain network. In this regard, the process will be very similar to WeChat users starting to use WeChat Pay.
1.5. An opportunity to merge the internet with blockchain
The Libra blockchain network supports the circulation of stablecoin and financial instruments. The first financial instrument is evidently the Libra stablecoin. Facebook users then can exchange Libra stablecoins with each other on the Libra blockchain. This migration process is, in essence, a merging process of internet and blockchain, and a merging procession of information exchange with value exchange. This migration process is completely different from the way WeChat users starting to use WeChat Pay. WeChat Pay is still an information exchange based on centralized systems. The Libra network, on the other hand, supports the direct value exchange between users. As more and more users start to use the Libra blockchain, a merge between internet and blockchain will occur(Also see my article, The Migration from Centralized Information Network To Distributed Value Network).
There is a lot of improvements to be done in the usability of the current blockchain. One improvement is to help ordinary users to see and use the valuable information on the blockchain. As more Facebook users starting to use the Libra blockchain to exchange values among themselves, more user-friendly tools will be developed to improve the usability experience. The adoption of blockchain will then be further promoted.
1.6. Provide an entry point for the future digital finance world
The future financial world will be based on digital assets. In this future unified digital financial world, the origination, storage, circulation, trade and usage of assets will be all on one blockchain. A user only needs one entry point to manage and use his digital asset and stablecoins, pay for goods and trade digital securities, and exchange conveniently between his stablecoins and digital assets. If the Libra network is widely adopted, all Facebook related apps , no matter whether it is Facebook app, or Instagram, or WhatsApp, will become such an entry point to this future financial world. In my previous article on Facebook stablecoin strategy (An Analysis on the Facebook Stablecoin Strategy), I suggested that Facebook should continue to strengthen its advantage in the entry point to users, and use stablecoins provided by other vendors instead of developing its own stablecoin to compete with other vendors. Now, the Libra stablecoin will be managed by the Libra Association. Facebook’s company Calibra will become one of 100 Libra members，and not become the competition target from other stablecoin vendors. Facebook will be able to focus on strengthening its advantages in user entry point. This will make it even harder for its social network competitors to compete with it.
1.7. The organization form of Libra is its one of the best advantages.
Facebook did not choose to develop this stablecoin all by itself. It instead chose to set up a not for profit organization in Switzerland, and invited more companies to join this organization. Committed members so far include Visa, Mastercard, PayPal, Stripe, Lyft, Uber, and etc. Different types but relevant companies will help to promote the cause of Libra. The organization governance principles and its starting members demonstrate the open and democratic nature of this organization. This will help to attract more companies to join the association.
This association type of business organization is a major organization form in the business world. Credit unions and the federal reserve systems are based on this organization principle. The Options Clearing Corporation (OCC) that I used to work for is also organized like this. OCC was set up collectively by the five United States options trading exchanges. OCC is a not for profit organization that serves its option exchange owners and clearing members. At the end of every year, any profit on its balance book will be distributed among its owners and clearing members. But, such organizations have been so far confined to a small geographic area or an industry in one jurisdiction. Blockchain technology makes this organization more powerful (See my articles, Why Does USDC Supported by Circle and Coinbase Have the Potential to Develop into a Real Stablecoin? and Fnality, a Milestone in the Evolution of Financial Market Infrastructure). In an union type organization, the governance principles and business rules are programmed into smart contracts that run automatically on the blockchain. If these rules are fair and open, this organization can attract more members to join the organization. Since these rules are executed automatically and any change will have to be approved by majority members, new members thus do not need to worry about any manipulation by existing members. Members from all over the world can join with confidence. More members will make the organization even stronger. Thus every member will benefit from the growth of this organization.
1.8. Feasible marketing strategy
An innovative financial product has to fill a niche area that is not being served well by existing financial institutions. Only in such an area, can this new product survive and prosper. The most representative case in this area is Ali Pay. At the time it was born, there was a strong need for a payment method for e-commerce that was showing strong growth potential at the time. The online financial transactions, however, were too small for the existing clearing network that served financial organizations. Ali Pay appeared to meet this demand. This is why Ali Pay got the chance to grow together with internet commerce.
1.8.1. Targeted geographic area
Libra stablecoin has the best chance to be widely accepted in geographic areas where local fiat currency is weak. Such areas include Germany after the first world war and Venezuela recently. The local market will have a strong demand for a globally stable currency in order to protect their own assets. Of course, if such a stablecoin had existed in these markets, local government would have been constrained in their desire to create more money.
Another possible area is in newly formed countries. In such countries, every government is motivated to issue their own fiat currency. However, because of their small economic output volume and the government’s limited monetary capability, it would be difficult for their newly issued fiat currency to be accepted by the market. In such areas, the local market will pay a premium for Libra stablecoin.
The least feasible area choice for Libra stablecoin is the most developed economies such as the United States. It would be just impossible to use Libra stablecoin to replace credit card use.
1.8.2. Business area
In terms of business area, the best application area for stablecoin is still in digital asset trading. The application area of the earliest stablecoin Tether is in digital asset trading. In the past couple of years, the main application area of most compliant stablecoins in US is still in digital asset trading. When the digital asset trading market goes up, the market demand for stablecoin is even stronger. And this is also demonstrated by the fact that the market is willing to pay a premium for stablecoins. But in this digital asset trading area, Facebook does not have an advantage. This is why it chose the second best application area, cross-border remittance.
The existing remittance process between different fiat currencies is done through a centralized clearing system. The most famous one is SWIFT. The existing clearing process is costly and ineffective. This is a problem that has existed for a long time and need a solution. The appearance of blockchain technology and crypto asset provides an effective technique to solve this problem. The market has already reached a consensus on this. Stablecoins JPM and USC that developed by financial institutions are aimed at solving this currency remittance issue among institutions. The World Wire alliance supported by IBM and Stellar is also aimed at solving this issue among regulated financial institutions in different countries. Therefore, it is just a natural choice for Facebook to choose this area as the first application area of Libra stablecoin.
In the field of cross-border remittances, Facebook does have its incomparable advantages. Facebook social networks have 2.7 billion users worldwide, with the largest number of users in India: 260 million Indian users in total. No other company can match his advantage. The retail cross-border remittance market is more than $600 billion a year and is expected to continue to grow. In addition, according to World Bank data, India received $80 billion in remittances from overseas in 2018, ranking first in the world. It is therefore logical for Facebook to choose India’s retail cross-border remittance business as the first application scenario for its stablecoin.
1.8.3. Technology factor
Facebook chose cross-border remittance services as its first stablecoin business application. This is very adequate to the current capability of the blockchain technology. Cross-border remittance services have low performance requirements for the underlying clearing system, and the current level of blockchain technology can fully meet such business requirements. Compared to the current level of at least one day clearing time in cross-border remittance, the real-time settlement nature of blockchain technology is a much bigger improvement. In comparison, the retail payment service in one domestic market has a much higher performance requirement for the underlying clearing network. The current level of blockchain technology is simply just unable to meet such business requirements.Provide financial service to the unbanked and underbanked groups.
1.9. Provide financial service to the unbanked and underbanked groups
The Libra white paper believes that Libra will provide financial services to more users worldwide. This is a very reasonable expectation.
On top of this underlying clearing network, the application of stablecoin is not limited to payments. Loan business can also be carried out. Since users on the Libra network requires identity authentication and anti-money laundering certification, the real identity of the user of the stablecoin will be recorded on the chain. The lending behavior of these users will also be recorded on the chain. The credit worthiness of a borrowing user is therefore very easy to find. This will solve a very big problem in the current real financial life, that is, to help those unbanked and underbanked user groups. A major factor in preventing this group from obtaining financial services is the high cost of credit checking. The credit level of each borrower can be easily obtained on the Libra blockchain, so a borrower with good credit level can get financial services corresponding to his credit level (see my article How To Use Blockchain To Bring Paradigm Shift To Global Personal Credit Business?).
1.10. Avoid excessive credit from commercial banks
On the Libra network, one of the benefits of using the Libra stablecoin is to take away commercial bank’s ability to create excessive credit. Because every Libra stablecoin is required to have equivalent fiat currency collateral, extra Libra stablecoins cannot be created as credits. When a financial institution in the Libra network uses Libra to lend, it must first have a corresponding amount of stablecoins. In the current banking market, commercial banks actually create more money through lending. The ability of commercial banks to create credit loans at different times is subject to different restrictions. Before the 2008 financial crisis, this restriction was very small. Excessive lending by commercial banks is a major cause of the financial crisis. But in the Libra network, financial institutions do not have the ability to create credit currencies. This then removes a major cause of financial crisis.
2. The Libra Business Model
As a financial market infrastructure service, Libra stablecoin and its underlying clearing network can only earn the most basic service fees. It is ridiculous to think that the stablecoin product itself can generate a high profit. It is even more difficult to expect that the Libra Association can create new stablecoins from thin air every year. It is also impossible to expect that the Libra Association can use leverage to create more credits as commercial banks do. Libra’s revenue stream will be generated by various business applications such as cross-border remittances and e-commerce.
When the stablecoin is circulated between accounts, the underlying network can choose to charge or not to charge for this service. If it decides to charge, it can also select to charge both parties or only the payee. On most existing blockchains, the network circulation fee is basically free. For example, the purpose of the Ethereum gas fee is to prevent attacks, not to generate revenues for the network. The same is also true for the design of transaction fees on the Stellar network that directly supports cross-border remittance services. If Libra chooses to charge, this will reduce its competitiveness relative to other stablecoins. I would assume that Libra network will not charge for circulation. Only when a user redeems Libra into a fiat currency will the node providing the service charges. This revenue will definitely be distributed between the servicing node and the rest of the network, with the most goes to the servicing node. The portion of the revenue allocated to the network must be evenly distributed among the nodes. Based on this calculation, the ROI of each node in this business should be limited.
Of course, other stablecoin-based businesses can generate reasonable revenues. For example, when the market has a strong demand for stable value, the market will pay a high premium for stablecoin. Given the current turmoil in global financial markets, the odds of obtaining this premium are very high.
3. 1. Highly risky project management
If the Libra project fails, project management is definitely one of the main reasons for its failure.
There are usually two ways to manage a project. One is gradual and progressive, the other is big bang type. Gradual project management is carried out step by step, starting from small scale and local. After the gradual completion of the various components and the gradual realization of the phased objectives, the ultimate goal of the project is naturally achieved. The big bang type is to achieve the ultimate goal as the first goal. All tasks of the project are planned and carried out for this purpose. The ultimate goal of the project is achieved in an either-o[C22] r manner. Comparing the two methods, it is clear that the first type is less risky, while the second type is highly risky. The Libra project uses the second method.
The Libra project is a large and complex project. Facebook has a global network of 2.7 billion users. The nature of a stablecoin project is much more complicated than that of a social network web site. It covers aspects such as technology, currency generation mechanism, financial market structure, business model, organizational model, promotion model, communication and coordination with local regulatory bodies, etc. Facebook plans to implement Libra wallet on all of its apps. Excessive project scope is one of the biggest risks in project management. Based on news reports, Facebook has a huge plan for this project. This is why it is working with various organizations, including commercial companies and regulatory agencies. In terms of project management, Facebook is evidently using the big bang approach. This type of project management has its advantages, but the risk is also very high. A large project requires close coordination among all aspects, a small mistake can lead to the overall project delay or a complete failure of the project. The gradual approach is a more secure approach to project management. The development of Facebook itself is actually a gradual project management implementation. It started from one university campus in the United States, then it expanded to other campuses, and finally it expanded globally. If the Facebook social network had launched globally from the beginning, it would definitely fail.
3.2. Resistance from existing interests in various countries
It is reported that Facebook chose India’s cross-border remittance business as an entry point for Libra. Although the choices in the geographic region, business, and technology aspects are reasonable, Facebook’s biggest resistance in this regard may come from the existing forces in Indian society. The Indian social system is a fully democratic system. It is characterized by the fact that any decision needs to be fully agreed upon before it can be implemented. Introducing a new type of digital currency in Indian society is obviously a very important issue. Libra and its underlying clearing network will directly influence India’s financial market infrastructure. Many of the existing interests will be affected. In such a situation, it is impossible to form a consensus in a short period of time. This factor will be one of the biggest risk variables in Facebook’s Libra promotion strategy.
The information in Facebook’s social network is freely circulated. But in a country, if a new currency appears, this is something completely different. The free exchange of values affects a society far more than the free flow of information. Governments must definitely assess its impact on its currency and financial policies. Therefore, the Libra Association needs to communicate with each country’s financial regulatory body. Libra’s free circulation around the world cannot be assumed to be a natural occurrence.
For US dollar that currently dominates global trade, since Libra is pegged to a basket of fiat currencies, not just US dollar, so Libra’s market acceptance will inevitably affect the market position of US dollar. In addition, because the Libra Association is an organization registered in Switzerland which is outside the supervision of the US government, this will also attract the attention of the US government. Finally, given Facebook’s previous user privacy issues, it is expected that the Libra project will have to spend a long time communicating and coordinating with the US government.
3.3. Competition risk
The Libra stablecoin will for sure compete with existing stablecoins in the market. USDC, TUSD, GUSD and PAX are stablecoins of the same type. They are all based on US dollar collateral, pegged to US dollar, and implemented using the ERC20 standard. Given the nature of these stablecoins and the organizations behind them, these stablecoins cannot form a strong competition to Libra.
One of Libra’s competitors is the IBM’s World Wire alliance among banks in different countries. Using the Stellar technology, this alliance supports the remittance business among its members. Stellar technology also supports the issuance of stablecoins on its network. And in fact, banks and third-party companies are issuing stablecoins based on the Stellar technology. But these issuers have far less influence in the global market than Facebook. Moreover, the World Wire’s main position is to support the money transfer business among financial institutions. It provides the underlying clearing and settlement network, not a stablecoin. IBM’s World Wire and Libra therefore are completely different. However, World Wire will be Libra’s strong competitor from the banking community. First of all, banks participating in World Wire can issue stablecoins based on their own national currency on this network. Secondly, the stablecoin circulation cost based on Stellar’s technology is very low. Therefore, the World Wire will be a competitor to Libra in terms of participating national banks, diversity of stablecoins based on fiat currencies and processing costs.
Another type of potential competitor for Libra is stablecoin issued by banking institutions. In this field, the most well known ones are JPM sponsored by JP Morgan and USC supported by UBS and other financial institutions. Although the current position of these two stablecoins is for clearing and settlement among banking institutions, these two stablecoins can be further developed into the retail payment field. This then will form a direct competition to Libra. Among the two stablecoins, USC will be more competitive because it is jointly supported by some famous financial institutions. This organizational model is more in line with the trend of blockchain technology development. The support for JPM is mainly provided by JP Morgan which still operates in the traditional organizational management model. This model of operating alone is hard to beat the mode of joint operations.
One of Libra’s potential competitors should be Jack Dorsey. Jack Dorsey is the CEO of both Twitter and Square. Twitter is a social network that rivals Facebook. The number of monthly users reached 320 million. About 80% of registered Twitter users are overseas. Another very important factor is that Twitter is the favorite social network for encrypted digital currency enthusiasts. Its advantage in this area is definitely ahead of Facebook. Square is a very popular retail payment client in the United States. As of the beginning of 2019, there have been 45 million downloads. And Jack Dorsey has always been a fan of Bitcoin. The Square app has already started support for Bitcoin sales and payments. So Jack should have a better chance than Facebook to promote a digital stablecoin on a global scale (See my article Jack, not Mark,Should Develop a Stablecoin). Among the reported members of Libra’s alliance, the relevant financial institutions are Visa, Mastercard, PayPal and Stripe. But obviously there is no Twitter and Square. For Libra, that is potentially a very strong competitor.
3.4. Lack of uniqueness
The application of Libra lacks a scenario in which there is a strong demand in the market, but the existing banking service does not serve well. It now appears that the best application scenario for Libra is cross-border remittances. The current inefficiency of cross-border remittances is well known, but it is also well known that blockchain and stablecoin is most suitable to solve this problem. IBM and Stellar has already teamed up with a number of banks to establish World Wire to solve this problem. Now Facebook is using the same solution. Facebook’s solution doesn’t have a strong first-mover advantage. In addition, bot USC and JPM can be extended to cross-border remittance for retail customers. It is therefore difficult for Libra to have enough time to build its edge in this field. In contrast, Bitcoin has many years of development time alone. This has helped it to build up a dominate leading position in the crypto asset market.
4. Related Analysis on Libra
4.1. Comparison with Bitcoin
The original intention of Bitcoin was to create an electronic cash. But it actually developed into a digital asset. But the idea and mechanism of Bitcoin inspired all subsequent digital currency projects. More innovations are constantly being derived from the mechanism of Bitcoin. This of course also includes the current Libra project.
In terms of the value attributes of money, Bitcoin is not associated with any other asset. Its value is entirely the result of market consensus. Bitcoin is actually a virtual commodity, not a currency. Libra is based on collateralized fiat currency. It is actually a derivative of the existing fiat currencies. So the essence of Libra is still a credit currency based on fiat currencies.
Since the value of Bitcoin is formed through constant trading in the market, its volatility is inevitable. Bitcoin is therefore not suitable as a value exchange medium. Libra’s price is pegged to a basket of fiat currencies, so its value is much more stable. It is therefore suitable as a value exchange medium.
In terms of governance mechanism, Bitcoin’s governance mechanism is completely pre-set, not controlled by any one or organization. Libra’s governance mechanism is governed by a 100-member association. Although such a democratic decision-making mechanism is still far from Bitcoin’s, it is more reasonable and more fair than some existing governance mechanisms.
As a digital asset, Libra’s biggest advantage over Bitcoin is that it can convert existing fiat currency into a digital form to be used in daily lives. Bitcoin, as a virtual asset, is not associated with any fiat currency and assets, so it is impossible to digitize real-world currencies and assets, and thus cannot be applied in real economic life. But Libra can successfully complete this migration. This will greatly advance the process of digitalization of money.
4.2. Don’t expect too much on Facebook’s users advantage
4.3. For profit or user growth
One of the first choices for Libra’s business model is to decide to pursue profit or user growth. These two goals are mutually exclusive and only one of them can be selected. The usual internet business model is to pursue user growth. But Wall Street’s expectation is clearly short term profit. Amazon’s success has proven the tremendous value of this internet business model. So in this regard, I think Libra is more likely to choose the user growth so that more users will start using Libra. As more users join the network, more value-added financial services can be provided.
4.4. Libra stablecoin cannot replace credit card payment
It was reported earlier that one of Libra’s stablecoin goals was to remove the 2% to 3% service charge that credit card companies charge merchants during credit card payments. If this is the case, I think this logic is unreasonable.
First of all, people who use credit card to pay are already used to this payment method. This type of payment is actually beneficial to payers and not beneficial to the payees. This payment is based on credit. However, the payment method of the stablecoin is the DVP method which is completely different from credit card payment method. People who use credit cards and people who use cash and debit cards are two distinctively different groups. It would be difficult to expect people who use credit cards to switch using stablecoins just for the sake of using stablecoins.
Secondly, if Libra positions itself against credit card use, then this strategy is wrong. The markets where credit card usage is common is also the place where traditional financial power is strongest. Libra is a direct challenge to the existing centralized financial market structure, so it will meet the strongest resistance from existing financial market. Besides, the user community in this region has become accustomed to using existing financial services. When a new type of financial services is introduced, it is difficult for users in this region to change their habits if they do not see a significant benefit. This is also why the QR code payment first rose in China, and only now it is gradually infiltrating into the US market.
Current Libra Association members include Visa and Mastercard credit card companies. I think the credit card company’s view is that Libra and its underlying clearing network will provide a very competitive DVP payment method (cash and bank debit card payment model), not a direct replacement of credit-based payment method. In addition, the application of blockchain technology and digital assets is a clear trend, and its fundamental changes in financial markets are also very obvious. As a financial market infrastructure service provider, credit card companies should grasp the changes that Libra may bring and be at the forefront of this change.
4.5. Lack of a digital security exchange
A digital security exchange is the most important missing part of the Libra overall strategy. Such an exchange is not like current cryptocurrency exchanges such as Coinbase and Kraken, but is similar to the various security token exchanges in the US. Such exchanges can legally register various securities using security tokens and trade them in the secondary market. These products are currently known as security tokens, but I think these products are more likely going to be called digital securities in the future. At present, two companies in US are already applying to SEC to form such digital security exchanges.
In the future financial world, various assets in reality will be digitized and then traded on the secondary market in the form of digital securities. Since the structure of the future securities market is global, the liquidity will increase substantially. Some of the currently smaller security types will also be traded in the secondary market by means of centralized trading. The asset classes will not only be limited to company’s equities and fund shares, but also will include current alternative assets such as real estate. In addition, since the secondary market in the future is a global 7/24 hour trading, the value of various assets will be priced all the time and on a fair global basis. Such a wide variety of assets and fair pricing in the market provide a solid basis for the issuance of commodity currencies based on these assets. This will provide Libra a solid foundation for becoming a commodity currency in the future.
A digital security exchanges also provides a major usage scenario for stablecoins. Due to the global nature of this digital security exchange, stablecoin is therefore more suitable for use in such an exchange than any other fiat currencies. So a digital security exchange and a stablecoin are very complimentary to each other.
Additionally, in the future financial world, the user’s retail payment scenario will be inseparable from the securities trading scenario. Users only need to use one app to perform retail payment and securities trading operations, an exchange stablecoin with variable digital assets at any time. Therefore, an exchange is also an indispensable part of supporting users’ financial activities.
But in the current Libra strategy, a digital security exchange is not a major component. I think this is a missing part of Libra’s strategy (see my article, Facebook Should Develop an ST Exchange, not a Stablecoin ). Of course, it is also possible that Libra is waiting for further development of digital security exchanges. It may already have kept a place for such a future exchange in the current design. Interestingly, Bakkt’s strategy happens to be at the other extreme. Bakkt’s vision is to create a network of digital asset generation, storage and distribution. Bakkt also foresees the convergence of future digital asset trading and payments (see my article, Is Bakkt’s Pursuit of Starbucks Worthy?). But Bakkt’s strategy missed the important role stablecoin plays in this ecosystem (see my article, Stablecoin, the Missing Part of Bakkt’s Strategy). Therefore, Bakkt definitely needs to improve in this area.
4.6. What kind of members does the Libra Association need?
The current members of the Libra Association can be called “All American but no banks”. Many members are leaders in their respective fields. In order to promote this stablecoin globally, what kind of members does this association need in the future?
The most important application scenarios for stablecoin are digital asset trading and cross-border remittances and payments. If Libra currently cannot be widely available for digital asset trading for regulatory reasons, then the second best choice should be cross-border remittances and payments. This is a field where fiat currencies do not work well, but there is a strong market demand. So the most helpful organizations for Libra’s
application promotion should be companies that conduct cross-border transactions and payment services in fields such as travel and cross-border e-commerce. In this respect, Uber and Lyft are very good choices. A user can use the same app and one digital currency to pay for taxi in different countries. This is much more convenient and cost-effective than existing taxi payment processes.
A lack of participation from organizations from other countries is a weak point of the association. But I believe that the Libra Association definitely has a clear understanding of this, and the recruitment of members from other countries is already in the plan. Industry leading companies in related fields are certainly the preferred association members. In the field of third-party payment in the Chinese language and RMB market, WeChat Pay and Alipay are naturally the first choices. I am sure that the Libra Association will invite both of them to join.
It is not surprising that there are no banks among the members of the association. After all, currency and currency-based financial services are the home court of banking institutions. Now that the Libra Association is going to enter this field and fundamentally change the rules of the game, it is for sure will alert the banking institutions. Besides, there are similar solutions available to banking institutions such as the World Wire sponsored by IBM. Banking institutions in different countries definitely need further evaluation before they can make a decision. More importantly, the banking system is strictly regulated and protected by regulatory policies. Without the permission of regulators, banks will be very cautious in participating in such an organization that changes the financial market infrastructure.
4.7. To join or not to join Libra?
For many companies, whether to join the Libra Association is an important strategic decision to make. Given the influence of Facebook and the existing members, as well as the nature of this business, there are already many companies that are strongly motivated to join. But I don’t believe all companies have a clear understanding of this. In this respect, I think at least the following factors should be carefully considered.
First of all, don’t expect that being a member can obtain high profit. Libra provides financial infrastructure service, so it is impossible to charge high fees for this service. For the common interests of all node companies, the underlying infrastructure should not be very expensive, as this will affect the profit margin of their respective businesses. For a node company, its source of profit should be the businesses running on this network. Libra Association also does not have the power to issue new Libra stablecoins based on credit, so it cannot obtain excess returns based on the limited amount of stablecoins. Finally, since this network is a regulated financial infrastructure, it cannot issue new stablecoins out of thin air and distribute them among nodes.
A company does not need to be a node to conduct business on this network. This network serves all companies, so it welcomes any company to do business on it. I think the biggest privilege of becoming a node is to influence the business decisions of this financial infrastructure. And this decision-making power is very important for many companies. If a company only cares about revenue, becoming a node of this network may not be the best choice. The same capital applied in other areas may yield higher returns.
For some of the more powerful companies, it is also a strategic choice to develop a competing product to Libra. Given that the stablecoin is still at a very early stage, and the various risks inherent in the Libra project, the chances of another stablecoin competing in the market are still very large. In terms of product development in any industry, each product category will eventually be monopolized by two products. This will also be true in the field of stablecoin product. However, given the global nature of stablecoin, any company considering developing a competing product must consider whether it can promote this stablecoin globally. Among all the factors that influence the spread of stablecoin, the ability to influence institutions and governments around the world to accept this stablecoin is of paramount importance. If a company does not have the ability to do this, it is best not to get involved in the field of stablecoins.
4.8. Comparison with WeChat Pay
The success of WeChat Pay is well known. I believe this is also a reason to motivate Facebook to start the stablecoin initiative. Facebook’s previous similar product was Facebook Pay. But that product was not well received in the market. The Libra project is another attempt by Facebook to enter into financial services. In comparison with WeChat Pay, Libra is fundamentally different.
In terms of financial service business, WeChat Pay is essentially a payment client running
on top of existing clearing network owned by banks. It provides retail users with a more convenient payment method. It is similar to PayPal, Stripe and Square. The payment medium for WeChat Pay is RMB. The balance in the WeChat Pay account actually corresponds to the user’s RMB deposit in his bank account. When WeChat Pay is used for currency payment other than RMB, the underlying clearing network needs to be integrated with the underlying clearing network where the merchant is located.
Libra is a digital currency whose value is pegged to a basket of fiat currencies. The Libra stablecoin exists independently and is stored at an address on the underlying clearing chain. The Libra stablecoin is not associated with the user’s deposit in a bank. Libra stablecoin’s circulation is on the Libra clearing chain which is independent of clearing networks among banks. So Libra’s circulation is not limited by the network among banks (see my article How Can Squares Bypass the Fiat Currency Clearing Network?). Because this underlying clearing network is global, users with Libra can trade directly between each other anywhere in the world. In addition, because Libra’s underlying clearing network is based on DLT, this clearing method is superior to the existing centralized clearing network which is also used by WeChat Pay.
As noted in Section 3.3 of this study, one of the biggest potentials of the Libra project is its underlying clearing network. Because this clearing network not only supports the circulation of stablecoins, but also supports the circulation of more complex financial products. Therefore, this clearing network is likely to develop into a global financial market infrastructure (FMI). Such an advantage simply cannot be matched by WeChat Pay.
4.5. How to make to a competing product to Libra?
Libra, whether it is successful or not, will be a milestone in the history of digital currency development. Based on the above analysis of Libra, it has a certain chance of success, but it is at a very early stage and there are still some high-risk factors in the project. These risk factors are likely to cause overall delays in product launch and may not even achieve Libra’s goal. In the next few years, a stablecoin that competes with Libra still has a great opportunity to emerge and become a major value exchange medium in the market. Such a stablecoin is likely to have the following characteristics.It is based on collateralized fiat currency in the near future, but will be based on collateralized commodity eventually.
- It is pegged to a basket of fiat currencies in the near future, so as to eliminate the risk of pegging to a single fiat currency.
- The underlying blockchain that supports this stablecoin must be open source.
- There will be a global digital asset exchange. The exchange provides a fair trading and pricing mechanism for digital assets and digital currencies. This digital asset exchange must be a global brokerage alliance (See my related articles, An Exchange That Is One Hundred Times the Size of Nasdaq, The Next Blockchain-based Cross-border Financial Alliance)
- Collateralized digital assets and fiat currencies are managed on chain and off chain in compliant custodial institutions globally.
- The underlying blockchain supports multiple asset custodians. Users choose from them to be their digital assets custodians.
- Given the current imbalance in global economic development, the minimum unit of this digital stablecoin should be suitable for supporting economic activities in financially underdeveloped regions.
- The governance mechanism of stablecoin is of a coalition nature, and it adopts a governance mechanism based on tokens. Alliance node members should be regional compliance brokers that can provide on-ramp and off-ramp services between fiat currency and stablecoins.
- The appeal of the alliance is not based on the influence of existing alliance members, but on the blockchain technology enforced governance and business rules. This will attract brokers from different parts of the world to participate.
- The identity of the user on the chain is provided by the participating node brokers or third-party identity authentication services.