Kirk Phillips is an entrepreneur, certified public accountant (CPA) and author of “The Ultimate Bitcoin Business Guide: For Entrepreneurs & Business Advisors.” Adam B. Levine is the creator of the long-running Let’s Talk Bitcoin! podcast and founder of Tokenly Inc.
At first glance, Facebook’s Libra cryptocurrency doesn’t make sense.
On its face, it is a non-speculative
token which uses enough decentralization to make it difficult if not
impossible for Facebook to profit off it as the company does from its
social media platform.
But in crypto, there is always
an upside to the people who launch a new protocol, in the event the
protocol succeeds and even in many cases for simply having started
development of the project.
This article deals specifically and
exclusively with that upside, admittedly handwaving aside many other
potential issues with the protocol, to be addressed elsewhere.
Libra users
It’s important to realize that Facebook is actually launching two cryptocurrencies:
the one everyone’s talking about (Libra) and the one available only to
Facebook and its corporate partners (the Libra investment token).
The former will be backed by a basket
of fiat currencies and cash equivalents, which means that for every
dollar of Libra in existence, there will be (in theory) a “dollar” worth
of real-world assets which that token may be exchanged for under
certain conditions.
As a normal user, you’d get $100
worth of Libra by spending $100. Your Libra can (again, in theory) be
used across a variety of platforms or sent to an approved friend.
The Libra Association (a Swiss
not-for-profit) puts your $100 into a variety of low-risk, short-term
investments like U.S. Treasury bills. As of July 1, the one-month T-bill
was yielding 2.125 percent on an annualized basis, so the association
would earn $2 and change on your $100 Libra purchase.
What happens to that money?
Libra investors
Those funds are controlled and spent
by the Libra Association. According to the white paper, funds are used
first to fund the operation of the network with the remainder being
divided among the Libra Investment Token holders according to their
holdings, with policies determined by the association.
The association itself is made up of
holders of the Libra investment token who invested a minimum of $10
million, as well as “special impact groups” selected by the association
to have a vote but who don’t have to buy the investment token.
From the white paper:
“How will the reserve be
invested? Users of Libra do not receive a return from the reserve. The
reserve will be invested in low-risk assets that will yield interest
over time. The revenue from this interest will first go to support the
operating expenses of the association — to fund investments in the
growth and development of the ecosystem, grants to nonprofit and
multilateral organizations, engineering research, etc. Once that is
covered, part of the remaining returns will go to pay dividends to early
investors in the Libra Investment Token for their initial
contributions. Because the assets in the reserve are low risk
and low yield, returns for early investors will only materialize if the
network is successful and the reserve grows substantially in size.” [Emphasis added]
Early investors are primarily large technology and VC companies, for whom $10 million isn’t actually a huge investment.
The big numbers come into play when
you look at what success, big or small, would look like for the
investors, at which point suddenly the project makes sense.
Size of the pie
To size up Libra’s potential market, let’s look at the U.S. money supply as tracked by the Federal Reserve.
In January 2019, M1 (which includes
cash, coins, and money in checking accounts) stood at $3.7 trillion, in a
country of about 329 million people. This compares against M2 at more
than $14 trillion, which is everything in M1 plus savings accounts,
money market funds, certificates of deposit and other bank deposits.
Assume that after a couple of years
Libra has achieved adoption equal to 10 percent of M1. We’ll also assume
that by this time Libra has sold $1 billion worth of the investment
token and that 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 year, 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 former group, in aggregate,
have put in a much smaller amount of money than the latter – which is
why they get such eye-popping yields from a portfolio of low-risk
instruments.
Stealth returns
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, in this scenario, returns $688 million.
And that’s the conservative scenario.
The craziness here becomes even more
apparent looking at our “middle of the road” scenario, where we assume
that Libra would see adoption equivalent to 15 percent of the more
inclusive money supply 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 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 as the stand-in for 10 percent to
15 percent of global 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 Commercial Bank of China (ICBC) takes honors in a recent report
as the largest bank in the world with a whopping $3.47 trillion in
assets. Banks haven’t had a market share challenger to their
centuries-old oligopoly until now.
If Libra grabs a 25 percent market
share of the U.S. M2 money supply, it would be the world’s “No. 1 bank.”
It could achieve the same thing with a much lower percentage than that
of the global money supply.
It’s taken ICBC almost 35 years to
reach global dominance and Libra could hack that timeline and be the
fastest all-time to reach number one.
The derivative opportunity
This is, of course, only the currency
side of the opportunity. A longtime Holy Grail of cryptocurrency, not
to speak of markets generally, has been the creation of a “trustless,”
tokenized, collateralized assets and derivatives marketplace.
In any Libra success scenario, we can
be assured that Libra-collateralized assets will quickly follow. Doing
so opens up the next phase of the speculative opportunity with the
potential for exponential returns far beyond the examples above.
Derivative, collateralized markets could represent hundreds of trillions of dollars of additional capital to the Libra system.
Supra-national digital currency
Libra is in a very real way,
different. To longtime bitcoin users and advocates, it is both a
beautiful and terrifying thing.
Part of cryptocurrency’s promise is
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 largely
by nature 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] look
like a kind of Neo-IMF [International Monetary Fund]. A new model for
an IMF that is based on consumer or retail banking, with reserves built
up by consumers but which will give them the ability to do things very
similar to what the IMF does.
“If I’m a central banker, or if I’m a
government politician or someone who works in the finance ministry of
say, France or India, I would look at this and say ‘Dear God; at some
point [Libra] will be able to come in, not only buy up our bonds, but
then 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 more than 2 billion users on a planet of
around 7.7 billion. This enormous scale comes with incredible power and
lots of scrutiny. While its ability to hold the high ground in years
and decades to come 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 seems like a way to capitalize
on Facebook’s dominance of today’s social media (and its partners’
industries) to kick-start a real, 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 path to becoming the largest and
most profitable “financial institution” (albeit decentralized) in the
world.
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