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Is Libra systemically important? Not likely!

Written by Dr Michael Maxwell, Senior Director Solutions at HCL

In his testimony before the US Congress on July 11, 2019, Jerome Powell, US Federal Reserve Chairman stated, “The size of Facebook’s network means it (Libra) could be, essentially, immediately systemically important [1].” While Powell did not share the reasoning behind his statement, this analysis is worthwhile for us all to consider.

How big is Libra? Not very big…
How big is Libra, Facebook’s proposed global cryptocurrency? No one truly knows its size, yet some mental math can be easily used to provide perspective into the economics around Libra. The mental math shows a possible Libra market capitalization of $24 billion (estimated). The amount is a tidy sum, but it is not that significant. $24 billion is equal to:

  • 14% of Bitcoin market capitalization on 30-August-2019 or
  • 15% of the amount wagered in the most recent FIFA World Cup [2] or
  • 16% of the fines paid by the top 5 North American banks since the financial crisis began [3]

It follows that we can reject the dire forecasts about Libra breaking the global financial system.

Some mental math is all that is needed
The mental math applied to calculate the $24 billion market capitalization is very simple, yet it provides much insight. Market capitalization is defined as the sum of value stored in Libra wallets across all Facebook users.

At the end of the second quarter of 2019, Facebook reported over 2.4 billion monthly average users scattered across the world. The model applies an average wallet balance per user to each region and totals the result. The details are presented here so it is easy for one to disagree – and even easier to insert alternative assumptions – into this very simple math problem.

Facebook Region Users/month(mil) % of Worldwide Average wallet balance (USD) Total balance (USD mil) Digital Wallet Use Case
US & Canada 244 10.1% $27 $6,588 Used to manage one transaction – a weeks’ worth of a favorite Starbucks beverage (5*$5.38)
Europe 385 15.9% $35 $13,475 Used to share expenses with a friend for a weekly night out
Asia – Pacific 1,003 41.5% $3 $3,009 Used for a wide variety of small transactions on Facebook with the wallet continually replenished using a local QR scheme
Rest of World 782 32.4% $1 $782 Receives remittances from relatives working in other countries. The funds are immediately converted to fiat currency.
2,414 100% $23,854

Is Libra the new global currency? No
In evaluating Libra’s significance, it is helpful to assess Libra against the classic economic definition of money. Is it a means of payment, a unit of account, and a store of value? Libra fails at two of the three.

Libra will be a means of payment with the “low-cost movement of money” as a primary reason for the initiative, and that’s likely how Libra will be used on its first day.

Conversely, it will be hard for Libra to become a common unit of account in any realistic time frame. Should an Uber or a taxi be used? For Libra to be a unit of account, both companies would need to price in Libra so a comparison can be made. How many regions, markets or industries will move to Libra pricing? The only plausible example of Libra as a unit of value is a market that solely resides within Facebook and prices in Libra.

For Libra to become a pervasive store of value, it would require more change than most societies have the need for. Digital wallets as a store of value are not new, and their usage around the world is routine. North America and Europe do not commonly use digital wallets to store value or make payments. Those regions use their bank’s current account to store value and a card scheme attached to that account to make payments.

In Asia Pacific, digital wallets have become pervasive through the growth of Alipay and similar payment services. However, the Libra wallet is not likely to replace these incumbent digital wallets in any realistic timeframe. Since Libra is not a unit of account, why would one give up the convenience of a digital wallet that is measured in the local currency for one that is not?

Can Libra advance financial inclusion? Possibly
What about financial inclusion in the rest of the world? Can Libra help the citizens in countries with unstable currencies and deleterious monetary policies? For example, consider the challenge of storing value in Venezuela. That use case is currently served by Bitcoin, and the Libra value proposition is not likely to unseat Bitcoin’s dominance for that need. The reason is the anonymity of Bitcoin will not likely be replicated in Libra.

The Libra Association has already agreed to subject Libra to KYC, AML and similar regulation as part of obtaining access to developed economies. Consequently, developed country regulators will likely require some form of similar regulation for Libra everywhere around the world. Think

For example, KYC cannot be effective if it is only performed on some wallets. Therefore, to hide value in an unstable country, Bitcoin will be used even with its inherent risk for fluctuation in price because it does do not have the regulatory visibility that a Libra wallet will likely have.

On the other hand, it is possible that other countries might welcome Libra as a low friction and pervasive conduit of foreign direct investment. What if an underdeveloped country used a global “go-fund-me” paradigm for Libra-based investments to enable entrepreneurial activity of all types and sizes. That scenario would achieve the universal access to better, cheaper, and open financial services to which the creators of Libra aspire.

No matter the use case, there is much profit to be made with Libra
Relying upon mental math, this post has reasoned that Libra will not pose a serious risk to the stability of the global financial system as many central banks have indicated. The same mental math suggests that Libra can offer much profit to the participants whether for the betterment of humankind or for pure mercantile ambitions. The opportunity for profit will be in a future post.


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