To Join Or Not To Join Libra

By Benjiaming Gu

Most reviews on Libra has underestimated the power of its organization, the Libra Association. This association, in my opinion, is the best feature of this initiative. It is more important than the other components of this project, and more important than 2.7 billion Facebook users.

The underlying technology

In terms of underlying technology, the Libra project is going to blockchain technology to support the circulation the Libra stablecoin. This technology infrastructure is in essence not that different from other blockchain implementations. Its consensus mechanism adopts Hotstuff which was released by VMWare a few months before. The only innovative part in this project is the Move language. But a new programming language appears every several years. Before this Move, there was Go. I am sure that in a few years, a programming by the name of Fly will probably appear.

The Currency mechanism

The Libra stablecoin will be pegged to a basket of fiat currencies. This makes the Libra stablecoin more stable in comparison with other stablecoins that are pegged to a single fiat currency. This pegging mechanism is similar IMF’s SDR. In terms of collaterals that stablecoin is based upon, Libra is based on collateralized fiat currencies and short-term government bonds. This mechanism is the collateral management mechanism widely used in the current financial market. In terms of monetary policy, the Libra whitepaper states clearly that it will rely upon the central bank’s monetary policies of fiat currencies the Libra stablecoin is pegged to. In terms of the quantity of Libra stablecoin issued, it is completely determined by market demand. In view of all this, the Libra’s currency mechanism is very conventional.

Potential users

In terms of potential Libra users, Facebook undoubtedly has a huge advantage in this regard. It has 2.7 billion users in almost all countries. Facebook can potentially migrate many of them to financial services based on Libra. But this user advantage cannot be overly estimated. Actually, in the crypto asset area, most enthusiasts use Twitter instead of Facebook as their social network. Twitter monthly active users reached 320 million and 80% of them are outside the United States. If financial application based on blockchain and stablecoin needs to be promoted, Twitter should be a better than Facebook.

Organization mechanism

In my opinion, the strongest point of the Libra imitative is its organization. It is reported that when Facebook started talking with potential partners regarding the stablecoin initiative, those potential partners told Facebook clearly that they would not join an organization which will be dominated by Facebook. To Facebook’s credit, it soon changed its strategy. It adopted a not for profit organization to manage this project. This organization is also registered in Switzerland to make it more neutral and accessible. Based on the organization mechanism stated in its whitepaper and the members who have joined so far, it is indeed a very open and democratic organization. Current members come from related fields that can help to promote the use of Libra. And these members are leading and directly competing companies in their respective fields and industries, such as Visa and Mastercard in credit card clearing, PayPal and Stripe in payment apps, Uber and Lyft in hail-ride apps. The fact these companies are all members of Libra Association demonstrates the equal and democratic nature of this organization.

The Libra is pegged to a basket of fiat currencies, not a single fiat currency. This shows the Libra stablecoin aims to be used globally, not just within markets dominated by US dollar. Since the goal of Libra is to be used worldwide, the various organizations involved will be international. The current Libra Association members are mostly American, but I believe this is mainly because of the fact the Libra project is initiated in US. The Libra Association will begin to recruit and accept more international companies. Leading companies in related fields and industries will be actively recruited. In Chinese speaking and RMB market, WeChat Pay and Alipay are the leading payment players. It is just natural that they will be highly sought after by the Libra Association. In this regard, it is really not that different from NBA scouting globally for top basketball players.

To join or not to join?

To many companies, whether to join the Libra Association is an important strategic decision. I am sure that WeChat Pay and Alipay will soon have to decide on this. Given the nature of Libra, the initiative leader Facebook and the current members, many companies are strongly motivated to join. However, I don’t think that they understand clearly the nature of Libra, and the trade offs of whether to become a member. The following factors should be considered before a company can make a decision.

First of all, don’t expect to obtain high profit of becoming a member. Libra provides financial infrastructure service. Because of the nature of this service, it cannot generate a lot of profits. For companies using the Libra service, they will get their profit by providing their respective services. Any cost increase from infrastructure services will inevitably erode their business margins. So even to Libra Association members, their main profit should be from their business services, not from participating in providing Libra infrastructure service.

It should also be made clear that as a regulated entity (I am sure that it will be), it does not have the privilege to use leverage to issue credit based existing Libra stablecoins. Therefore, it cannot obtain profit this way. Also, it also cannot make Libra stablecoins out of thin air and distribute these newly minted coins among its members.

A company does not need to be a member to conduct business on Libra network. Since this network services all companies, so it welcomes all companies to conduct business on this network. The biggest privilege of being member is the right to participate in the decision making of this association. And this right is very important to many companies, more than possible monetary returns. If a company only cares about economic returns, the $10 million membership requirement may be better used somewhere else, where it may generate higher returns.

To some other companies that have more resources, whether to develop a competing product to Libra is also an option. In view of the fact that stablecoin is still at a very early stage and all kinds of risks in the Libra project, there is a good chance that a competing stablecoin may appear. I already analyzed various factors that can contribute to the appearance of such a competing stablecoin in another report. Besides, in any product category, it is eventually dominated by two leading competitors. The stablecoin category should not be an exception. But any company that thinks about developing a stablecoin should think whether it has the capability to promote it globally. Particularly, whether it can persuade companies and governments all over the world to accept using it. If a company is not capably of doing so, then better not to get into it.

Author:Benjamin Gu

Mr. Gu has worked in both US and Chinese capital markets for many years. He has a successful professional and management working experience in US Options Clearing Corporation, i2 Technologies, a Chinese security firm as well as several other financial service companies. He has an excellent track record in applying technology to solve business problems. Mr. Gu received his MBA from University of Texas at Austin, BA from University of Notre Dame, MS graduation from University of Science and Technology of China, and BS from Shandong University.

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