Though only time will tell how much the Libra cryptocurrency disrupts the payments industry's status quo, no one can accuse Facebook (FB) of not taking the development of Libra seriously.
As you likely know by now, Libra, a cryptocurrency that will launch in 2020 and whose value will be tied to a basket of existing currencies, was unveiled to much fanfare on Tuesday morning. Also unveiled: The Libra Association, a non-profit governing organization for the cryptocurrency, and Calibra, a Facebook subsidiary that will provide financial services relying on Libra, starting with a digital wallet service that will be available both through a standalone app and via Facebook Messenger and WhatsApp.
Facebook's shares, which had rallied in recent days as fresh media reports about Libra arrived, fell 0.3% in Tuesday trading amid a 1.4% gain for the Nasdaq. Payments incumbents Visa (V) , Mastercard (MA) and PayPal (PYPL) , all of which are among the 28 firms that are initially part of the Libra Association, were flat to down slightly.
Though some additional details still need to be shared about Libra and its backers, Facebook and the Libra Association did disclose quite a lot about their project. Here are some things that investors and would-be Libra users should keep in mind about the cryptocurrency.
1. Facebook Won't Control Libra
No member of the Libra Association will have more than a 1% voting share. Since both Facebook proper and Calibra will be members, Mark Zuckerberg's firm could technically have a 2% voting share, but no more than that.
And though some media reports had suggested this was a possibility, Facebook says it won't have access to Libra transaction data for purposes such as ad targeting. Transaction data will only be shared for activities such as fraud prevention and anonymized research into Libra usage.
In addition, while users will need to provide a government-issued photo ID to set up a Libra account, they won't need a Facebook account. Also, third parties will be free to create Libra wallet services that compete against Calibra's.
2. Transaction Fees Will Be Very Limited
Kevin Weil, Calibra's VP of product, told The Verge that his firm doesn't plan to charge fees for peer-to-peer (P2P) payments. He adds that "there may be low fees for merchant payments" to cover things such as fraud and chargebacks, but also says these fees are expected to be "an order of magnitude lower" than what existing payments services charge.
Such a fee structure could of course make Libra a competitive threat to the likes of Visa, Mastercard and PayPal, if it's widely adopted. It could also help drive the use of Libra for international money transfers, and also for digital content and advertising microtransactions that can't be cost-effectively handled by credit cards.
At the same time, Libra's supporters could face an uphill battle convincing credit card owners to use it instead of credit cards for traditional online transactions, given that loyalty/rewards programs remain a major incentive for credit card usage. One possible tactic for driving Libra usage: Merchants could provide a small discount on orders paid for with Libra instead of a credit card, on account of its lower transaction fees.
3. Facebook Is Taking a Long-Term Approach to Monetizing Libra
Given that it won't be profiting from Libra usage via purchase data or (for all intents) transaction fees, how does Facebook plan to benefit from supporting the cryptocurrency? Facebook blockchain chief David Marcus has suggested that his firm's ad sales will indirectly benefit if Libra drives additional commerce on Facebook's platforms -- here, Libra's ability to service consumers and small businesses lacking bank accounts or credit cards could help it out, as could its potential support for microtransactions.
Facebook also suggests it will eventually offer Libra-based credit services via Calibra. And one has to assume that the company is also betting that Calibra's wallet service will drive greater usage of Messenger and WhatsApp.
4. Libra Will Rely on Interest Payments and 'Incentives' to Compensate its Initial Backers
According to crypto news site TheBlock, in order to be a "Founding Member" of the Libra Association, a company has to make an initial $10 million investment in Libra tokens, meet certain business and technical criteria and run a "validator node" that will help secure and confirm transactions. In return, the companies will receive incentive payments when they drive Libra sign-ups and usage, as well as (after backing out the Libra Association's operating expenses) interest payments on funds within a Libra Reserve that are invested in "low-risk assets."
"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," the Association writes. It also notes that regular users won't receive interest payments on their Libra funds.
5. On Paper At Least, Libra Has a Strong Set of Supporters
In addition to Facebook, Visa, Mastercard and PayPal, the 28 initial Libra Association members include Booking.com, Spotify, Uber, Lyft, eBay, Stripe, Coinbase, Vodafone and several other well-known tech, telecom and financial services firms (tech giants Apple, Google, Microsoft and Amazon.com are notable no-shows). Ultimately, the Association wants to have 100 "geographically diverse" members act as validator nodes.
However, as Wired points out, not all of these initial 28 backers have committed yet to paying $10 million to act as validator nodes. And whether or not the payments giants contribute $10 million (a small sum for them), one has to wonder to what degree they will support a platform that could disrupt their existing businesses. As I wrote last week, the initial support being given to Libra by these firms could be a case of keeping your friends close and your enemies closer.
6. Libra Could Be Subject to Some Currency Volatility
Libra won't be pegged to the U.S. dollar alone, but also to the euro, pound and yen. The Libra Association says it's structuring the Libra Reserve to minimize volatility, but given its planned makeup, U.S. owners of Libra funds could see the value of their assets drop when the dollar rises against foreign currencies, and vice versa.
7. Libra Isn't Really a Rival to Bitcoin
It isn't hard to see that there are some massive differences between Libra and a truly decentralized cryptocurrency such as bitcoin. Given that it will be pegged to existing currencies and will be governed by an organization that in turn is set to feature many publicly-traded companies as voting members, Libra is unlikely to appeal to many of those who are investing in bitcoin for capital appreciation, who like its status as a store of value that's independent of established currencies (and thus a hedge against currency devaluation) and/or who view it as a means of protecting their assets from potential government seizure.
On the other hand, given its corporate backing, as well as how it stands to be much less volatile than bitcoin and have much lower transaction fees, Libra could be adopted for commercial transactions on a scale that bitcoin has thus far failed to reach.
