From our Obsession
Future of Finance
New technology is upending everything in finance.
When Facebook announced its new digital currency, Libra, on June 18, the company changed the conversation about the viability of cryptocurrencies. It immediately surmounted one of the most important obstacles: users. With 2.7 billion customers across its platform (that includes Instagram, Messenger, and WhatsApp), Facebook has a user base like no other. Unlike most crypto projects, Facebook doesn’t have to convince people to sign up: It has them, and Libra will be integrated into apps that are already a part of their daily lives.
Facebook has also benefitted from a decade of bitcoin’s trial and error. Researchers like Christian Catalini—head economist for Facebook’s Calibra wallet and founder of MIT’s cryptoeconomics lab—understand potential attack vectors. Facebook also realizes the importance of building a clean user interface (oddly, something that remains a struggle for many crypto-native organizations).
Though we’re six months-plus from Libra’s launch, Facebook has changed the outlook for many existing crypto industry players. Some could be instrumental to Libra’s future, while others may be rendered obsolete. Here’s a closer look at the winners and losers:
To be successful, Libra will need banking partners (to custody reserves) and crypto partners (to assist with currency conversion). While Facebook hasn’t announced the former, it included a few crypto-focused companies in its debut of the Libra Association, the Swiss nonprofit that will manage the Libra network and reserves. Coinbase is the most recognizable crypto name on the list. (Others include Anchorage, Bison Trails, and Xapo.) Coinbase has been around since 2012 and is successful in its own right, but after Facebook’s entry into the space, the company could grow substantially from the $8 billion valuation it received in October. Another prominent exchange, Binance, is reportedly in talks with Facebook about about listing Libra.
Since Libra’s unveiling, bitcoin has zipped from $9,000 to $12,000. While other factors could be at play, including potential market manipulation, bitcoin benefits from Facebook’s legitimization of crypto. The original cryptocurrency isn’t backed by cash and government bonds like Libra is, but its name recognition is second to none. As Jack Dorsey told Quartz, bitcoin “has an amazing brand.” Libra likely spurs additional interest in bitcoin, both from speculators who hope to profit and ideologues who hope to avoid Facebook-led money.
Blockchain-as-a-Service (BaaS) companies
In April, two months before Facebook introduced Libra, Amazon made its blockchain service available to general customers. AT&T, Nestle, and Accenture are experimenting with the Amazon Managed Blockchain. Then, in May, Salesforce announced a “low-code” blockchain platform, meaning that customers might use graphical interfaces rather than traditional programming languages to create applications. Although BaaS companies are distinct from a crypto initiative, they’ll likely win customers because of the renewed attention on blockchain. The feeling is, if Facebook is doing it, there’s got to be something there.
In creating Libra, Facebook is facing down some of the biggest cryptocurrency challenges, including price volatility and network speed. But many projects have attempted to create a pegged unit, or “stablecoin,” like the Libra before. Some have run into regulatory hurdles (i.e., US securities law), as did Basis, which shut down and returned funds to investors. Others, like Dai—an algorithmically-controlled unit—have struggled to maintain their core proposition, stability. Only 30% of stablecoin projects are live, says BlockData. The majority have closed, or remain in development. If Libra is tied to the US dollar, as the project’s backers expect, it could make obsolete the few stablecoin companies that have launched. Presumably, Libra would be more widely accepted/available, more liquid, and possibly more secure. Those are a lot of caveats, but no stablecoin project has really captured the public yet. It’s Libra’s market to lose.
Note: Unregulated stablecoin projects are an exception, as they may remain useful to traders who want to swap less popular cryptocurrencies on exchanges with lax listing standards.
Blockchain developers have been impressed by Libra’s new programming language, Move. It might be considered a competitor to Solidity, the language on Ethereum, the second largest crypto network behind bitcoin, as measured by market cap. Facebook-led development might not be the vision the ethereum community wants, but it could easily outstrip ethereum, in large part because of superior management. Companies have actual deadlines—people have to deliver or else they’ll get fired. With its open-source community, ethereum doesn’t really work that way, and it’s worse for it.
Ripple & remittance services
XRP is the third largest cryptocurrency, behind bitcoin and ethereum. Ripple, the company that created XRP—but claims it didn’t (because again, US securities law)—has long dreamed of using the digital unit for international transfers. Ripple CEO Brad Garlinghouse describes XRP as a “bridge currency,” which supposedly helps pre-fund international transfers. However, when pressed on XRP’s minimal liquidity in important trading pairs, like the Mexican Peso, he hasn’t given a satisfactory answer for why Ripple works—or what it could do to grow the market. Indeed, since he spoke to Quartz in November, the XRP/Mexican Peso pair has actually lost volume. Its daily trading is $490,000 compared to $600,000 in November.
Remittance providers, like MoneyGram (which Ripple invested in) and Western Union, could also lose market share to Libra. It might be considered a long shot, but if populations in developing countries begin using Libra rather than their local currencies, then demand for currency conversions and transfers could diminish. A new global currency is an unusual business risk, but one that they’d be wise to recognize.
Winners: Privacy coins, blockchain forensics companies, attorneys
Losers: Central banks
Indeterminate: Payment networks