In June, Facebook announced it was creating a payment system based on blockchain for its billions of users. Understandably the news has attracted a lot of attention including from regulators. Could Libra become a rival of – and possibly even a successor to – Bitcoin as the world’s leading cryptocurrency?
One way to get some perspective on the opportunity is to compare Libra with Bitcoin.
How Bitcoin & Libra are similar
Libra and Bitcoin have many things in common. Both started life as research papers. Both are based on blockchain. (Blockchain is a data structure that has recoverability, privacy and security built-in from the ground up.) Both are open-source projects. Both are intended to give everyone the ability to rapidly, cost-effectively, and anonymously transfer value anywhere in the world. But the differences may be even starker than the commonalities.
How they are different
Despite sharing a similar mathematical foundation, Libra and Bitcoin have some profound differences. One difference is that while no one owns Bitcoin, Libra will be the property of the Libra Association, a Swiss nonprofit created to oversee the cryptocurrency. The association has 28 initial members, including Facebook, Visa, and PayPal, as well as other technology, telecommunication, nonprofit, and venture capital firms.
Another difference between the two is the value of Bitcoin has fluctuated wildly. Libra’s value is expected to be tied to a pool of assets in the Libra Reserve, which will be funded by members of the Libra Association. Although it may turn out differently in practice, the Libra Reserve is intended to stabilize the token’s value.
Even though these are significant differences, the single biggest difference between the two cryptocurrencies may be Bitcoin has been in circulation for over 11 years and is proven while Libra is not yet off the ground.
Although Facebook has announced it will comply with all regulations, it also, perhaps over- optimistically, predicts that Libra will be available to exchange in 2020. The initial reaction of central banks from around the world has ranged from dubious to skeptical.
That means the answer to the question “would now be an excellent time to get in at the ground floor of a new global currency” is no, not yet.
Despite the regulatory challenges Facebook and the Libra Association face, it would be a mistake to discount Libra. 1.7 billion people – 31% of the global adult population – do not have bank accounts. Even in the United States, over 8 million households, consisting of 14 million adults and 6 million children also are without banking. This is a large potential market.
Worldwide, Facebook has over 2.41 billion monthly active users as of June 2019. Facebook has a very cost-effective distribution channel to those billions of people. Libra marks the start of an effort of for large technology companies to create their own commercial cryptocurrencies, but it is sure not to be the last. Among the global tech giants, Facebook has once again taken the initiative.
In our view, the best thing to do today is nothing. While the prospects for Libra may be interesting, the idea of Libra is far from implementation. The idea of a more stable cryptocurrency is appealing but for the majority of individuals, cryptocurrency does not yet have a practical day-to-day use.
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