There is much angst in Europe and the US about Libra and its ability to disturb the global financial system. Is it justified?
In the US, Jerome Powell, US Federal Reserve Chairman stated that Libra could be systemically important on its launch because of the size of Facebook’s network (July, 11, 2019 testimony to Congress). In Europe, Burno Le Maire, head of the French finance ministry went further and stated that Libra threatens the monetary sovereignty of governments (September 12, 2019, speech to OECD conference)
The math for these statements just does not work.
How big is Libra? Not very big.
How big is Libra, Facebook’s proposed global cryptocurrency? No one truly knows its size yet but some simple math can provide perspective into the economics around Libra. The Libra market capitalization of $24 billion (estimate) is a tidy sum but is not that significant. $24 billion is equal to:
- 14% of Bitcoin market capitalization as on 30 August, 2019 or
- 15% of the amount wagered in the most recent FIFA World Cup or
- 16% of the fines paid by the top 5 North American banks since the financial crisis began
So, the dire forecasts about Libra breaking the global financial system can be rejected.
Some simple math is all that is needed
An estimate of Libra’s market capitalization can provide some insight. Market capitalization is defined as the sum of value stored in Libra wallets across all Facebook users.
At the end of the second quarter of 2019, Facebook reported over 2.4 billion monthly average users scattered around the world. The model applies an average wallet balance per user to each region and adds up the result. The details are presented here so that it is easy for one to disagree and even easier to insert alternative assumptions into this very simple math problem.
|Facebook Region||Facebook Monthly Active Users (million)||Percent of Worldwide Total||Average Libra Wallet Balance (US$)||Libra Wallet Balance (US$ million)||Digital Wallet Use Case|
|US and Canada||244||10.1%||$27||$6,588||Used to manage one transaction type – a week’s worth of a favorite Starbucks beverage (5*$5.38)|
|Europe||385||15.9%||$35||$13,475||Used to share expenses with a friend for the 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 being continually replenished using a local QR scheme|
|Rest of the World||782||32.4%||$1||$782||Receives remittances from relatives working in other countries. The funds are immediately converted into fiat currency.|
| ||2,414||100.0%|| ||$23,854|| |
Is Libra the new global currency? No.
Le Maire also attributed Libra’s threat to its potential to become a global currency. How does Libra compare to the classic economic definition of money – 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 is how Libra will likely be used on its first day.
Conversely, it will practically be hard for Libra to become a common unit of account where a region, market or industry uses Libra pricing as the default. I am considering taking a taxi versus Uber and can find both alternatives priced in Libra. The only plausible example of Libra as a unit of value is a market that solely resides within Facebook.
For Libra to become a pervasive store of value, more change would be required than most consumers would be willing to make. Digital wallets, like the ones Libra will use, are not new and their usage as a store of value 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 the incumbent digital wallet 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?
The other wallet use case is for citizens in countries with unstable currencies and deleterious monetary policies. That use case is currently served by Bitcoin and the Libra value proposition is not likely to affect Bitcoin’s dominance for that need. The reason is that the anonymity of Bitcoin will, mostly likely, not 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 the developed economies. Consequently, the developed country regulators will mostly require some form of similar regulation for Libra everywhere around the world. Think fatf-gafi.org. Therefore, to hide value in an unstable country, Bitcoin will maintain its advantage even with its inherent risk for price fluctuation because it does not have the regulatory visibility that a Libra wallet will likely have.
Can Libra advance financial inclusion? Possibly.
According to its founders, the promise of Libra is that many more people will have access to financial services and cheap capital. It is possible that some countries could 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 would lead to better and cheaper financial services – something that the creators of Libra are aspiring for.
No matter the use case, there is much profit to be made with Libra.
Through simple 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 simple 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 covered in the next post.