Tuesday , 20 August 2019


Facebook’s Libra Cryptocurrency Will Differ From Bitcoin In At Least These 5 Ways

Many people have been comparing the new cryptocurrency with Bitcoin, and thinking that the Libra will have a lot in common with Bitcoin but the Libra will be quite different from Bitcoin in at least five major ways…

1. Permanent Recording & Tracing Of All Transactions

What some people really like about Bitcoin – and what most governments hate – is the anonymous nature of the transactions, and the potential for moving money between people and between nations with complete secrecy. The Libra white paper, however, states that they intend their new cryptocurrency to be the direct opposite of Bitcoin. Libra will be set up for regulatory compliance, and they intend to work together in an innovative manner with regulators to find the best ways to defeat such things as using Libra for money-laundering, or tax avoidance, or any other potential nefarious purposes that involve personal privacy when it comes to money

2. Permissioned Node Verification

For at least the first five years Libra will be based on “permissioned node verification”… i.e., the verifications for each transaction will only be permitted by the insiders who set up the network – Facebook, Mastercard, Visa, PayPal, Stripe, eBay, Lyft, Spotify and Uber…[and, as such,] this central, permissioned network could, in some ways, be called the direct opposite of the decentralized way in which verifications are handled with cryptocurrencies such as Bitcoin.

3. “Stablecoin” Means No Monetary System Hedge Or Independent Investment Status

…Bitcoin…was intended for savers who did not trust the integrity of the U.S. dollar or the euro, and who wanted a place to put their money that was not controlled by central banks or subject to inflation via unlimited monetary creation. Once again, while it shares the name “cryptocurrency”, the Libra is intended to be more or less the direct opposite of Bitcoin in this regard…[As the following] quote from the Libra white paper says:

Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra. That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when traveling…Libra…will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”

The Libra will not be an alternative to the global monetary system, but a creature entirely of the global monetary system. Facebook and the Libra Association are promoting this as being huge advantages to Libras over Bitcoins and other cryptocurrencies…

There will be no point to trading or investing in Libras…Their value will exactly track with the Libra Association’s portfolio holdings of bank deposits and short term government securities in a number of developed nations. Because anyone can enter or exit at the value of the Libra on any day, there is no point in buying or selling at a different value.

4. Complete Tracking Of All Minting & Burning

Libras will not be mined – but “minted” through an entirely different process. A Libra will be created – or minted – when a normal national currency is spent to buy one. That currency (less any transaction fees) is taken by the Libra Association, and used to buy part of the pool of global bank deposits and government securities that form the Libra Reserve so there is more or less a dollar for dollar (or local currency for Libra) exchange. If the Libra Association takes in a trillion dollars worth of Libra, it “mints” the Libras, and uses that money to buy a trillion dollars of global bank deposits and government securities.

Once the system is stable, the intent is undoubtedly that on most days inflows will at least more or less equal outflows, so there is little need to mint. However, when people are cashing in Libras faster than they are buying them, the Libra Association will “burn” the Libras, and sell sufficient Reserves to raise the cash to pay the money. Again, this is 180 degrees different from Bitcoins – and the difference is entirely intentional.

It is also worth noting that the entry and exit of normal currencies in and out of the Libra wallets will be entirely trackable, and this ability is very much built into the design of the system. Money will have to be spent to buy the Libra, the Libra is then entirely trackable throughout its existence (albeit with the partial protection of being held in pseudonymous electronic wallets), and the wallet from which the Libra leaves the system and becomes a normal currency again will also be established. All it takes is the satisfaction of the protocols needed to pierce the pseudonym of the entry and exit wallet owners…

5. Interest Income Goes To Association – Not Consumers

The Libra Association is not a non-profit association. [As the Libra Association paper points out]:

  • Interest on the reserve assets will be used to cover the costs of the system,
  • ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem (read “The Libra Association” here),
  • and support further growth and adoption.
  • The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association.
  • Users of Libra do not receive a return from the reserve.

As an example, let’s assume:

  • that there were a trillion dollars of Libras outstanding once the system were fully established,
  • that it had succeeded in its goal in becoming the global payment system, particularly for the “unbanked”,
  • that the trillion dollars was invested at the U.S. overnight Fed Funds rate at about 2.40% and
  • that the annual income from interest income would be about $24 billion, to be split among the members – none would go to the people whose money that was. From that amount, expenses would need to be deducted, and transaction fees would be added in.

…[Given the above scenario] the Libra Association would in essence become the world’s largest bank depositor – they just wouldn’t share any of the interest. This reinforces the separation of Libras from the more investment-oriented cryptocurrencies. Owning a Libra is like buying a global basket of bank deposits and government securities, except that if you bought them directly, you would get the interest, and with a Libra – you don’t…

In Conclusion

…Bitcoin was to some extent an exercise in monetary idealism that has given rise to its direct opposite, Libra. What Libra could give rise to, how it could be used, or what could replace it – can’t be known with certainty now, but fundamental change does seem to be on the horizon.

Editor’s Note: The above excerpts from the original article by Daniel R. Amerman, CFA, have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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Check out this article from Seeking Alpha which concludes that:

  • “It’s way too early to tell how Libra will be globally adopted, but what’s being presented is very promising.
  • Libra’s multi-institution developed and governed nature greatly increases its chances of being uniformly adopted.
  • A stable, financially backed, and decentralized secure crypto-technology based payment platform is equally appealing because it could open up the world for individuals and businesses everywhere.
    • It would open up underdeveloped markets for global businesses while at the same time open up the world’s products to an online shopper in any country.
  • Whether it’s Libra or an equivalent successor, it’s clear online payment will be heading in this direction in the very near future. Thus, investors should also be positioned as online payment moves away from traditional methods of the past.”