Due to a lot of questions coming from my friends about potential investment opportunities, I decided to write a separate article for those who still want to get more details on potential upsides of Facebook’s Libra project.

In my previous article on the workings and structure of Libra and Calibra, I mentioned that Facebook will back Libra with a basket of fiat assets, and it would set up the governance of the blockchain in such a way that would limit Facebook’s autonomy over the project.

For those familiar with the development culture of the crypto space, it is totally normal for developers and early investors to set up one or more financial perks exclusively for themselves. The same is true for the Libra coin, therefore, this piece will analyze these perks, and how it affects the average user.

First, let us do a recap on Libra and its functionalities with a breakdown of the Libra Coin:

2 Libra Tokens

One important thing to note is that contrary to what the media had fixated on, Facebook is planning on introducing not just one, but two tokens (*note: I still prefer not to call them a cryptocurrency in order not to confuse readers).

  • Libra token (in simple words user token) — the one publicized as the ultimate payment solution.
  • Libra investment token (in simple words investor token) available to its corporate partners

Reminder

  • Libra Reserve is a basket of currencies, government securities, and bonds, which helps maintain the price stability of Libra tokens
  • The reserve is funded by Libra users and investors.
  • Libra investors also receive Libra Investment Tokens, which entitles them to dividends paid out by the Libra Reserve

Details

  • Libra Token will be backed by a basket of fiat currencies and cash equivalents, which means that for every dollar of Libra in existence, there will be (in theory) a “dollar” worth of real-world assets, which you can exchange it for..
  • Libra token shares some similarities to a stable coin. However, unlike a stable coin, it is pegged to a basket of fiat currencies. Therefore, for every $1,000 you own, there is (in theory) a $1,000 worth of real-world assets you can exchange it for.
  • You will access $1,000 worth of Libra by paying $1,000. In addition, you can access Libra by accepting it as a form of payment or receiving it from an approved friend. You could also transfer it to approved users.
  • The Libra Association, which will oversee the operations of the Libra network, would put the $1,000 you have gotten from any of the means I mentioned above into short-term and low-risk investments similar to the U.S. Treasury Bills. And if I am going with the 2.125% annual yield of the one-month T-bill as of July, Libra Association will earn $20 on the $1,000 worth of Libra token you hold.

What happens to that money?

Libra Reserve And The Stakeholders

If you are thinking that you, the user, would have a stake in the returns from these low-risk investments, you thought wrong. According to the information I was able to gather from the whitepaper, and a breakdown by Kirk Phillips and Adam Levine, these earnings are for the Libra Association to spend. As such, a percentage will go into funding the operations of the network while the remainder will be shared among investors with Libra investment token holders.

The sharing formula is simple; the association will share the fund according to the holdings of each investor. Recall that the Libra Association is a consortium of an exclusive group of companies that had paid $10 million (and they are holders of Libra investment token) to have a say in the running of the network.

In addition to this, the association also comprises of selected “nonprofit and multilateral organizations, and Academic institutions” who would have inputs in the operations of Libra but will not necessarily need to own an investment token. These organizations include Women’s World Banking, Kiva, Mercy Corps, and Creative Destruction Labs.

Only 1 Question: Where Did A Non-Profit Organization Get $10 M To Invest In Libra?!

From the section of the whitepaper that highlighted vital information about Libra’s reserve:

“How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. 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 early investors in this context are those multinationals and VC companies that forked out $10 million dollars to access the Libra investment token. Note here that $10 million is nothing to these companies compared to the amount they normally pour into investments that are as promising as Facebook’s Libra. As a matter of fact, I am certain that these companies would have paid as much as $100 million to get a seat at the table, considering the financial implications of investments designed to back the value of Libra as well as the mode of sharing the returns from these investments.

Potential Conflict Of Interest

Furthermore, early investors, in addition to the financial stake that their $10 million investment avails them, have the responsibility of validating the transactions of the network. These companies, 28 in total, are what Libra’s whitepaper refers to as the founding members. Each validator, as well as Facebook, would have an individual representing its interest sitting on Libra association’s council, and this individual will carry out its responsibilities on its behalf.

Having said that, it is clear that Facebook, and it’s business allies, have created a potential cash cow that could solidify their position as the biggest beneficiaries of what could turn out to be the first centralized global currency. Undoubtedly, these entities will do just about enough, and even more, to get people to hold Libra, and they will push for government policies that will favor the consortium and Libra’s market.

Market Opportunity

To analyze Libra’s potential market, I will take you through the potential returns Libra could generate for early investors by shadowing the Federal Reserve statistical measure of the U.S. money supply earlier this year.

According to the Federal Reserve’s reported money supply figures of January, M1 (the money supply that includes coins, cash, and bills in circulation) stood at $3.7 trillion. And M2 (which contains everything in M1 plus savings accounts, time deposit, monetary market funds, and other bank deposits) stood at $14 trillion.

Now, let’s assume that Libra managed to command 10% of January’s M1 in the next couple of years. If by this time the network had sold $1 billion worth of Libra’s investment token, and the association manages the network and its investments with $1 billion, then the network would generate 688.51% ROI yearly, which is roughly $7 billion.

Note that this assumption would only hold if the T-bills rate mentioned earlier holds.

Stealth Returns

If these projected figures for future Libra market is sustainable for the next decade, an early investor would have realized returns of $68,850.70 on every $1,000 he had invested in the project. And since each validator is expected to invest $10 million, as such, investors would expect that their investment would have returned $689 million in the next ten years. Funny enough, this scenario I have painted is nothing near the wild numbers that many expect Libra to yield in the nearest future.

Owing to the promising nature of this project, I will assume that Libra would be able to boast of 15% of the $14 trillion of January’s M2. If this is the case, then for every $1,000 invested in Libra, each validator is expecting a return of $447,848.9 over 10 years. Likewise, going by this calculation, a $10 million investment would generate nothing less than $4.4 billion in ten years.

The Derivative Opportunity

However, note that the assumption and figures projected using current money supply figures only deals with the currency aspect of Libra’s market. When it comes to digital assets, it is impossible not to mention the market contributions of derivatives marketplace and collateralized assets.

Assuming Libra is able to capitalize on the vast Facebook ecosystem as a launchpad to success, it is certain that Libra-collateralized assets will come to the fore. This assertion and the inevitability of secondary markets would drive speculative opportunities that would, in turn, generate returns way beyond the returns on the Libra currency projected above.

Although the whitepaper explains that the token is designed to sidestep the sort of volatility associated with Bitcoin, the emergence of secondary markets, tied to Libra, would certainly test the viability of such a claim.

Exchange-Traded Fund (ETF) Similarity

Although Facebook does not plan on trading libra on regulated exchanges, a broader look at the design that Facebook adopted suggests that Libra very much functions as an Exchange Traded Fund (ETF) since it is an exchangeable asset. Similar to what Dave Weisberger, CEO of Coinroutes, noted, the reliance on Authorized Participants (APs) and arbitrageurs to ensure that trades conform to the underlying value of the token should arouse the interest of the SEC on the workings of the network.

Securities and Exchange Commission (SEC) has already started examining whether Facebook’s cryptocurrency is a security.

As we know from the latest news, not only SEC:

  • Federal Reserve Chairman Jerome Powell discusses the central bank’s concerns about Libra
  • Treasury Sec. Steve Mnuchin on Facebook’s Libra

Neo International Monetary Fund

Away from the ETF argument, Libra also bears apparent similarities to the International Monetary Fund’s (IMF) Special Drawing Right (SDR). Like Libra, the SDR has a basket of sovereign currencies backing its value, and it is exclusive to the IMF and its member states. The only difference, however, is that Libra is a private financial instrument that an average individual will have access to. More importantly, the availability of Libra to the common man would establish Libra Association as an entity that can rival the sovereignty of central banks. By reducing the percentage that fiat currencies command in their basket, the Libra Association could devalue currencies in a blink of an eye.

Owing to the probable implications of such monetary power, I expect that central banks would start scampering into introducing initiatives to preserve their control over the money supply. True to this notion, the IMF has predicted that central banks would start issuing Central Bank Digital Currency (CBDC) in the nearest future. In addition, lawmakers in the U.S. are fighting tooth and nail to have Facebook release more information regarding the intricate functionalities of Libra.

As such, it is clear that the argument that Libra could derail Bitcoin is baseless, as the information pieced together so far suggests that central banks are the ones that could be at the receiving end.

Andreas M. Antonopoulos stated in a recent episode of Let’s Talk Bitcoin!:

“…This makes [Libra] look like a kind of Neo-IMF [International Monetary Fund]. A new model for an IMF that is based on consumer or retail banking, with reserves built up by consumers but which will give them the ability to do things very similar to what the IMF does.

“If I’m a central banker, or if I’m a government politician or someone who works in the finance ministry of say, France or India, I would look at this and say ‘Dear God; at some point [Libra] will be able to come in, not only buy up our bonds, but then hold us over a barrel’ and dictate to small countries, until eventually it can dictate to medium countries, then large countries…”

Conclusion

The seemingly questionable altruistic image that Facebook has tried to establish as the motivation for the implementation of the Libra Association, as well as the enormous scale of this project, will continue to subject Libra to scrutiny.

It is left for you and me to pay attention to the technologically gratifying and yet terrifying aspect of the Libra project as Facebook’s latest initiative is simply replacing the villains of the traditional banking system with a new one. Here, it is handpicked corporations that help themselves to the returns your money generates.

Libra is very much a well-timed project to take advantage of Facebook’s (and its partners’) power in the tech industry by snatching the reins of monetary power from central banks and financial institutions. While at it, they will establish a “supra-national digital currency” with the sort of global reach that the world has not witnessed before.

But it is easy to lose focus of the real reward here. Today’s data-centric world relies on the availability of data and those that can compile the most data are the true power mongers. As such, Libra would give Facebook a more accurate insight into our spending culture and that in itself is the real deal.

As A Bonus Quote From Donald Trump 🙂

P.S. Facebook has lost the public’s trust more than any other company.

Companies people trust least with their personal information as of December 2018

Source: Toluna via Recode

Disclaimer: This article has provided general information only and is in no way intended as investment advice, research or a recommendation.

P.S. Contributed to The Capital (former Altcoin Magazine)