Comment: Is Libra a paper tiger?

Libra is certainly not a paper tiger. Otherwise, it will not attract the attention of global financial supervision. The US Congress will not hold a hearing soon to investigate the real intention of the Libra project and its impact. However, the project itself does have huge risks, so it is very likely that after its high-profile launch, if it is not appropriate to deal with the various risks that it will certainly face, it is very likely that it will die halfway, and its short-lived existence therefore It is more like a paper tiger.

Shortly after the release of Libra News on June 18th, I pointed out in a research analysis of the analysis ( Libra project research analysis report ) that a huge risk of this project is project management risk. It tries to complete a large-scale project involving multiple aspects in a very short period of time, so this project will encounter very high risks, and this project has a very large possibility of failure. This article further explores the various risk factors of Libra.

First, Facebook does not have the social support to carry out this business.

Facebook has been unanimously condemned by the society for its data privacy issues. It had to pay a $5 billion fine for this. Facebook does not have a good social image in American society and is not considered a responsible operator of a social network. In fact, in American society, there is a strong anti-Facebook power.

Among the blockchain and enthusiasts of digital assets , Facebook is definitely not a positive image. It has forbidden to post ads on encrypted digital currencies on Facebook's network for a long time. Such behavior is consistent with its overall regulatory review. But such behavior is incompatible with the pursuit of cryptographic digital asset enthusiasts. So the community of encrypted digital asset enthusiasts has a very strong criticism of Facebook. In this respect, Jack Dorsey's Twitter is in stark contrast. In fact, Twitter is a social network for hacking digital asset enthusiasts. Now that Facebook is leading the promotion of such a digital stable currency project, it will naturally not be supported by enthusiasts of encrypted digital assets.

In terms of traditional financial institutions, the project led by Facebook is even more difficult to resonate. Libra Stabilized Coins and its clearing network have created direct competition with existing financial institutions. Not to mention the traditional financial institutions and compliance considerations. So this project has not been supported by any major financial institution so far. The attitude of mainstream financial institutions will have a decisive impact on the success of Libra.

Second, the huge resistance of supervision

The project's stable currency and underlying blockchain are direct challenges to the basic structure of existing financial markets. The various legal currencies available are issued by governments based on their own sovereign credit. Each currency has its own clearing network. Because of their respective clearing networks, the circulation between legal currencies is not efficient for the global market. However, for such a market situation, there is no strong incentive for various legal currency issuing governments or institutions to change. But Libra's underlying clearing network is global. Libra stable coins circulating on top of it are also global. Given this advantage, especially with the support of Libra Association members, currencies in the global market are naturally attracted to this network. This will weaken the influence of various currency issuers on their location and the global economy. This is certainly not something that currency issuers are happy to see. Then Libra will definitely encounter extreme resistance in these markets.

Third, unprofitable coinage tax

Stabilizing coins is also a product in nature. If you promote this product to the market, you must have a reasonable income. According to the white paper for this plan, each node needs to invest $10 million to participate in the project. Libra plans to set up 100 such super nodes. So Libra will have $1 billion in funding available. According to the white paper for this project, Libra reserves will use cash and short-term government bonds. It works like a money fund. The benefits that Libra receives in this way are fed back to these nodes. The income generated in this way is similar to the income earned by participating in the casting of stable products. But this model has two very big flaws. One is that the income generated by the money fund will be very limited. More importantly, this model has potential risks that could result in a loss of principal. The gains that participants receive from this may be negative. In addition, because of the cost of business management, it will cost more than a simple money fund, so the proportion of the $1 billion that can be used to buy short-term government bonds will be smaller, and the pressure to generate income will be even greater. Therefore, from this perspective, if the participants of the node are not able to obtain more benefits than the direct income that they can generate by the $10 million (and should also exclude the risk), then they participate in Libra. The power will be greatly reduced.

4. It is difficult to coordinate the needs of various legal currency issuers

Libra will accept a legal currency mortgage, and its price will be marked with a basket of legal currency. Which French currency is accepted as collateral, which legal currency is included in the target legal currency, and the proportion of each legal currency will affect the influence of the existing legal currency in the market. It is precisely because of this factor that the impact is significant, so even when the white paper was published, these factors were not finalized and therefore could not be announced. Such uncertainty naturally causes concern and uneasiness among major currency issuers around the world. Therefore, the attitude of some financial regulators is not beneficial to this project. Even Marcus’s hearing at the US Congress indicated that the basket of French currency would contain 50% of the US dollar as well as the euro, the pound and the yen. But such information will certainly not satisfy the world's major currency issuers. This project will certainly undergo a long period of communication and coordination with the issuers of major currencies. Whether these institutions are satisfied with the final results directly determines whether the Libra Stabilizer can operate in these economic regions.

5. The huge number of Facebook users failed to produce the expected effect.

Facebook social networks have 2.7 billion registered users in multiple countries around the world. On the surface, this will provide a huge number of potential users for Libra Stabilizer. But if you do further analysis, you will find that such users may not be able to provide a large number of potential users for the stable currency.

The country with the largest number of Facebook social network users is India. In this country, there are 240,000 active Facebook users. However, the Indian government currently prohibits the use of encrypted digital currency. Therefore, this stable currency must not be used by these users. One of the main application scenarios for digital stable currency is cross-border remittance. India is also the largest recipient of remittances in cross-border remittances. This places significant limits on the use of Libra Stabilizers across the globe for cross-border remittances.

In terms of the nature of users, Facebook users are more family-oriented than young people who can take the lead in trying new things. Promoting the use of digital stability coins in such a user community will certainly be very slow.

According to the white paper for this project, the main target of this stable currency service is the 1.7 billion users worldwide who do not currently have access to financial services. However, among the 1.7 billion user groups, the number of users who can use the Internet and Facebook is greatly reduced. If the user's area that meets the above conditions accepts the circulation of stable currency, local users of the stable currency will need financial institutions to help convert Libra and local currency. If some users are unable to open an account with a financial institution, this will exclude some potential users. Due to the network effect of money, the ecology of a user can only really use this stable currency in his daily economic activities when all the parties around him use this stable currency.

Among the major economies, even if Libra can operate in these regions, it is difficult to serve groups in the region that currently do not have access to financial services. The reason these users are not getting financial services is due to reasons other than currency and clearing networks, and Libra stable currency and clearing networks do not help solve such problems.

Sixth, the diversity of association members will hinder the application of Libra

First of all, the current membership of the association has a mixed commitment to this project. Some members directly indicated to the media that the agreement they signed with the association was intentional and not binding. This shows that these members are adopting a wait-and-see attitude to join the association. In addition, some media reported that some of them have not invested in the promised $10 million so far. Therefore, this association still needs a lot of work to do in rallying its members and enhancing its membership commitments. This will be a long-term game process. Looking at the current membership of the Eurozone and the current Brexit in the UK will see how much the organization's current and future risks in this regard will be.

One of the biggest shortcomings of this association's members is to concentrate all parties with opposite interests in one association. Moreover, the current interests of some of these members are likely to be affected by the development of this project, so the participation of these members will certainly hinder the progress of this project. The most typical representatives in this regard are Visa and Mastercard. The two companies provide clearing networks for credit card transactions worldwide. Each service that provides credit card payments will charge 2% to 3% of the recipients. Visa and Mastercard are the biggest beneficiaries of this business. Libra is providing a peer-to-peer clearing and settlement network for peer-to-peer payments worldwide. This will directly impact the existing business of Visa and Mastercard. It is therefore difficult to believe that these two companies will fully support Libra's promotion and use. They will certainly encourage the association to make decisions that are beneficial to them in order to protect their own interests. Although the two companies are two of the more than 100 members in the future, they still exercise their power to influence the Libra Association to make decisions that are beneficial to them. Most of the other members are users of currency and clearing networks, so they definitely want the lower the cost of the transaction. Even third-party payment service providers hope to increase their revenue by reducing the cost of clearing networks. Therefore, disputes between members within the association will be a problem that the association needs to face for a long time.

The consensus mechanism of blockchain technology support is best suited to the cooperation between institutions that share common interests but do not trust each other ( see DAO's organizational principles from Vikings ). Such institutions are usually homogenous and face a powerful common enemy. Such a consensus mechanism can ensure that participants work together for common interests. But in this association, the association unites the interests of multiple parties, which will definitely affect the propulsion of the association.

In short, there are huge risks in the Libra project. These risk factors will at least cause them to fail to progress according to their current planned timetable and may even lead to their failure. When dealing with these risks, Facebook has neither the support of civil society nor the support of strong business partners. Whether Facebook can successfully deal with these risks is a huge challenge for it. Whether the Libra project can be successful, we continue to observe. But regardless of Libra's results, it has pushed the application of blockchain technology and encrypted digital assets to an unprecedented level. At least based on this, or hope that it does not become a short-lived paper tiger.

Author: Valley Yancey