Over the last week or so we have heard quite a bit about what Facebook’s Libra and Calibra are and how it all works. We have heard about the value it will bring to the unbanked and how it will lower the cost of transactions. We have heard how the formation of Calibra will protect users’ transaction data from being collected. We have heard about all the large companies involved. On the other hand there have been a plethora of articles about how Libra is neither anonymous nor decentralized, two very important qualities of a cryptocurrency. But what is the impact of Libra and Calibra on the world of cryptocurrency?

 

How Does Libra Generate Revenue?

 

There are three pieces to Facebook’s entrée into the world of “cryptocurrency:” the currency Libra, the entity charged with managing the wallets (and more) called Calibra, and the Libra Association, a group of companies that Facebook has gathered together to support Libra.

 

The Libra Association is made up of 29+ companies, each with one vote (what they will be voting on we don’t know). What is pertinent is the level of investment from each company. As noted on the Libra Association site, the minimum investment is 10 million USD. We have also been told that that the Association will generate revenue from the interest on the fiat currency , and on transaction fees which they have said will be a fraction of a cent. Let’s cover the transaction fees first.

 

 

Since Libra is a permissioned blockchain, only Libra Association members can verify transactions. The members with the most processing power will earn the most transaction fees. Don’t fall into the thinking that since the transaction fees are so small that this will be an insignificant number: with millions of transactions happening every day they will generate a significant revenue stream. Initially, the system is built to handle a 1000 transactions per second. I believe that within six months (or less) of launch they will be running at full capacity. If the transaction fee is a half cent, that means $5.00 per second which equates to about 160 million USD a year, just at initial capacity. So if you assume 29 companies invest 10MM USD each, that 290MM USD gives the Association 160MM USD return in one year. Not bad. But that’s a minimum number. The forecasted number of Libra users worldwide is 2.1B, which means that the initial system will be able to handle one transaction per user every 25 days, and it’s safe to say that each user will utilize the system with greater frequency than once every 25 days! Even at a reasonable infrequent once every 5 days returns 600MM USD to the Association.

 

As stated, the Libra members will also generate revenue from the interest on the fiat held in reserve to cover the outstanding Libra. Here is how this works:

  • you buy Libra and that Libra is minted for you;
  • the money you used to buy the Libra is held to cover the cash out of that Libra;
  • when Libra is cashed out (turned back into fiat) the Libra is burned (deleted).

As long as Libra is being passed around from user to user, the fiat used to purchase  Libra is earning interest for the Libra members.  The potential is enormous. If 2.1B users have 5 USD of Libra on hand at all times throughout the year (what I think is a conservative estimate), then based on the Fed’s overnight rate, the Association could earn an additional 250MM USD over one year. You could do worse.

 

Consider This

 

When your money is in the bank, the bank pays interest to you. They also charge transaction fees which are taken on by the merchant but often reflected in the cost of goods. This means the increased cost in goods due to credit card and debit fees is built into most goods from merchants, so even if you pay by plastic, cash, digital, or libra you are still taking on the increased cost. So yes, Libra brings lower transaction fees (which won’t necessarily mean lower cost of goods) for the digital elite but Libra member companies keep all the interest on your money.  It should be noted that the Libra transaction fee will be far lower than services like Venmo which currently is 3% for credit card payment and $0.25 to transfer from Venmo to bank.

 

 

So far, we have covered two earning events, interest and transaction fees. What will be the long-term effects on these? What happens when traditional banks take large losses in these areas as Libra adoption rises? Don’t get me wrong, I am not a fan of big banks, but I am a fan of people having jobs. Banks will need to close more locations, raise transaction fees, and adjust the terms of interest given. Libra could very well end up costing people and countries a lot of money in the long run. Will it cost jobs? Most likely many jobs will be lost. Will it create jobs? Very few.

 

At Whom is Libra Really Targeted?

 

Most of the materials like to tout how Libra will be a boon for the unbanked. But in reality, this is mostly a convenience service for the Uber generation, and maybe a cheap way to move large sums of money for large corporations and wealthy individuals.

 

Who are the unbanked? This term seems to have two different meanings depending on if you are discussing developed or underdeveloped nations. "Unbanked" is a slang term for adults who do not use banks or banking institutions in any capacity. The US based unbanked generally pay for things in cash or by money orders. They also typically do not have any other type of professional money-related services. In the US, they often take advantage of alternative financial services, such as check-cashing and payday lending, when available to them. There is also a significant number of individuals that choose this to hide illegal monies.

 

The numbers of unbanked are significantly higher in underdeveloped nations. The Global Findex shows 3/4 of the world’s poor do not have bank accounts. And the use of mobile micro payments systems is quite high in places like sub-Saharan Africa where the Internet penetration is only about 36%, translating to about 204 million users. There are many villages where one mobile phone is used to serve many people.

 

Libra says that unbanked people will be able to “go to the corner store” and turn cash into Libra. There are problems with this model. In underdeveloped nations the corner store does not exist, and there is no infrastructure in the far reaches of sub-Saharan Africa to support the model. In under developed nations this becomes a last mile (or hundred miles) issue.

 

Even just looking at developed nations there should be questions on how this will work, e.g., what will the point of exchange, the corner store, charge to conduct these transactions? They will need to have some method of turning cash into Libra in a secure way so that both parties are made whole. The trouble is on the side where the cash is submitted, where the Libra recipient would want their Libra right away, so how does Calibra verify that cash was truly received? The opportunity for fraud when these transactions are done outside a financial institution is large.  I suppose they can start putting up kiosks but that would just further centralize Libra.

 

Your Data, Their Gain

 

Let’s talk about the security of your payment data. It has been stated that Calibra was created to assure that the data of your Libra transactions is kept separate from the data that is collected about you from Facebook services. This is because you will be able to use Libra through Facebook Messenger and WhatsApp. There will also be a crypto wallet available from Calibra. I am sure that most transactions will be via the Facebook services as they become more deeply integrated with services where you will spend your Libra, e.g., Uber, Lyft, and Amazon just to name a few. The assurance that your transaction will be secure from data collection (by the way this does not mean anonymous) pertains to the last part of the transaction itself, meaning the data of the transfer of funds only. All the data about shopping or connecting to a service all the way up until the transaction is all collectable including that you chose to use Libra. This data related to your shopping and service consumption across multiple vendors is incredibly valuable. I would say it is the crown jewel of the whole Libra space. The users will get nothing in return for this data: they won’t get rewarded with discounts, Libra, or cash. But the company collecting this data will drive huge market share and revenues from it. I am guessing that even when the California Consumer Privacy Act (the CCPA) goes live in January that this will be an opt-in service in order to use the convenience of Libra. 

 

In the End…

 

The association earns the transaction fees, interest on users’ money, and very valuable data. The majority of the users, the digitally connected, receive convenience. It is an old story that needs to be flipped.

 

 

https://www.internetworldstats.com/stats1.htm

http://www.worldbank.org/en/news/infographic/2012/04/19/who-are-the-unbanked

https://www.investopedia.com/terms/u/unbanked.asp

https://techcrunch.com/2019/06/18/facebook-libra/

https://libra.org/en-US/

https://calibra.com/