Libra - All Signs Point to Interesting

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by Timothy D. Carkin, CAIA, CMT
Senior Vice President

The Roman poet Marcus Manilius, proposed author of Astronomica, the earliest work describing astrology, characterized the sign Libra as “the sign in which the seasons are balanced.” Last week, Facebook announced that Libra is now the moniker for its new blockchain-based payment system. Inspiration for the name was threefold: the relation to Libra’s astrological symbol of the scales of justice, the basic Roman unit of weight (libra) and the French word “libre,” meaning free. If Facebook is right, Libra could be the digital currency that brings balance to the crypocurrency space. In simple terms, Libra will be a digital currency and worldwide payment system.

This is not a new idea; many cryptocurrencies such as Bitcoin and Ethereum boast the same concept. Libra is touted as being different in several fundamental ways that supporters say will stabilize it relative to current crypto-options. Control of this new “global currency” will be held by the Libra Association, of which Facebook has one vote, as do 28 other firms including Mastercard, Visa, Paypal, Uber and Spotify. Facebook’s goal is to have 100 large corporate members of the Association, making governance meaningfully important.

Two potentially game changing risk management tools that Facebook and the Association will employ are the ability to cancel or stop a transaction and control of who uses the Libra and how. Libra’s transaction ledger or “blockchain,” isn’t decentralized like other cryptocurrencies, thus enabling more control to remove bad actors. Furthermore, Libra will be backed and pegged to stable government securities which they believe will mute excessive volatility. The hope is that a more regulated cryptocurrency won’t experience the risk of Bitcoin and others.

Libra will start with a network of 2.4 billion Facebook users across the globe, incorporating a digital wallet into their messaging app and WhatsApp. Initially, Bitcoin was built almost as a novelty and was not meant to work on the massive scale Facebook envisions. The largest payment processors being members of the Libra Association offers credibility to retailers wary of new technology. PayPal and cryptocurrencies have required technologies and platforms to make purchases that are not currently available for the average retailer.

We believe the initial target users are the unbanked; specifically, the 1.7 billion unbanked consumers outside the U.S. who utilize services similar to Western Union. Peer-to-peer transaction services, such as Venmo, Paypal or Cash App, may also be impacted.

Facebook’s scope means they have a standard payment platform that will work across the world, in big businesses and in small. While it is far too early to anoint Libra a transformative technology, we certainly will be watching its launch next year with interest.

Week in Review and Our Takeaways

  • As the second quarter draws to a close, investors have their eyes on the G20 meetings and ongoing trade negotiations with China

  • Equity markets finished the week down half a percent, after hitting a new high last week

  • Similarly, the 10-year U.S. Treasury finished the week at 1.99 percent, near its lowest level of the year