There is a lot of confusion over Facebook’s proposed electronic currency, Libra, because, well…it is confusing. No one, not even Facebook, is sure of how Libra will take shape. The goals of the currency are generally to improve the ease of electronic transactions and broaden the access to banking. It’s like mobile banking on steroids.
Libra’s intention of using blockchain technology and corresponding ledger systems utilized by crypto currencies like Byte Coin and Ethereum have caused many to mistakenly view Libra as just another cryptocurrency. The inability of typical crypto currencies to meaningfully increase supply of the currency causes wild swings in their prices. In turn, these wild gyrations in price make it impossible to use the existing cryptocurrencies for daily transactions of normal goods and services.
I think it’s easier to think of Libra as an ETF. Imagine an ETF invested in three traditional currencies (Euro, Yen, USD, etc…). The price per share of the ETF will simply be the weighted average value of those currencies and closely track an Index of the underlying currencies. The supply of shares (i.e., Libra currency) will grow and shrink directly with demand just like an ETF. As a result, the share price will be much more stable than cryptocurrencies. Liquidity and stability will be further enhanced by the ability to hedge out all of the volatility by shorting the underlying currencies. As with any currency, there will be an exchange rate based on the value of the currency in the country where you live relative to the value of the currencies in the hypothetical ETF example.
Facebook wants to allow people without access to traditional banking services the ability to use their platform to launch a mobile banking system. I imagine a worker electing to have their employer deposit their pay into their Facebook account. The employer would convert local currency to Libra through a digital Facebook pocketbook and disperse payroll payments to employees. People and businesses could then complete transactions electronically between each other similar to Pay Pal and Venmo using Libra. As a result, rather than needing a bank account to be able to write checks or have a debit card for transactions, people would simply need a pocketbook on Facebook’s platform.
I immediately think of how easily airlines flying between countries could begin quoting ticket prices in both Libra and their current prices. They have expenses in multiple currencies already and are currently hedging currency risk. Hedging Libra would be simple. And paying more and more of their workforce in Libra would ultimately reduce their currency risks and hedging costs.
Next, maybe someone will launch a Libra ETF…
