3 Key Outcomes We Expect From Libra, Facebook’s New ‘Cryptocurrency’

Can Libra become one of the biggest recent breakthrough in the markets?

Facebook is one of the largest companies in the world with a market capitalization of more than $500 billion. The bulk of the company’s money comes from adverts, which it serves through its flagship Facebook and Instagram products.

In 2014, the company acquired Whatsapp, in a transaction that was valued at more than $20 billion. After the acquisition, the company changed Whatsapp’s business model, which required an annual subscription after one year. Since then, the company has struggled on how to monetize the hugely popular application, that has grown to become the biggest messaging app in the world.

Late last year, rumors started moving around that Facebook was creating its own cryptocurrency that would help to monetize Whatsapp. These rumors said that the currency was being created for the Indian market.

This changed last week when the company unveiled Libra, its new ‘cryptocurrency’. In the announcement, the company announced that it had collaborated with 27 other large firms like Booking Holdings, Uber, Visa, and Mastercard to build the currency.

However, while Libra was presented as a cryptocurrency, it became evident that it was not indeed a cryptocurrency but a stablecoin for a few reasons:

  • Unlike other cryptocurrencies, Libra will be backed by real currencies like the USD and Yen
  • Libra will not be decentralized. In fact, it will be overseen by Callibra, an independent NGO based in Switzerland
  • Libra will not be mined. Instead, each Libra that will be developed will be backed by a real currency.

If Libra does indeed become a successful global currency, the following could be the main outcomes.

Facebook Stock Will Soar

If the stablecoin becomes a success story, it is likely that Facebook’s stock will continue to soar. Last week alone, the stock rose by more than 5%, which was partly attributed to the launch. However, the path forward remains challenging for Facebook.

First, American lawmakers were not pleased with the launch. Immediately after the currency was announced, Rep Maxine Waters, who chairs the House Finance Committee said that she will not allow Facebook, which is known for its privacy issues, to run a currency ‘out of a Swiss bank account.’ The same statement was repeated by other members of the house and senate.

In Europe, the French Finance Minister said that the country – and the Group of 7will not allow Facebook to replace the traditional currencies.

Therefore, in the event that the currency will indeed see the light of the day, there is a possibility that Facebook’s stock will soar.

Emerging Market Currencies Will Slump

In the White Paper released by Facebook, Libra will be backed by key currencies like the USD, yen, and euro. It will also be available globally.

This means that most people in the emerging and developing countries will move to Libra at the expense of their local currencies, which are known for being volatile. With a single global currency, it also means that local central bank’s actions will not have significant impacts on their economies because they won’t be in control of Libra.

Therefore, if it indeed becomes popular, emerging market economies could suffer.

How to Trade Emerging Markets Profitably

Alternative Coins to Rise

If Libra becomes popular and widely accepted, it means that other companies will start to develop their own currencies. This is because there is nothing proprietary with Libra. In fact, there are a number of stablecoins in the market today like Tether and Gemini Dollar.

Therefore, there is a likelihood that other companies will start to develop their own versions. Early this year, JP Morgan announced that it was launching its own currency to facilitate international transfers.

Final Thoughts

Libra intends to change the world by reaching out to the unbanked and underbanked. However, as it has already emerged, the road ahead will be very challenging.

The company will need to convince lawmakers and policy makers on the merits of the currency. It will also need to convince users that their data will be safe and not shared.

Further, it will need to convince the world that Calllibra, the non-profit that will oversee Libra will be independent.

Other Useful Resources to understand Libra

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