We need to talk about Libra

I spent last Wednesday at Lord’s. I was there to watch the first day of the second Ashes test.

If you’re a cricket fan you’ll know what’s coming next: I didn’t see a single ball bowled. It rained all day. It rained hard. So hard the water soaked through my boots and gave me soggy feet to top the disappointment off. (I’ve never been to an Ashes test before and was child-at-Disneyland excited.)

As we stared at the sky hoping for a break that’d allow even an hour of play to begin, we (I was with former publisher of this business, Dan Denning) tried to figure out if any of the hundreds of bars, food stalls and coffee stands inside Lord’s would accept bitcoin.

Short answer: none of them did.

Slightly longer answer: many of them wouldn’t accept cash either. I find that strange. It seems to have changed in the last few years. Big outdoor sporting or musical events used to be the kind of place you’d need a pocketful of cash to pay for anything because they wouldn’t accept cards. That has now flipped. Which left me with cash I couldn’t spend at Lord’s.

Digression over. It’s perhaps not surprising no vendors would take bitcoin. Lord’s is a bastion of tradition. It’s not exactly where you’d expect to see continuing evidence of a monetary revolution. Though I had enough time on my hands to search.

That got me thinking, though. In a year or two, will it be acceptance of bitcoin we look out for as a sign of a step change in the monetary system? Or will it be something else? Facebook’s private currency Libra, perhaps?

**Trigger warning for crypto heads** I’m about to discuss Libra as a cryptocurrency existing within the same universe as bitcoin and other crypto/blockchain projects.

I know this will upset some of you.

I know that decentralisation is part of the DNA of all “true” crypto projects, and Libra is not decentralised, but rather controlled and issued by a powerful company that commodifies people’s private lives and sells them to the highest bidder. I don’t trust Facebook. Anyone that has to hire Nick Clegg as an ambassador (Cleggwashing) is hiding something. My guess is some sort of “Stranger Things” crime against nature.

But Libra is a private currency, issued by a private company. Such a thing would have been unthinkable before bitcoin reminded us that governments need not have a monopoly on the issuance of currency. In fact, bitcoin showed us there is quite a demand for money that isn’t government issued or controlled.

Therefore my contention is that without bitcoin, you don’t get Libra. Bitcoin was like a meteor. Now Libra is crawling out of the primordial soup of the crater bitcoin left behind to begin its own evolution. This is my justification to grouping bitcoin and Libra together, despite their obvious differences.

One key similarity: both currencies found themselves under attack by the authorities. In the last bitcoin boom, bitcoin was cast as the realm of the criminal, the money launderer, the drug dealer and the speculator. (Much as central banks have characterised people who use cash.)

The same goes for Libra. Within days of Facebook announcing it, the gatekeepers of the existing financial system were lining up to fire their opening salvos.

Federal Reserve chairman Jerome Powell said: “Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” and claimed that “I don’t think the project can go forward” unless these concerns are addressed.

Which is central-banker-speak for “back down, Zuckerberg”.

Keep in mind Powell is responsible for overseeing the dollar-based monetary system. Which, of course, has never once raised concerns regarding “privacy, money laundering, consumer protection and financial stability”, has it?

Powell’s real problem is Libra is a challenge to his own authority. He’s not alone.

US lawmakers were quick to attack Libra too. Five Democratic lawmakers sent a letter to Facebook “requesting an immediate moratorium on the implementation of Facebook’s proposed cryptocurrency and digital wallet.”

Why? A press released explained the logic behind the threat:

Because Facebook is already in the hands of over a quarter of the world’s population, it is imperative that Facebook and its partners immediately cease implementation plans until regulators and Congress have an opportunity to examine these issues and take action.

Which is politician-speak for “Whoa now!” (Which is English for “stop a horse”.)

I don’t know about you, but that sounds like a group of people who are worried about a threat to their own power – and irritated they weren’t consulted ahead of time.

The Chinese are concerned too. According to the director of the central bank’s research bureau:

“Facebook’s plans to create its own cryptocurrency have forced China’s central bank into stepping up research into creating its own digital currency as Libra could potentially pose a challenge to Chinese cross-border payments, monetary policy and even financial sovereignty.”

Which is Chinese-central-bank-speak for: “We wanted to be the ones that killed the dollar!”

All these attacks – and there are more I could have shared with you, but I don’t want to labour the point too much – tell us something important.

People target and attack what they secretly fear. Like a cricket team targeting their opposition’s best player, the attack itself is a form of respect. It signals that Libra is on to something big enough that it is worth confronting.

Why is that?

Here’s my theory. You may have your own. I’ll remind you at this point you can always reach me at nick@southbankresearch.com.

Bitcoin and Libra may be part of the same universe (the point I made earlier). But there’s a key difference in the way they are constructed or backed that gives Libra a power I don’t think bitcoin has.

Here’s why. Bitcoin is totally decentralised and has no issuing entity. It is total free market anarchy. No one can issue a press release defending it or laying out plans for growth. Its power is its very existence and the fact that people use it. That and the scarcity built into its code. (All of these arguments also hold up for gold, but with 10,000 years of extra data to back them up.)

I’d argue that decentralised anarchy means bitcoin is like an “anti-financial-system”. As trust and faith in the traditional system – or the people in charge of it, who repeatedly abuse that power – declines, so the value of bitcoin increases. Owning bitcoin is like shorting people’s faith in the existing monetary system.

Strangely, Libra is the opposite of that. But in quite a powerful way.

See, Libra is backed by a basket of currencies. Therefore it can’t be denominated easily in any one currency. Its “denominator” won’t be dollars or pounds or yen or euros, but a collection of them all.

Benefit one: to do this, Facebook will be required to hold large amounts of those currencies, in the form of government bonds. Which means it’ll be lending powerful governments lots of money. Always a good way to grease the wheels.

Larger benefit two: the basket-backing effectively means Libra aggregates the remaining trust in all fiat currencies and uses that as its backing. The dollar may be mismanaged and trashed in the coming decade. The same may go for the pound.

But what Facebook is betting is some fiat currencies will be properly managed and survive. Perhaps even the majority. By using this as the backing for Libra, it is attempting to create a highly stable coin. It already has a large user base to act as its eco-system. A stable coin backed by the remaining faith people have in the existing financial system.

If bitcoin is short faith in the existing system, Libra is long.

Bitcoin is emerging from the fringes of the financial system, supported by monetary punks and financial revolutionaries.

Libra is erupting from the very centre of the system, draped in the flag of every powerful nation on earth.

I think that is why governments and central banks fear it. Because it might work. And it might survive even a catastrophic collapse of a major currency… because its denominator isn’t singular.

Of course, if we get a race to the bottom in which all major currencies decline relative to real assets, Libra would become as unstable as the dollar or pound. This could happen. (If this worries you, read this, buy gold and you’ll sleep better at night.)

I’m running out of time! I’ll return to this idea tomorrow because there’s another dimension to the story that is worth thinking about.

But before I go, I’m going to make a recommendation.

If you haven’t yet given cryptocurrencies – and their relationship with our existing monetary system – your time and attention, then you’re making a mistake.

Never mind the fact major tech companies are moving into the industry. You need to understand cryptocurrencies based on the fact that anything the authorities fear is guaranteed to be worth your time.

A great way of getting up to speed with what’s happening is to listen to Eoin Treacy’s recent cryptocurrency masterclass. In it, Eoin lays out what’s happening right now in the crypto world… and shows you how to access his two most urgent crypto plays. It’s here.

Until tomorrow,

Nick O’Connor
Publisher, Exponential Investor

Category: Cryptocurrency

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