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Death of Crypto? Will Facebook Libra’s move to peg CBDC kill the crypto space?

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Bloomberg reported unceremoniously that “Facebook Inc. and its partners are considering redesigning the Libra cryptocurrency project so that the network accepts multiple coins, including those issued by central banks, in an effort to woo reluctant global regulators and rebuild momentum for the plan.”

While Libra Association’s Head of Policy, Dante Disparte assured that “the Libra Association has not altered its goal of building a regulatory compliant global payment network, and the basic design principles that support that goal have not been changed,” crypto folks know that this move will change everything for Libra.

From an aggressive plan to undermine government issued fiat currency and possibly creating a parallel economy – to – Libra turning into a crypto PayPal – the plot made a 180 degrees turn.  

What sets Facebook’s Libra apart from PayPal would be its sheer size.  

We have talked about Why Governments are scared of Facebook’s move before, however, for the context, between Facebook App, Whatsapp and Instagram, Facebook has direct access to over 3 billion people.  That is bigger and wider than most populated nations in the world. In fact, Facebook messenger alone with over 2.41 billion is bigger than the population of China, Europe and the United States, combined.  When we add numbers for Whatsapp and Instagram (also owned by Facebook) – the numbers are staggering.

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What happens when a company with access to 3 billion people decides to mint its own currency?

facebook communityThat is the question that made governments all over the world summon their powers to put brakes on Facebook’s effort to launch its own currency, Libra.

US officials visited Switzerland, where Libra Association is headquartered, and all of a sudden – Facebook’s evil past has been used against it to thwart its plans to launch Libra coin.

This is how Libra’s white paper introduces its project:

“Now is the time to create a new kind of digital currency built on the foundation of blockchain technology. The mission for Libra is a simple global currency and financial infrastructure that empowers billions of people. Libra is made up of three parts that will work together to create a more inclusive financial system:

  1. It is built on a secure, scalable, and reliable blockchain;
  2. It is backed by a reserve of assets designed to give its intrinsic value;
  3. It is governed by the independent Libra Association tasked with evolving the ecosystem.”

No where in the whitepaper is the mention of using Central Bank Digital Currency (CBDC) as part of the reserve.  

In fact, the white paper is quite explicit (read the underlined section) about describing the missing to create a NEW digital currency and bring about its adoption as a new digital currency: “This approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”

Facebook made a quick 180 degrees from the bold statements of creating a new currency to becoming a ‘me too currency’, to stay alive.  

Now the question on the crypto minds is: 

How will this move impact crypto space?

This move is significant for many reasons and it is surprisingly being under played, in our opinion.  Let’s look at both the good and the bad of this move.

The Bad

Death of crypto?

end of cryptoNot quite, but it is so for sure for projects that do not have any value proposition other than ‘alternative currency’ or medium of ‘faster transfers’ across borders. 

These projects will be the first to be blown out of water. Remember, 99+% of people around the world have not touched crypto and they never will if Facebook introduces its own ‘crypto’ currency that is ‘backed by’ the US dollar.

Facebook has unlimited marketing budget and resources to convince people around the world to use Facebook’s Libra and forget about those ‘scammy cryptos’ out there.  

When that happens, companies like Ripple may not have a lot of ground to stand on.  Our readers know that we like to pick on Ripple as the worst crypto representation, but Ripple or some other project that promises simpler-faster-cheaper transfer of value will have no chance against Facebook’s libra, especially when it is backed by US Dollar. 

If people are able to exchange value in Libra over messenger that is readily accessible by 3 billion people, why would we need any ‘new’ form of money transfers? And what happens when a company like SWIFT fully supports Facebook’s libra?

Sheer size, popularity, accessibility, government blessing and partnerships will make Facebook’s Libra world’s most popular crypto (may be right after Bitcoin) overnight.  

While it will be a great step for ‘blockchain technology’ and crypto in general, it will be the beginning of the end for the ‘decentralization’ movement, unless something miraculous happens, like people refusing to let Facebook exploit them.

People said yes to Whatsapp and Instagram and Facebook bought both of them.  Looks like there is no escape for us, at least at the moment, from the Facebook’s outreach.  And that is the point – Facebook has the means to undermine this ‘decentralization’ movement overnight, especially with government backing.

While it will not kill all cryptos, it will most certainly kill a great number of them.

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The US dollar is already ‘digital’

Remember, the US dollar is already ‘digital’.  

USD Coin Latest UpdatesAs of February 2020, the dollar value of total bills in circulation is about 1.75 trillion.  This generally represents 10% of total cash value in the US.  That means, 90% or approximately 16 Trillion dollars exist in non-physical cash form.

This means, Facebook’s Libra doesn’t have to wait for the US Government to issue a blockchain based digital dollar to peg it against Libra.  It can do it today.

In theory, the US government could keep the existing fiat system as it is and still become part of the blockchain revolution and drive it wherever it wants it to go.

The good

Counteracting China’s Digital Currency move

china blockchainAs we anticipated, Facebook’s lawyers were not going to let Libra die.  The only way to keep it alive and even become an ally for the government is to help bring US Digital Dollar to the globe so that US dominance of global reserve currency is not challenged.  While China is making moves to become the world’s most popular digital currency, Chinese currency itself does not have the reach or popularity of the US Dollar.  

If our speculation comes to fruition, we could see Facebook’s Libra backed in a majority by Digital Dollar.  

That means, US Digital Dollar will be accessible by over 3 billion people overnight through Facebook’s platform.

Once Facebook gets blessing from the US Government, it will quickly and easily onboard many companies around the world.  

These partnerships in turn will bring access to a digital dollar to even more populace.  

If this happens, China’s dream to become world reserve currency might remain a dream.

Why do we think a US digital dollar dominance is better than China’s global reserve?  A government purportedly fighting for a free world is better than a government that has openly and unabashedly implemented a monarch regime.

Coronavirus: Timing couldn’t be better for Libra

We do not intend to sound morbid or undermine the pain that Coronavirus has caused around the world. 

While China is fighting with CoronaVirus, its plans to launch a global digital reserve currency might take a backseat. This opens a critical window of opportunity for Facebook and government agencies to slip in the US digital dollar to the world.

As we said earlier, the US Government doesn’t have to issue a blockchain based digital dollar currency; Most of US dollars are already digital and to peg it against Facebook’s Libra is easy.

Proliferation of Libra as ‘backed dollar for dollar’ with Libra will remove any resistance that businesses and non-crypto folks have about crypto based digital currencies.

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Conclusion

Facebook’s Libra pegging against CBDC will not kill crypto space, not all of it anyway.  It will, however, kill most of the projects that do not have much use-case than that of ‘crypto-currency’.  

It could also bring a new wave of adoption to the crypto world as more and more people starting using cryptocurrency without realizing that they are transacting on blockchain.  This might actually become a blessing for other blockchain based projects and Libra could end up acting as the ‘cross-platform’ currency to bring blockchain to mainstream, without the jargon.

Let’s hope for the best!

Thank you for reading and sharing this article. We appreciate you.

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Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.

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