Your crypto overlords are coming ...

Scott Williams

Fiftyone Capital

I've never bought bitcoin nor did I get caught up in the 'crypto' mania of 2017. In our opinion, bitcoin and other digital currencies could never have been widely accepted as a form of payment. This was due to the extreme volatility in the asset class (i.e. no business would accept payment in bitcoin if its value could drop 30% in under a week). 

However, everyone should start understanding and following what Facebook is doing with their proposed digital/cryptocurrency 'libra,' which is due to launch in 2020. This article aims to outline some of our initial thoughts on the topic. 

Libra - the basics: Without going too deep, libra is a proposed digital currency backed by some of the worlds largest organisations. As a libra coin is created, it is backed by a mix of other stable currencies (it's a pity they didn't include gold in this mix). This idea of a digital currency backed by real assets goes back to the good old days of the gold standard (when currency was backed by physical holdings of gold). 

In theory, this asset backing is designed to create stability for the libra currency. By using a diversified mix of stable currencies, it should make the libra less volatile than any single currency it is backed by. The libra currency can then be stored in a digital wallet called 'Calibra'.

From this digital wallet the libra currency can then be used globally for payments and instant transactions with some of the world's largest companies (these original companies who have signed on to back the libra currency). 

The pitch

For lower socioeconomic countries, this is potentially game-changing. Millions of people around the world live in countries where they don't have a bank account, but they probably have a smartphone. Whatsapp/Facebook could start to be used (similar to how WeChat is used in China for payments) to conduct payments and transactions using libra. 

Our view is that poor countries (Africa/South America/Asia) could flock towards using libra as a new alternative to using their existing countries currency or away from US Dollars (which many accept as tender for good and services already). However, the take up of libra coins will depend on its ease of use and acceptance from businesses/users. 

The more items you can buy using libra from your smartphone (which is why all the big companies signed on to accept libra) the more functional and therefor appealing it is to potential users. Facebook has roughly 2.4 billion users, so the potential take up of the currency could be significant. Its likely that third-world countries will adopt and accept libra as a form of payment very quickly should it remain stable and be a useful form of legal tender. 

As an example, a Mexican working in America may want to send money back to family in Mexico. If they are paid in US dollars, they could convert this into libra at a fluctuating rate (in future they may even want to be paid in libra). Instead of sending dollars or converting into peso via a company like Western Union (with high fees), they can transfer libra instantly via the digital wallets. This relative could then use libra to buy goods from the local supermarket, pay phone bills or pay for other goods or services where libra is accepted (without ever needing to convert the currency into Mexican peso). As the ecosystem and level of acceptance grows, so to will the demand for libra, and lack of demand for other currency. 

The new reserve currency? 

As a result of this growing ecosystem and acceptance of libra, it could effectively become the world's reserve currency. A long way off (especially as it hasn't even launched yet), but something to consider. 

This could have significant ramifications and potentially be the catalyst that finally dethrones the mighty US Dollar. This is why central banks, policy makers and governments are getting very worried about this digital currency. Forget all the other issues they are talking about (money laundering or Facebook spying etc), the major concern for any government is that demand for their currency could diminish significantly should libra be the first widely accepted digital currency (globally). 

Inflation and the US Dollar Devaluation

Without this secondary market/demand for dollars it could result in the US dollar losing its reserve currency status. This would potentially create a surplus of dollars and therefore a lack of demand for spending/holding dollars in the form of purchasing of US treasuries. In a world of negative interest rates the opportunity cost of holding libra is negligible and it may even be a better hedge against inflation. 

When we think logically about it, having a global currency with minimal costs and involvement from central banks/governments backed by real assets is very appealing. While it is still somewhat of a science experiment, we think it could gain popularity and become a widely accepted form of tender. No doubt as its popularity grows, so too will other forms of credit and banking systems that could link to the currency. 

So, while never having bought any cryptocurrency, i do plan on getting some libra! 

Scott Williams
Portfolio Manager
Fiftyone Capital

Scott is the Executive Chairman at Fiftyone Capital. As the previous CEO, Scott founded the company to manage not only his own wealth, but the wealth of other investors and families looking for a safe harbour for their capital.

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