Understanding Libra

CIO Global Blog

16 Jul 2019

Despite its unique characteristics, we have more questions than answers on Libra at this stage given the uncertainties around its governance and regulation.

Hence, from an investment point of view, we see limited near-term implications. We believe investors should consider our Long Term Investment theme "Fintech," as we believe the industry is at an inflection point favoring leading payment and fintech companies.

For some years now, we have maintained a cautious view on cryptocurrencies, regarding them a speculative bubble due to their lack of intrinsic value and a failure to meet the basic principles of currencies (see our “Beneath the bubble” report published in October 2017).

Last month, Facebook announced plans to launch a slightly different type of cryptocurrency (a "stablecoin"), called Libra, which will be backed by a reserve of low-volatility assets such as bank deposits and short-term government debt. The company also announced the establishment of a new, regulated subsidiary called Calibra, which will focus on financial services with an eponymous digital wallet for Libra. We see limited impact on the internet industry and the technology and financial sectors in the near term, but in the cross-border payment or remittance market and given a potential entry into banks' savings and investment business, it could be disruptive in the long term.

Overview of Libra protocol

Source: The Libra Association, UBS, as of June 2019

While we agree Facebook's crypto offering is unique, we are neither bullish nor dismissive of the Libra project given a lot of details about it are needed first. The project is interesting, but, equally, there are more questions than answers at this stage. As highlighted in our previous report on cryptocurrencies and blockchain, the success of Libra doesn’t depend just on the technology itself, as we believe blockchain as a technology will continue to evolve. Questions also remain on Libra’s governance, including: 1) how the consortium members plan to align their interests, work together and transition to a decentralized validation process in the future; 2) how the currency can be independent without major privacy and security challenges; and 3) more importantly, it is not clear to us how Libra can comply with regulations across the globe given the initial pushback. Nevertheless, Libra as a project should be monitored, in our view, considering it is not only backed by many major companies, but also has some unique features.

For more details, please read our report, "Understanding Libra" published on 24 June 2019.

Author:

Sundeep Gantori, CFA, CAIA, Analyst, UBS AG