The Private Equity for Families Blog

Facebook’s Libra May Be a SuckerBit

Mark Zuckerberg would be one of the last people on the planet I would trust with my financial information, but obviously his Board of Directors must see it differently.

Facebook announced that it would introduce its own cryptocurrency called Libra tied to a market basket of world currencies and backed by real assets. A group of passive investors like MasterCard, Visa, PayPal, Uber, Spotify, Coinbase, VC firm Andreessen Horowitz and many others will capitalize a subsidiary of Facebook called Calibra with $1 Billion. Here is how Forbes describes Calibra:

A centralized subsidiary of Facebook, that promises to act independently, Calibra ,is a wallet for all your Libra coins! Calibra will require (you guessed it!) KYC of all users. Calibra will be available as a stand-alone app, and integrate directly into your WhatsApp and Messenger App. The app is primarily meant for sending funds peer to peer, as well as paying for everyday transactions. The announcement is vague on the question of fees, but promises for them to be reasonable.

What Forbes means by “KYC” is Know Your Customer which is a banking concept to prevent crooks and terrorists from laundering money through the US Banking System. This will require Libra users to divulge their financial information to Calibra (Facebook) just like Mastercard or Visa or your bank gets your financial info. Alternatively, Calibra will likely accept a bank transfer of currency to buy Libra.

Just recently Facebook introduced their own white paper explaining Libra which they promote as a “universal stablecoin”- an instrument impervious to the violent swings of markets in periods of doubt and uncertainty.

Seductive and Laudable Objectives

This white paper is seductive. The notion of a universal currency available to the masses (including a wide swath of the world population that is not within the banking system) is laudable. The Libra white paper presents a wonderful dream which Facebook with its 2.4 billion users across the world is well suited to sponsor. But I have enough reservations about the likelihood of more mercenary objectives that I prefer to call Libra “FakeBits or, if you like to rhyme, SuckerBits”.

Libra Is Just Another Payment Cartel

My first caution is the unbanked members of the Facebook community will probably find they have to open a bank account or deliver all their financial info to Facebook to get credit or swap their local currency for FakeBits. In countries with totalitarian, repressive regimes your financial anonymity is often life itself.  Facebook’s own white paper contrasts FakeBits to cryptocurrencies like BitCoin that operate outside the banking system. That is exactly BitCoin’s founding principle- don’t buy into a system where central banks can print money and control yours or where your anonymity as an ordinary citizen (not a crook) is existential.

There is also a fundamental difference between Bitcoin whose value is primary and not backed by anything other than users’ confidence and coin scarcity and Libra whose value is derivative and backed by a mountain of assets that may be highly leveraged. There is also the difference that the validators of bitcoin are paid in bitcoin while the owners of Libra are paid in a special Libra Token that is different than the Libra currency you will use to buy coffee. I am suspicious that the Libra Token may trade as a security thus giving owners a path to liquidity in hard currency?Finally, bitcoin is not owned by anyone while Libra is owned by a cartel of really wealthy interests.

It is true Bitcoin has had problems becoming a universal currency because of its volatility and costs of validating its blockchain, but I am much more comfortable with its model than Libra. Here is Bitcoin’s chart since inception. Notice how the Libra announcement has helped Bitcoin’s valuation:

Independence Will Be Assured By Switzerland

FakeBits will serve as the first commercial attempt at an internet or universal currency and Facebook with 2.4 billion users has the heft to make this market. Evidently there is a concern that, like its users’ data, Facebook will be tempted to monetize Libra’s financial info. Ostensibly, an independent Libra Foundation in Switzerland will assure secrecy and resolve other conflict of interest concerns.  At inception Facebook will control Libra Foundation but promises to transition control after 2019.  I will take the over bet on that promise because I can’t see Facebook’s Board allowing Switzerland to control its Calibra subsidiary.

Currency Volatility Will Be Muted By Owners’ Capital

The stablecoin will be pegged to a market basket of real currencies. Yikes- I can’t think of anything more unstable than real currencies. Nonetheless, The Reserve Fund will dedicate trading capital to buying and selling the tracking currencies to stabilize the peg.

The Big Recession convinced the founder of Bitcoin of the need for a worldwide currency that was not controlled or manipulated by central banks printing money or a small group of owners whose capital disappeared when the going got tough. One of Libra’s the biggest risks is lack of support by the ownership cartel for the underlying currencies in an economic meltdown. Even worse the owners may monetize the Libra Reserve Fund with leveraged dividends and destroy its capital base.

The Reserve Fund May Be Like Lehman Brothers- Thinly Capitalized

The group invited to make a $10million investment in Calibra is among the smartest money in the financial world. When the fog lifts on Calibra they are unlikely to have any real capital at risk. Their $10 mil contribution will likely be returned in profits in the first 12 months, if not before then from a loan against the business model. It is completely possible The Reserve Fund will be capitalized with borrowings from banks and lenders who will loan against the future cash flows of the payment processing model which will include transaction fees and float on Reserve Fund Assets. The numbers are staggering. The Economist suggests the Reserve Fund could hold more than a Trillion Dollars:

What’s not to like? Mr Zuckerberg’s initiative, which has been cooking in Menlo Park for 18 months, has two problems (see article). First, it could disturb the stability of the financial system. America’s biggest bank, JPMorgan Chase, has 50m digital clients. Libra could easily have ten times that number. Were every Western depositor to move a tenth of their bank savings into Libras, its reserve fund would be worth over $2trn, making it a big force in bond markets. Banks that suddenly saw lots of deposits leave for Libras would be vulnerable to a panic over their solvency; they would also have to shrink their lending. And the prospect of huge sums flowing across borders will worry emerging countries with a fragile balance of payments.

After All This Is Facebook’s Casino

Would you withdraw $100 from your bank account insured by FDIC and backed by the taxing power and full faith and credit of the United States to buy a poker chip with Marc Zuckerberg’s face on it? Recognize his casino will cash out your poker chip, if at all, when it pleases him and his investors and at a price that clears them of any financial responsibility. Watch the movie “The Big Short “and ask yourself why the mutts who bet correctly on a meltdown in the housing market could not get out of their winning trades? They held poker chips in someone else’s casino – in this case it is Zuckerberg’s casino.

I am sure Libra is just the same playbook. Buy SuckerBits at your risk.


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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

Private Equity for Families Blog | CapitalWorks Private Equity Cleveland Ohio

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