According to the Financial Times, the Libra Stablecoin will be launched in January 2021 at the earliest. It will launch the Libra USD Stablecoin first, followed by other fiat currency-based stablecoins. In my opinion, if Libra is launched, it will have at least the following impacts.
First, Libra will expand the influence of the dollar on a global scale.
Existing U.S. dollars currently circulate on top of a clearing and settlement system backed by a centralized system, and only to the extent that such a system can be reached can U.S. dollars circulate. However, the Libra USD Stablecoin runs on the Libra blockchain, which is completely independent of the existing dollar payment system. It can reach areas that current payment systems can’t. Any user who is approved to join the Libra network will be able to access and use the Libra USD Stablecoin using a mobile client.
However, the Libra USD Stablecoin will not gain much of a market in the current major economically developed regions, where existing fiat currencies are very mature and often have very high levels of protection. As a new product, it is difficult to gain an edge in such a mature and highly competitive currency market. For the Libra USD Stablecoin, the greatest scope for development lies in areas where local fiat currencies are weak. Such regions are usually those where the flow of dollars is not smooth, either because of the underlying support system or for political reasons.
Libra’s underlying blockchain solves the systemic problems, and its USD stablecoin can begin to circulate in these areas with other conditions permitting. Then, the dollar’s influence will therefore increase in these regions. So in terms of influence on the dollar, the Libra USD Stablecoin will increase the dollar’s influence around the world.
Second, it will promote the creation of more digital currencies.
Before the Libra Stablecoin, there were already digital dollar stablecoins such as USDC and PAX. The rapid growth of the issuance of these stablecoin products in the market has shown that there is a strong demand for digital currencies (see the chart below). When a stablecoin of Libra’s size is introduced to the market, it further demonstrates both the growing trend in demand and the viability of the product. As a result, it could lead to the emergence of more similar digital stablecoins in the market. Companies whose current business directly involves cross-border transactions, or who are already in the financial sector and are preparing for the future of the crypto-digital financial ecosystem, will have a strong incentive to also launch a digital stablecoin.
The launch of the Libra Stablecoin will also further encourage central banks to launch their own CBDCs, since the weakness of cross-border payments in the global economy is now a well-known fact. Global economic activity is increasingly interdependent and there is an urgent need for a better medium of value transactions to facilitate the development of the global economic activity. The advent of blockchain technology and various developments since then have shown that there is at least one technology that can support the creation of such a new medium of value, and the introduction of the Libra stablecoin to the market will further motivate central banks to act individually and cooperate with each other to provide CBDCs.
Third, it will drive up the price of bitcoin.
Since Libra operates under compliance conditions, it is able to convert other forms of dollars into digital dollar stablecoins on the Libra blockchain in a compliant manner. The dollars in the possession of institutional and retail users can then flow into the Libra ecosystem. Among the various application scenarios for Libra’s stablecoin, crypto digital currency trading is a major one. The influx of large amounts of money provides the basis for the growth of cryptocurrency prices. Among the various cryptocurrencies, Bitcoin is still the most widely accepted, so the price of Bitcoin is in a better position to grow.
One of the main categories of members who have recently joined the Libra Association is those who provide services in the cryptocurrency trading space, such as Tagomi, Paradigm, and Slow Ventures. The reason why these companies joined Libra at an early stage is that they thought the Libra stablecoin would help their business. Businesses related to cryptocurrencies in the market can thus be boosted. The flow of funds into the cryptocurrency space through the Libra Digital Dollar Stablecoin and Libra Association members has provided the basis for the growth of the Bitcoin price.
Fourth, more companies will be prompted to consider their crypto-digital finance strategies.
Given the influence of Facebook and the members of the Libra Association, the launch of the Libra Digital Stablecoin will certainly prompt other companies to consider their own crypto digital finance strategies. In fact, prior to Libra, a number of companies offering services in this area had already experienced rapid growth. Examples include CME, which offers bitcoin derivatives trading, and Square and PayPal, which offer bitcoin buying and selling services to retail customers. The success of these companies in the crypto-digital currency space and the official launch of Libra will encourage other companies to seriously consider their strategies in this area and take advantage of the business opportunities that crypto-digital finance presents.
After the first announcement of Libra in June 2019, I believe there will be two main forces in the market, one eager to join the Libra Association, and the other to build organizations that compete with Libra. These two forces will be even stronger after the Libra stablecoin is actually launched. Joining the Libra Association is a natural choice for companies that are in the business of cross-border transactions for retail users and want to focus solely on their own business. The Libra USD Stablecoin would facilitate the business of such companies. Of course, such a company can choose not to become a member of the Libra Association, but it can also operate within the Libra ecosystem and use the Libra USD Stablecoin to its advantage.
Developing another brand of digital stablecoin is also an optional strategy for companies that can’t join the Libra Association or don’t want to join Libra. In a previous post, I explored the possibility of Amazon issuing its own digital dollar stablecoin. For other companies in the market, this is also a possible option, and perhaps even a better one.
Article from Gu Yanxi, Founder of Liyan Consulting
Translated by Yang(Mengyan Finance)