Rethink Facebook’s stablecoin strategy —Libra

The latest G7 statement on the global stablecoins brings Libra to the attention of the markets once again. Obviously, this statement aims primarily at Libra and makes it clear that G7 takes a restrictive attitude towards Libra, which in turn would make it hard to market Libra. At this point, it’s actually a good idea to review Facebook’s Libra for future stablecoin projects.

When Facebook first started Libra project, it planned to do it by itself. But it was also courting the co-operation of other companies. According to media reports, the potential partners made it clear to Facebook that they were unlikely to participate in a Facebook-led stablecoin project. So when the project was launched, it became a project led by the Libra Association, and it's all members joined the Libra Association on an equal footing.

Looking back now, it is likely that potential partners on the one hand indicated that they could not participate in that project led by Facebook, but at the same time, they must have shown great interest in participating in such a stalecoin project. Such interest must also have motivated Facebook to push ahead with the project. So when Libra was really launched, it became a multi-agency project.

The agencies that initially planned to participate include major industry leaders, like Visa&MasterCard, PayPal&Stripe, and Uber&Lyft. These companies work together to launch Libra, which is instantly gaining global attention. In the business world, such a strategy would make it easier for the Libra to hit the market quickly. But it also attracts attention from all quarters, especially the parties that Libra would directly affect. Among these parties, the most directly affected are the financial regulation and central bank of each country. Thus, since Libra was launched in June 2019, its biggest obstacle has been regulation, not the market.

In this respect, Libra stands in stark contrast to the previously existing compliant stablecoins, such as USDC, PAX and GUSD. Because these stablecoins are relatively small-scale in terms of product design, business model, market scope, and market influence, they are not subject to regulatory resistance. Compared with these digital stablecoins, Libra has ambitious goals from the outset and is able to attract significant institutions to participate, which in effect blocks its launch.

In terms of product design, Libra is designed to stand in obvious opposition to the world’s major central banks. Although in April this year, according to its new white paper, Libra would be issued based on the existing fiat. In which way, it would ease its tension with central banks, but the Libra Association’s members’ global clout and their collective support for a medium of exchange and underlying financial market infrastructure would still create considerable uncertainty to the existing fiat market, which naturally would lead to a restrictive stance by central banks.

Imagine, if Facebook had issued this stablecoin on its own and based it directly on USD, that is, it would have been issued in the same way as other digital dollar-based stablecoins, then Facebook wouldn’t have faced as much resistance, and users of it may soon be able to transfer money between each other using digital stablecoins. Actually, this is the ultimate goal of Facebook’s stablecoin, which is to provide more efficient financial services to users. But Libra’s goals are too ambitious and it has too many resources to mobilize, which in turn limits its growth. In June 2019, just after the publication of the Libra White Paper, my research views on Libra pointed out that Libra’s biggest risk was its too large project scope, and it also adopted a big-bang approach to project management rather than an incremental approach. Such a project scope and management mode is likely to lead to a significant delay or even failure of the project. Libra’s subsequent development shows that I was right.

The essence of Libra is an innovative application of blockchain technology. Libra is certainly not the end of the line for applications in this field. After Libra, there are bound to be more stablecoins projects like this. Subsequent projects should draw on the experience of Libra in order to launch smoothly.

In an earlier post, I mentioned some of the areas where new retail digital stablecoins are likely to emerge (see my post “Cross-border Retail Payments after Libra”). I think the stablecoin project in the retail sector in the future should have the following characteristics.

First, it should be based on a single fiat currency. From a practical point of view, only in this way can it be likely to be brought to market. The newly created digital stablecoins, which are based on a basket of fiat, are neither regulatory nor practical.

Second, it starts with a niche. This niche must be in cross-border payments and transactions, such as e-commerce, gaming and social networking.

Third, it must match the organizational form like Libra association, in which participants are made up of institutions from different countries and it would build a truly transnational network. Not every company, after all, has its own international operations like big tech companies. Moreover, from the perspective of the application trend of blockchain technology, it also needs cooperation from all parties on the basis of equality.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Milian Tech)

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To translate some latest policy and issues on blockchain and fintech happened in China