Libra may be the end for Facebook – Part I

In 2019, Facebook crossed a red line. The company announced the Libra project. Before digging into Libra, let’s get a very brief history lesson on Facebook.

Back in the 2000’s, Mark Zuckerberg, a 23 year old introverted, Harvard university computer science college dropout, started “The facebook” website as a side project while trying to overcome a bad break up.  Zuckerbeg allegedly stole the idea from twin Harvard brothers Cameron and Tyler Winklevoss. Nonetheless, Mark built up his website, which quickly became extremely popular across universities and colleges. Now the website has transformed to become one of the largest online targeted advertising companies in existence.

Facebook started in 2004 as a private company, it was only eight  years later that the company went public. Facebook’s IPO in 2012 was at a stock price of $38, and as of February 2020 the company is valued at $560 billion USD and has revenues of $70 billion USD. Facebook witnessed a valuation growth of 452% over 8 years. This growth helped facebook buy other influential companies like instagram and WhatsApp. Facebook currently controls 7.79% of traffic on the internet and 86% of social networking traffic. While the glowing mission statement of Facebook is to connect the world; Facebook is actually using Machine Learning to curate user generated content to grab human attention in order sell ads. Apart from the controversy surrounding the company, Facebook has excellent technology that helps it achieve technological superiority over any other competitor. This fact brings us to 2019 when Facebook announced Libra. The Libra project was a statement that made it clear that Facebook thinks that it is larger than life.

Facebook currently controls 7.79% of traffic on the    internet and 86% of social networking traffic.

One major risk that Facebook’s business model has been facing over the years is its reliance on one type of revenue stream; online advertising. The business model is unlike other big tech companies Amazon or Microsoft or even Google which have more than one successful steam of revenue. To deal with this risk, Facebook must have been thinking of a better way to leverage its powerful network and create new revenue streams.Facebook thought that could happen by dipping into currency business by issuing its own token, or in other words a centralized digital currency; Libra.

In the software world tokens are typical in gaming. Game companies like EA, Rockstar, Ubisoft issue game tokens  to create an economy around their product to keep it afloat.

A currency however is fundamentally different from a digital token. Hundreds of years ago, currency in its widely accepted form, used to be a form of easily exchangeable precious assets like metals. In our modern economy, and until  the 70’s, currency was backed by a precious metal reserve held by a custodian (the precious metal was typically gold).  Then a new system came along, the FIAT modern monetary system came and removed the Gold backing and replaced it by trust. Then recently new monetary ideas came along with the abundance of the internet, such as Bitcoin (BTC) and Ethereum (ETH). These are decentralized, distributed, pseudonymous, public ledgers, that are similar to FIAT cash, but exist in a permissionless digital form. The main premise for these methods was to make a statement. This statement was that decentralization and privacy is a better way to handle modern money in the future.

We cannot stress the importance of differentiating between issuing a currency that is an alternative to modern money, from issuing a centralized token that is like a game token. We believe that Facebook, as a software company, fails to make this differentiation as Facebook is inherently biased towards a game token understanding of the concept of currency, rather than creating Libra as an innovation or next level technology.

Issuing currency is different from game tokens or any other centralized tokens because: The issuer of a currency has to be concerned about inflation. When it comes to this, Facebook will be on the line with the government, as a central issuer of Libra. Facebook will have to answer to a global demand of its currency Libra which can be so high that will induce pressures on the basket of assets it will be pegged to, otherwise the currency will be inflationary with unexpected swings and two-way feedback effects between Libra and its USD dominated basket of FIAT money and assets. In other words Facebook would be faced with imminent risk of failing to provide a unified global banking safety net.

The other issue that Facebook may face is ideological in its nature. It is an identity related issue, if Libra is a success. There is a fundamental question that Facebook needs to answer: if Libra is a success, why would Facebook participate in public markets? It would be easy for the company to go private, as it wouldn’t need public markets to fund its activities, as it will have Libra. This would be the biggest pivot for any company in history.

There is a fundamental question that Facebook needs to answer: If Libra is a success, Why would Facebook participate in public markets?

The two above issues are just a sample of many other issues we researched. These issues should be evaluated by investors when looking at Facebook.

Only time will tell if Facebook chooses to go ahead with Libra and if Libra will be a more powerful and efficient economic mediator than most of the governments of the world.

In our next article, we will discuss Facebook’s understanding of Modern Money and our recommendation of how Facebook or other comparable entities can move forward with their projects.