By Sharon Lewis and Reethu Ravi This article is the first of a four-part Tech’s Year in Review series reviewing developments across industries in 2020. This first installation discusses some industries spotlighted by the COVID-19 pandemic, namely edtech, logistics and supply chains, fintech, [...]
By Adrian Lai
There’s more to Facebook’s game-changing crypto project than meets the eye
Facebook’s recent announcement of their foray into digital assets shook the world, but there’s more to Libra than just cryptocurrency.
What is Libra Coin?
There are over 1.7 billion people worldwide who are unbanked or have improper access to banking services. However, one billion of them have a smartphone, and half a billion have access to the internet–a pivotal element in the success of Facebook Libra.
In the official whitepaper, Facebook presents the Libra project as a global payment solution that unbanked people in developing economies can use to transfer money at low cost. By simply connecting to the internet, they can purchase Libra coins and transfer them to their friends locally and internationally.
The Libra coin is the fiat-backed coin that will be used as a payment token on the Libra network, but there’s more to it than a regular coin. Although Libra coin is designed to be a cryptocurrency, unlike bitcoin, which is often looked upon as a speculative asset, the Libra coin must maintain a stable value over time to encourage its mass adoption as a payment token. Therefore, Libra coin–classed as a stablecoin–is backed by a basket of fiat currencies and government securities in the Libra Reserve.
The Libra Reserve
The money in the Libra Reserve comes from two sources:
Users: If a user wishes to purchase 100 Libra coins, they can use the Libra wallet app to buy the equivalent of US$100 of the currency. During the transaction, Libra coins worth $100 are minted by the Libra Association and the fiat deposit is added to the Libra Reserve. When the user sells the Libra coins and gets the $100 back, the Libra coins are destroyed, and the money is removed from the Libra Reserve and transferred back to the user. Through this cyclical movement of money, all Libra coins are asset-backed.
This emphasizes the importance of mass adoption of Libra. The more the fiat on the network, the larger the reserve will get.
Investors: Inclusive of Facebook, there are 28 founding members of the Libra project, all of whom have invested a minimum of $10 million into the project. Facebook plans to partner with 100 companies by the official launch in mid-2020, with all expected cash inflows from onboarding partners added directly to the Libra Reserve.
Of the 28 founding members, most are American corporations, and they hail from a diverse range of sectors. They include credit card issuers like Mastercard and Visa, startups like Lyft and Spotify, venture capital investors like Andreessen Horowitz and Creative Destruction Lab, and NGOs like Mercy Corps and Women’s World Banking.
The Second Coin is a Security Token
Why are investors piling on to Facebook’s crypto project? What do these investors get in return? Do they receive a contract or some form of ownership in the project? This is the hidden element of Libra that no one is talking about.
On the investor end of Libra’s platform is a second token called the Libra Investment Token (LIT). This is a security token that investors receive in exchange for their investment. A security token represents a legal right to a form of ownership or intrinsic value of the issuing company. In Libra’s case, it represents an investor’s right to run one of the nodes on the network, have voting rights in the Libra Association Council, and receive dividends.
With a total of 100 members by the launch date, the Libra Investment Token will potentially facilitate a billion dollar Security Token Offering (STO), making it the largest STO in history. In fact, the billion dollar mark is only the minimum, and companies may invest more than US$10 million.
Given the scope of the LIT, why isn’t anyone talking about it? This is because marketing the STO publicly may violate regulations in some jurisdictions. For instance, the Monetary Authority of Singapore temporarily suspended a STO in January 2019 because the issuer promoted it through a LinkedIn article. This goes against the directive to market only to professional investors.
The Libra STO is a private placement and only a select group of elite companies can invest in the Libra project. This is why Facebook rarely mentions the Libra Investment Token and instead diverts their marketing push towards the Libra stablecoin, which requires mass adoption to be successful.
Why Are They Doing a STO?
Facebook could have attracted investors traditionally. However, the process would be much slower, less transparent and more costly. With regulatory bodies eyeing STOs as an alternative method to raise money for projects, the Libra STO will officially introduce blockchain as a scalable and regulated technology for fundraising.
The institutional backing behind Libra is also a show of support for STOs as investment vehicles. Libra’s investors must believe that security tokens can safely facilitate their investments, process dividend payments, record their votes, etc.–making a case for greater adoption of STOs going forward.
Put simply, we are not just witnessing a paradigm shift in the payments industry through Libra. We are also witnessing a technological disruption in the way that large enterprises and SMEs will raise funds in the future.
About the Author
Adrian Lai is the co-founder and CEO of Liquefy, a venture-backed security token issuance platform. He is also a trainer at the Hong Kong Securities and Investment Institute, and a columnist at the South China Morning Post. Adrian has been a commentator on digital assets for major international media such as the Wall Street Journal and CNN. Before joining the blockchain space, Adrian worked at BlackRock Asset Management.