Facebook, Ready To Become A Global Bank?

What advantage do social media giants have to offering financial services?

A large user base. Facebook is set to provide electronic payment services using their own digital currency called the Libra coin. This story was huge when it first came out because of the hype around it as a cryptocurrency that would compete against Bitcoin and Ethereum. Perhaps that is not quite correct. The Libra coin is being offered as a token that provides ways for users on Facebook’s platform to make payments to each other. The tokens are provided with the Calibra wallet and a network validates transactions via a group known as the Libra Association.

Facebook’s cryptocurrency is not using an actual blockchain, but more a digital ledger. While it also uses cryptography to secure transactions and make them immutable and provide transparency, the set number of validators on the network make it more permissioned and centralized than a public blockchain. That is counter to the ideology behind cryptocurrency which are supposed to be permissionless and decentralized. Facebook will not be the sole validator on the network though, that is because it will be the duty of the Libra Association.

The Libra token is also not exactly going to be a competitor against Bitcoin. Libra’s value will not be based on market speculation or demand, but will be pegged to fiat currency. It is not exactly the type of digital asset to acquire as a store of value, unless the purpose of the token changes. Otherwise it is just like another version of an electronic payment system that is already quite common. Pegging it into fiat removes the volatility that is typical of cryptocurrency. No matter how many Libra coins you have, its value will remain the same as the amount of fiat you exchanged it for. The use of the Libra token for payments is to provide easier ways to pay with less friction and for accountability purposes.

The list of Libra alliance members is what is impressive. The idea that Facebook was able to unite companies like PayPal, Uber, Lyft, Visa and Mastercard gives the notion that this must really be on to something. That is because it has such huge potential, it has already attracted scrutiny from mainstream finance and regulators. However, it is not exactly a good thing because rather than approve it, critics want to either stop the whole thing from happening or regulate it with the full extent of the law.

What we have to realize is that Facebook has over 2+ billion users. The impact such undertaking has can influence people’s lives. That means that billions of users will be able to use Facebook to not only make payments, but as an on ramp to trading cryptocurrency as well. That can be good news for Bitcoin and Ethereum holders. Rather than compete, it can foster cryptocurrency growth. Facebook wants to reach out to the greater part of the population that is unbanked. Now that is a significantly large proportion of the world’s population. With more people having access to the Internet through their smartphones (4G technology), the impact this can have is really huge.

For regulators, the concern is Facebook’s reputation. Since the data privacy issues and Facebook’s appearance before the Senate, why would anyone trust Facebook? Other concerns include whether Facebook will censor those on their platform from using Libra. The overall power that Facebook will have in this field makes it hard for anyone else to compete against because of how large the user base is. Facebook is an ecosystem that includes Instagram, WhatsApp and Messenger. It will become so easy and convenient to use these apps to make payments, it is a great business plan.

For banks the biggest concern here is Facebook as a competitor. Libra coins can be bought using the Libra Association’s payment processors. It does not require banks, and this raises more scrutiny. Does this mean “Facebook will become their own bank?”, because they can very well do that. If people and businesses can start taking out loans from the Facebook, that will disrupt the banking industry. The amount of fiat reserves that Facebook and their Libra Association will hold from selling the coins will be held as not for profit. However, they can use the funds to continue to develop the Libra ecosystem and it will still benefit the members of the alliance and Facebook. Despite being not for profit, they still make money from accrued interest and the amount of money is huge. This is actually from a second token called the Libra Investment Token, and this is the financial reward for members of the Libra Association. Just like any cryptocurrency, there is an incentivized reward system for those who participate in its consensus.

Without further regulatory clarity and the amount of requirements, Facebook will have a mountain to climb until they get Libra to the public. Since the Libra Association has registered in Switzerland, they will also need to meet compliance with the authorities there. In the US, it will have to meet both federal and then state regulation before it can be approved. Other countries like China, may have a conflict of interest with Libra and may not ever see its use there.

What Libra coin can also provide is an on-ramp to on-board more people to an electronic payment system. Depending on how you look at it, the system can also be a gateway to cryptocurrency. Thus it will not directly compete with cryptocurrency like Bitcoin, but can actually make it easier for people to buy them. This is because Libra can be listed on digital exchanges where they have a pairing to other cryptocurrency. While Libra can be used for payments, they can also be traded for other cryptocurrency on digital exchanges.

A global bank will have plenty of power, but also require more responsibility. Facebook has already violated trust among its users by selling their data to third party. There are now also issues with privacy after Facebook admitted that it listens in to conversations in order to improve the service. Will consumers also be comfortable knowing that all their transactions are tracked on digital ledger that is controlled by a sort of oligarchy i.e. The Libra Association. The problem is that there is so much lack of transparency, users would not have been aware of what is happening. The Libra Association claims they will move to a more permissionless and decentralized system by moving to the PoS (Proof-of-State) consensus. They also want to guarantee that there is transparency and immutability like in any other blockchain. Libra may be good for users in general, but earning trust is the issue. Whether or not Facebook is up to the task remains to be seen.

Litecoin Halving – Do Less Rewards Mean More Value To Miners?

The Litecoin blockchain halving was succesful at the block height of 1,680,000 at 10:16 UTC (Monday August 5, 2019). The halving reduces the Litecoin reward in half, from 25 LTC to 12.5 LTC per block mined. There was no immediate dramatic rise in the price of LTC, but it showed plenty of optimism in the market. Litecoin, like Bitcoin, has a limited supply which caps at 84 million LTC. The halving is an event that occurs on the Litecoin network every 840,000 blocks or approximately every 4 years. As the name implies, it is a 50% reduction of the miner’s rewards for every block they validate on the network. This is part of the Litecoin consensus mechanism called PoW (Proof-of-Work) which is also used in the Bitcoin blockchain.

The halving creates digital scarcity, and to some analysts this means the digital asset becomes more valuable. Whether it is due to the lower supply of LTC or the hype surrounding the event, prices have not increased at the levels some may have expected. Perhaps this is due to the halving being priced in with investors already having accumulated the digital asset ahead of time. If these transactions were done over the counter style, then it will not really affect the market prices on digital exchanges. Some analysts believe there should be more to expect in terms of the utility of the token rather than just anticipate the digital scarcity will increase prices. Perhaps the law of supply and demand doesn’t exactly equate to expectations in a volatile cryptocurrency market.

LTC is used mainly in making direct P2P online electronic payments. It functions like any other cryptocurrency, where the transactions are made transparent and immutable, allowing for greater accountability. In terms of speed, it isn’t any faster than traditional payment systems like VISA or Mastercard. However, LTC can instantly transfer value across any border because of its P2P feature. The transactions also have lower fees than money transfer agents or bank charges. When you don’t have intermediaries in the payment network, you can pretty much transfer value easily in a frictionless manner. All that is needed is an exchange that supports LTC that converts the cryptocurrency to fiat.

The problem is that regulatory clarity has not fully accepted cryptocurrency like LTC. Although it is being used by some people to make payments or transfer value, it is not happening on a large scale yet. Not all exchanges are available in all countries that support a fiat to LTC pairing. If any exchange has a Litecoin pairing then it would be easier to transact. This would be like how using the USD becomes viable because of currency exchanges that support it. Therefore it makes it accessible to everyone and it is the legal medium for exchange. LTC on the other hand is not readily available to be used to purchase items, unless the business supports it. So far there are very few establishments that will accept LTC as a payment for let us say a cup of coffee or breakfast sandwich. How easy it is to use fiat to pay for those items.

There is more concern among the mining community though. Since block rewards have been cut in half, operations will be affected due to decrease in profitability among miners. It would be fine if the price of LTC greatly increases, but if not then the miners will have to absorb net losses. The issue here is related to the electricity costs to cover producing LTC from mining blocks. What this can result to is an exit among miners who cannot absorb the costs, while established miners will continue mining and making profit. The bigger mining pools can survive because they have the resources to do so. The hash rate of the overall network could also decrease, making the difficulty target easier and block mining just as profitable for the miners who remain in the game. 

Let’s look at how blocks are mined on Litecoin’s blockchain. The block production time, on average, is 1 block every 2.5 minutes, which is 576 blocks are produced every 24 hours. Due to the halving, each block mined now rewards miners 12.5 LTC. That means that every day or every 24 hour period 7,200 LTC is created. This will go on for the next 840,000 blocks which will be the next halving. With a total supply cap of 84 million LTC, the halving leads to less and less rewards for miners. The incentive here is to produce blocks, but with less rewards there may be less miners providing hash power to the network. The idea is that demand will exceed supply, so miners will still be incentivized to validate and mine blocks so the value of LTC will increase. The point here is that the lower amount of LTC is not going to stop miners if the price of LTC increases due to the demand. Fees should also be reasonable enough that people will use LTC to make payments. So far it seems current fees are low enough in terms of LTC/KB with 3 priority levels (the highest level costing more than the rest). This is what the Litecoin team refers to as “near-zero cost payments” i.e. cheap fees.

The only thing that has not been determined is whether LTC will continue. The LTC is only valuable if it is being used, but if it is just speculation fueling the prices then there is really no utility behind it. The developments in Litecoin need to catch up to the demand which is what is creating it in the first place. There has been encouraging news about new ways to bring privacy to transactions on the Litecoin blockchain. Developers will need to make sure that the value of LTC doesn’t rely on pure hype and speculation alone. Instead it must demonstrate that the technology is capable of providing the features of a decentralized instant electronic payment system for the world.