Facebook's Libra shines a light on blockchain technology as a disruptor

9 Sep 2019
This year, Facebook announced the launch of their new currency and blockchain platform called Libra, which attracted investors such as Visa, Mastercard, PayPal, Uber, Lyft, and Coinbase.

Lawmakers in the United States and European Union have however called for a halt in the rollout of Libra to address possible regulatory issues first.

Facebook’s Libra is intriguing as a medium of exchange, according to Hywel George, Director of Investments at Old Mutual Investment Group. But importantly, because it will bring blockchain into the mainstream, he says.

“The proposed currency is very interesting,” says George. “Unlike Bitcoin, Libra is tied to fiat currencies, which acts as a store of value to each Libra. This should eradicate the random volatility inherent in other cryptocurrencies like Bitcoin.

“However, we’re particularly interested in how it is likely to bring blockchain into the common discourse, which is positive in our view,” he points out. “Blockchain is likely to be a significant disruptor over the next five years, which will create more efficiency in terms of reducing intermediary costs.”

Essentially blockchain is a list of public records, also known as a public ledger, where transactions between parties are listed or stored. Each record, known as a 'block' within blockchain terminology, is secured using cryptography.

Facebook states that the main goal of Libra is to reach unbanked individuals across the world – some 1.7 billion adults globally. Dante Disparte, head of policy and communications for the Libra Association, told online cryptocurrency publication, Coinbase that the goal of this new project is to build a financial ecosystem that can empower billions of people.

A transactional medium like Libra will reduce the frictional cost when transferring currencies across borders, notes George. “It can be extraordinarily useful as a medium of exchange on modern e-commerce platforms. Globally there’s an outcry for more efficient use of exchange with the creation of grids across e-commerce platforms, so this might lead to a viable solution.”

While he doesn’t see Libraforming part of a conventional asset class in investment portfolios, George says it could in future be part of a global balanced portfolio, forming part of a cash holding, including, say, yen, dollars, euros and Libra.

However, he cautions investors to be wary of cryptocurrencies such as Bitcoin.

“There is still significant reason to regard other cryptocurrencies with scepticism - as an asset class and means of transaction. We don’t invest in Bitcoin or any other cryptocurrencies and I doubt we will, mainly as the valuation of these coins is extremely difficult to pin down,” he explains.

“When there is a scarcity of information and a lack of understanding, combined with intense global speculation, you often get an artificial bubble in an instrument or item. You get to a point where uninformed investors pile in simply because the instrument is going up in price,” he explains. “This is the definition of speculation, which leads to a bubble.”

Digital coins will only serve as a substitute to cash when they become inherently more liquid, less volatile and easier to use, and we do not expect this in the foreseeable future. Libra, on the other hand, could prove a lot more useful as a well understood, secure and truly global means of exchange” George concludes.