Facebook (NASDAQ:FB) is getting into the cryptocoin business with a new currency dubbed Libra, which it says will be backed by a market basket of currencies, not just pegged to the dollar. Thus far, the announcement has proven positive for some FB stock investors, while others are far more cautious. With that said, here’s a look at what we can expect from FB’s Libra.
In a white paper the company said its plan is to build a blockchain that can let unbanked people around the world afford banking transactions. It announced a host of banking industry allies will support it, including Visa (NYSE:V), Paypal (NASDAQ:PYPL) and Mastercard (NYSE:MA). Facebook is hoping for $1 billion of investment for Libra, but so far only $10 million has gone into it.
Facebook stock had been shooting up since the start of June on rumors of the move, a gain of almost 16% since June 3, adding $75 billion to its market cap. Speculators sold the announcement, sending the Facebook stock price down 1% in overnight trading. FB was due to open at about $186.50 on June 19, a market cap of $538 billion.
Credit card processors risk being bypassed in the developing world by blockchain and other technologies that let people trade and access banking services at low cost.
India’s Unified Payments Interface (UPI), for instance, handled 250 million transactions last June after the government there removed high-denomination bills from circulation. Indian transactions of under 1,000 Rupee, worth about $14.30, can now be done using UPI for the equivalent of .14 cents. Standard Visa rates are about 3 cents per transaction, and a 2.5% “discount” to merchants for settlement risks.
People with worthless currencies in places like Zimbabwe and Venezuela have turned to bitcoin and other cryptocurrencies. The smallest unit of bitcoin, called a Satoshi, which is 1/100,000,000th of a bitcoin, is now worth about 3 Zimbabwe cents. But the cost of the bitcoin blockchain makes it difficult for the ordinary citizen to use it.
The Libra dream is of a stable coin running on a low-cost, global blockchain, allowing those who can’t afford banking services to access them and, eventually, replace weaker currencies. The hope is that buyers and sellers will be able to move Libra money with simple Facebook Messenger or Whatsapp messages as early as 2021.
The idea of a banking system that’s only regulated as a blockchain and bypasses governments has its critics. Economist Nouriel Roubini says there’s nothing blockchain about Libra, calling the whole thing a pipedream.
Fans of existing crypto coins aren’t thrilled by Libra either. Facebook insists its Calibra wallet, which will hold the Libra currency, won’t share data with its ad platform. But analysts hyping the play still see power in combining financial data with Facebook’s user data.
Libra includes a new transaction language called Move, a protocol called Byzantine Fault Tolerance meant to make permission-less transactions safe, and a new Libra blockchain database. The Libra Association itself is defined as a non-profit, but the payment companies, internet merchants, venture capitalists, communication companies and blockchain enthusiasts involved all hope to make billions by using Libra to conduct business outside the current banking system.
The Bottom Line for FB Stock
Trading on Libra today is trading on hype and hope.
Facebook’s value remains rooted in its free ad-supported services, which continue to churn out $15 billion of revenue each quarter, one-sixth of which becomes net income.
Facebook’s value is also based on its cloud network, with four data centers, three more on the way and more cloud capacity in Singapore.
FB remains the smallest and, because of its business model, the most controversial and least stable of the Cloud Czars. (The others are Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google.) Its goal in getting into financial services is to diversify its asset base and create a truly global footprint of data centers.
It’s all highly speculative. But it’s also highly innovative. If that’s what you’re looking for in a cloud investment, look for an entry point in Facebook stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT and AAPL.