There is a lot of ink being spilled (or keyboards being pushed) to analyze Libra, the grand Facebook (and partners*) entrance into the world of payments and digital assets. Now, if you're a hammer, everything looks like a nail, and so it goes with many of these analyses. And as I recently came across an article claiming that Libra was fundamentally an ETF (here), I guess if you work in the ETF world, then well, the same.
What is Libra?
For those of you who don’t know (perhaps you’ve been living off grid or even worse, living a normal life blissfully unaware of the digital asset revolution), Facebook recently partnered with 27 different companies to establish a foundation, known as Libra, which will issue two digital assets: the Libra Global Coin and the Libra Investment Token.
Libra Global Coin
The Libra Global Coin will be a retail token that will facilitate simultaneous money transfers to anyone in the Facebook/Whatsapp/Instragram network. You can buy Global Coins by depositing fiat currency with the Libra Foundation. You can transfer Global Coins over the network, and the recipient can redeem those Coins for an equivalent amount of fiat money or hold it for further use. A variety of additional services will evolve from this, of course, but that is fundamentally what Libra will offer at launch next year.
To ensure the Libra Global Coin has some independent value (the old adage, money doesn’t simply grow on trees or from 2.5bn strong social networks, comes to mind), the Libra Foundation will “invest” the proceeds from the sale of Libra Coins into a variety of short-term, interest bearing instruments in major currencies such as USD, GBP, EUR and JPY. Assuming the Global Coins have proper ownership over the short term assets, they should maintain a relatively stable value against the basket of currencies.
Libra Investment Token
So, wait, you say that’s not a bad deal: I give Libra my money, they invest it in interest bearing assets, and I get a super efficient, super inexpensive payment mechanism plus some nifty interest - sign me up. Well, sorry, you get all of that except the interest. Libra is issuing Investment Tokens to partners who invest in the Foundation, so you give Libra your money, they invest in short term assets to generate income and that income pays off Foundation expenses and the remainder goes to the partners (and given that interest can scale dramatically off 2.5bn users, while costs will probably level off quite quickly, it would seem that will be a very profitable side earner for Libra partners.)
Ok, so how is that an ETF?
It’s not, really. Yes, Libra has borrowed from the ETF world, making use of what one could all authorised participants (to create Global Coins, you have to give your money to a partner, who then will deliver the assets to the Foundation in exchange for Coins, which it will deliver to you), but otherwise, the comparison fails to provide real insight. There is no "filing", Libra's Global Coin won't be exchange traded (at least, not on a regulated exchange) and it's unlikely it would be considered a fund under the '40 Act (an investment company generally being defined as a company that primarily invests in securities with money received from investors who share equally in the profits or losses proportion to their interests in the investment company). Libra's "clever" and quite profitable decision to keep the profits of the investments for its founders goes a long way there.
Nice try, but no, it's not an ETF.
So what is it?
Well, I guess it depends on your perspective and bias (hammer and nail, again). It has characteristics of an efficient, online payment system, a digital asset and an asset backed currency. But if you ask me how the regulators will look at it (governments can go a long way and defining something), then I would start looking at relevant banking laws. If Libra looks systemically risky, then I think US and European regulators will try to classify a purchase of the coin as some form of deposit (the French have already come out with this angle) and Libra as some form of bank. And this is probably right: since 2008, banks have fundamentally acted as safe custodians and payment intermediaries for cash. And they have done this without paying any meaningful interest. In effect, Libra users are depositing money with Libra, and instead of getting a bank account, they get Global Coins, and Libra is lending that money on in the form of short-term debt instruments, which it then uses to pay expenses and enrich its shareholders. Sounds an awful lot like a bank to me. Admittedly, what is and isn’t a bank is not necessarily as clear as that, but I can easily see regulators stretching the interpretation and if it doesn’t stretch any further, turning to lawmakers to change the rules. And if that happens, then it could have wide ranging implications for the crypto world, in particular for the multiple stablecoins that provide on/off ramps between crypto currencies and fiat currencies.
Townsend Lansing, Chief Commercial Officer of TokenMarket