Ripple Explained - Chapter 6 (Ripple Inc.) vs. Libra (Facebook Inc.)
20 August 2019Reading time: 6 minutes
Vontobel
now offers investors access to the crypto currency «Ripple». But what is Ripple
(XRP)? In six chapters, we want to give you high-quality knowledge about the
exciting topic of «Ripple».
Companies and decentralized
crypto currencies attack state money monopoly
The
creation of a new currency and the collection of transaction fees associated
with that currency is a profitable business. Companies like Ripple and Facebook
(but also Amazon, Google, JP Morgan and
start-ups) all want to benefit. This chapter deals with the two crypto
currencies XRP (Ripple Inc.) and Libra (Facebook Inc.). Both companies are
competing with their technologies to establish themselves as a global currency.
Thus they are in competition with the US dollar, which is why Trump is not a
proponent of crypto currencies.
Is this the beginning of the end of the state money monopoly? The crypto
expert Andreas Antonopoulos describes how competition is currently developing
between three types of money: government money, corporate money and
decentralized crypto currencies. The state money monopoly has hardly been
questioned in the past. It was not until the 1970s when Friedrich August von
Hayek described the idea of competing, non-state currencies in his book
"The denationalization of money". But his book was long dismissed as
a theoretical thought experiment far from economic and political reality. Five
decades later, with the advent of crypto currencies, this debate is now
relevant. The general public suddenly has to ask the question: What is money
and how can optimal money be created? The new type of money, however, meets the
demands of today's generation for new and cheap alternatives to the
conventional monetary and financial system.
Facebook enters the crypto
market with «Libra»
In
June, when Mark Zuckerberg announced that he would bring a crypto currency
called «Libra» onto the market, the plan seemed to be well received:
The Facebook share reacted to this announcement with a price increase and the
Bitcoin price also rose. Zuckerberg wants to create a digital economy around
its social media services. Libra is to act as a means of payment.
In addition, Facebook wants to set up its own wallet called «Calibra» and
integrate it into WhatsApp and the Facebook Messenger. Together, these apps
have over 1.7 billion users worldwide. Calibra is to be established as a
separate subsidiary so that account data is not passed on to Facebook.
Facebook
has already collected EUR 280 million in cooperation with 28 well-known
companies such as PayPal, eBay, Visa, Mastercard and Uber, which operate as
members of a consortium («Libra Association»). The
Internet giant hopes to raise a total of USD 1 billion by the time Libra is
introduced in 2020. It will serve as a reserve to cover the currency. In the
future, the consortium will consist of over one hundred members, all of whom
will be spread around the world. No one should have more than 1% of the voting
rights in order to guarantee decentralisation. Facebook will also have no
direct control over the coin. Instead, Facebook, together with the other
consortium members, will operate a blockchain whose rules are fixed. This could
lead to broader acceptance and trust in the long run. Since the Swiss-based
Libra Association will be responsible for managing the financial reserves, it
is nevertheless said to have a certain centrality. The interesting thing about
this new coin with its reserves is that it is a "stable coin", i.e.
its value is linked to various government currencies and bonds in addition to
the US dollar. This is associated with the expectation that high exchange rate
swings, such as in the case of Bitcoin, could fail to materialise. In this way,
Facebook wants to enable its users to pay quickly and cheaply. Zuckerberg thinks:
"Sending gold must be as easy as sending a photo". Therefore, a stable
coin makes more sense than other volatile crypto currencies. However, there is
not a single bank among the 28 founding members of the consortium, as Libra is
regarded as a competitor by the banking world. Facebook has a much larger customer network than the
largest banks in the world. If the 1.7 billion members held only a fraction of
their bank balances in Libra, its reserve would grow enormously, making Libra a
serious counterparty in the financial industry.
Trump not only criticized crypto currencies like Bitcoin, but also attacked
Libra. He explained that if Facebook wanted to become a bank, the company would
have to comply with all banking regulations - just like all other banks. Since
Libra could also put pressure on the dollar and become a competitor to US
monetary policy, Zuckerberg was asked by the US House of Representatives to
discuss issues relating to data protection, trade, national security and
monetary policy. Libra could even become a substitute for single fiat
currencies, as Libra is a combination of different fiat currencies, and that
entails diversification. At a time of currency wars, this could become a
desirable factor.
But Libra could be very interesting for politicians. For example,
regulators can access data on Libra financial transactions if needed. Libra was
therefore referred to by Facebook as GlobalCoin, which could be used by
governments worldwide to monitor the financial activities of their citizens.
Since Libra will hold a basket of government debt and fiat currencies, it could
tap savings from Asia, the Middle East and South America and redirect them into
US and European debt and fiat currencies. Libra could thus create continued
demand for the US dollar as savings flow into the US government's pockets,
which could strengthen the US dollar. While the Libra Association is not
obliged to buy US Treasury bonds to cover Libra, it is likely that Libra and
the US government will agree on a mutually beneficial solution.
Is XRP too volatile?
Ripple
and Libra are trying to become a global private central bank. The main
investment argument made by XRP enthusiasts is that retail investors can
front-run banks that eventually will adopt XRP for cross-border
settlements. Since banks will use and
acquire the reserves of the XRP as a intermediatory currency, the price could
rise and reward early investors. Currently, banks incur costs of
about 20 basis points per transaction in processing international payments.
Ripple could use its system to reduce costs by six basis points - and a further
two basis points if XRP is used on the xRapid network. For XRP to be truly
accepted as an intermediary currency, XRP and Ripple Labs Inc. would also need
to be more trusted, as with the US dollar and the Federal Reserve.
However, the XRP price is volatile, which could affect its competitiveness
against the US dollar as a global reserve currency or the Libra as a stable
coin. Libra would have stable purchasing power and low volatility - necessary
to establish itself as a medium of exchange and unit of account. In contrast,
XRP is not covered by anything. The price of XRP is based exclusively on
speculation. But if XRP would cover its currency also with reserves, in order
to stabilize so their purchasing power, XRP would be subject to no more price
increases. Only the participants in Ripple Labs would benefit from XRP as a
global reserve currency.
It's amazing how much opposition Libra has encountered from regulators as
compared to XRP. This is because XRP, unlike Facebook, does not have a network
of 1.7 billion users. However, the fact that XRP's network is smaller than
Libra's and XRP's volatility may be higher does not mean that XRP cannot
compete for crypto currencies. XRP could compete with Facebook's Libra, Apple
Pay and JP Morgan Coin, which in turn compete with the US Dollar.
Conclusion: XRP vs. Libra vs.
USD
After
the groundbreaking invention of the Internet, a race for the perfect digital
money is about to begin. The next decade will see a hard-fought competition
between three major competitors: government spent money, corporate spent money
(Libra) and decentralized crypto currencies (XRP). Politicians will have to
accept that the future will bring competing types of money.
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19/04/2021 14:48:52