For those who are new to crypto or operating in the crypto marketplace and are blissfully unaware – Facebook is launching a cryptocurrency (supposedly) next year called Libra. I say supposedly as there still hasn’t been any kind of official release date and the actual currency itself is still in its infancy, especially around details of application and functionality.
We do know a little bit about Libra however, and if you want to get up to speed, I highly recommend you check out the Bitcoin vs Libra article which highlights the big differences between the two cryptos.
For now, we are going to address the elephant in the room – the world at large doesn’t want Libra and nor does the cryptocurrency market.
Libra Could be a Recipe for Crypto Disaster
Libra entering the marketplace is already drawing harsh criticism. Donald Trump (who is notoriously unkind about cryptos in general) has taken exception to Facebook launching a cryptocurrency and has categorically said that if Facebook wants to create a currency then it needs to adhere to the same regulation that banks do.
Banking regulations are now incredibly tight (following on from the recession) and it remains to be seen whether a company like Facebook will be able to adapt its model to fit the regulatory framework of a bank. Banks also need to prove liquidity and solvency which Facebook should have no issue doing.
Regulations Could Spill Over
The real problem occurs when the regulators of Libra start looking at the crypto market as a whole. The expression “what’s good for the goose is good for the gander” comes to mind and it could well be that regulators seek to impose the same strict codes of conduct on other cryptos.
Solvency is going to be a major issue for most cryptocurrencies if this type of regulation is bought in.
What is Solvency?
Solvency is basically an institution having a pot of money that shows that in the event of an emergency they can maintain the business model and mitigate risk. In the EU there are strict directives which form a larger regulatory framework for banking that go a bit further than US regulators.
Most cryptos will not have enough “money in the bank” to prove solvency as most cryptos use the asset of the token itself as the financial mechanism. As the market is so volatile, token price would be too erratic to form any risk mitigation on.
Asset Backed Cryptos
Strangely, asset based cryptos might well be the solution to the regulatory headache that is almost certain to ensue to some degree. I go into a bit more detail about asset based cryptos in another article. But for the purposes of wrapping this article up, asset based cryptos have a central pot of reserves (assets) which would go a long way to appeasing the demands of regulators.
It is almost certain that Libra is going to take the world by storm and it is even more certain that Libra is going to disrupt the crypto marketplace. Hopefully it makes a positive impact rather than a negative one.