Ripple Explained - Chapter 6 (Ripple Inc.) vs. Libra (Facebook Inc.)

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.