Facebook's Libra Could Bring Stability to Cryptos | ETF Trends

Facebook’s recently unveiled Libra digital currency could, according to some market observers, bring some much-needed stability to the often volatile world of cryptocurrencies.

The Facebook cryptocurrency news is setting the space abuzz with optimism as Bitcoin reached a high of $20,000 near the end of 2017 and fell over 70 percent since, but is climbing back to prominence again following this news. Despite pressure from governmental regulators for privacy issues, analysts are expecting this cryptocurrency offering will bolster Facebook’s profile.

A year ago, the plan for Facebook to roll out its own form of cryptocurrency was set in motion when the company appointed former PayPal executive David Marcus to begin exploring the opportunity. Since then, rumors swirled that Facebook was developing its own digital currency that would allow its users to store, trade, and exchange for regular currency via apps like Messenger and WhatsApp.

“Until this year, and maybe even today, the average investor has never heard of a stablecoin,” said VanEck in a recent note. “With Facebook’s Libra announcement and the controversy it has created, we feel that it is high time to explain what a stablecoin is, where it came from, and how it may disrupt the payments system.”

Loving Libra?

Recent media leaks suggest that Facebook’s “Libra” project will be an extension of its past efforts to grow its payments business and maintain a loyal customer base to its social media apps by creating their very own money.

“A stablecoin is a digital asset that is linked to a lower-volatility asset, such as the U.S. dollar, a basket of currencies or gold,” according to VanEck. “The use of a creation-redemption mechanism, similar to an ETF, helps keep the price of the stablecoin close to value of the underlying asset.”

Tether is a prime example of stablecoin and some market observers see payments as fertile territory for Libra, Tether and other stablecoins.

“The second advantage of stablecoins for payments is cost. While the average credit card processing fee for merchants for major credit cards is approximately 2.5%, the typical daily spreads for Gemini GUSD to U.S. is a few basis points,” notes VanEck. “Gemini and Flexa currently allow for real-time payments at participating retailers, including Starbucks and Whole Foods/Amazon. Facebook’s announced Libra cryptocurrency is expected to be a payments stablecoin, launching in the first half of 2020. It will be a digital asset on a permissioned blockchain initially, and will be backed by a multi-currency basket, similar to the International Monetary Reserve’s Special Drawing Right (SDR) system.”

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