Part I of our Four Part Series actively explained how Facebook’s Libra works. As a fellow CEO, COO or CMO, we at SCT believe you deserve a crash course in the emerging Digital Economy before 2020 appears on your smart watch. The global economy is shifting. For example, there are now more billionaires in China than there are in the United States. As a ‘C-Suiter’ we want to pay attention to these shifts, so that we can modify our own digital strategies and harness the speed of business.
Many would agree that our monetary system is faulted and weighted by federal and international regulatory bodies that know a lot about policy, but not enough about trade and the art of borderless service and transaction models. Regardless of our total number of employees or our EBITDA, we all are in some way, shape or form a multi-national company. We may have business addresses here in the United States of America, but we have vendor and supplier relationships in other continents and time zones.
What’s Next for FIAT Currencies:
Facebook’s Libra is set to start out as a centralized currency. But within five years will become completely decentralized just like Bitcoin (that’s the plan although it’s not mandated in the algorithm, but it could be). That’s a staggering conjecture when we think about the international user base of Facebook. Facebook is no longer just a personal endeavor of shared stories and laughs. Instead, Facebook, has become a go to platform for multi-nationals to pitch their latest releases. Facebook has become a subject of continental voter intervention. Facebook has become a verb. It’s an action. It is something 2.41 Billion accounts ‘do’.
And like a country, Facebook now needs governance and its own infrastructure.
The Rise of The Libra Association
In its development stages, the Libra Project will be managed and controlled by the Libra Association. A nonprofit organization headquartered in the peaceful and no-conflict city of Geneva, Switzerland. It will comprise of global companies, social organizations, and academic institutions. Think of the Libra Association as a ‘Digital’ United Nations 2.0.
Membership Has Its Privileges – “How to Get Your Ticket to The Dance”
To become a founding member of Libra and The Libra Association, you need to demonstrate stake of USD$10,000,000. This is the ‘hard cost’ of membership. Each founding member will also be required to run a validator node, which is a computer that validates and approves transactions following the Libra Association rules known as a consensus algorithm. A node is a fancy ‘fact checker’. This node process is similar to what a miner does in the Bitcoin network. But money and computing power aren’t enough to join the Libra Association as a founding member. There are other qualifications…read on fellow ‘C-Suiter’.
‘The Big Three’ (That We Each Must Have) – Money & Computing Power & Scalability
Libra Association members as validator nodes need to pass a certain scalability bar. It’s like the Internet’s version of an NFL combine. It’s a ‘minimum standard’ for us all to follow, and exceed.
Here’s the Check List:
- Commercial Companies must have more than $1 Billion in market value. Reach over 20 million people a year. Be recognized as a Top 100 leader within their industry vertical.
- Cryptocurrency Investors must have at least $1 billion in assets under management.
- Social Organizations must have a track record of working on poverty alleviation. Rank in the Top 100 in their cause vertical. Have an operating budget of over $50 million.
- Academic Institutions must prove placement in the Top 100 in the world in the education vertical according to certain standards.
Libra’s vision is that any with a sufficient stake in the Libra Association Network will be able to serve as a validator node. To start, the Network will be limited to 100 qualified founding members and validators.
How the Libra Association Works…Really Works!
The Libra Association is in charge of the Libra protocol, meaning the rules of the network, and of managing the Libra reserve. The Association is ‘the government’. The governing body of the Libra Association is the Libra Association Council, comprised of one representative from each member of the association. Here’s the math: 100 Founding Members = 100 Members on the Libra Council.
Think of the Council as your current day Shareholders in the Libra Association. They get to vote on key decisions, but they’re not involved in the day-to-day management. The voting powers in the Council are generally proportional to stake. In other words, invest more money and you have more opportunities. However, the voting powers are also capped to avoid concentration of power. The Council appoints an executive team under a Managing Director to carry out decisions and manage day-to-day issues. Additionally, a Libra Association Board, comprised of 5 to 19 Members of the Council will provide guidance to the executive team. This would be similar to a Board of Directors, to which a CEO is accountable. And finally, we have the Social Impact Advisory Board led by the non-profit organizations and academic institutions. This Advisory Board seems to have limited influence since the Libra Association Board must approve its recommendations.
Important ‘Operations Manual’ Note:
Facebook Inc. is the initial Founding Member of the Libra Project. It has the same commitments, privileges, and financial obligations as any other Founding Member. For Libra’s vision of decentralization to be realized, the Association would eventually become unnecessary and the Libra Project will be controlled through the public’s participation in the network. The Association are the ‘training wheels’ until the public learns how to ‘pedal’ on its own.
The Libra Reserve – The Value of Libra
Most cryptocurrencies aren’t backed by any commodity or fiat currency. That’s why they often fluctuate so dramatically in price since a lot of people are speculating on how much they will be worth ‘tomorrow’.
Libra, on the other hand, is set for day-to-day use, which requires it to have a less volatile nature. Stability. Like your local gas station doesn’t change its price mid-day, but it may change the price for tomorrow’s consumer. That’s why for every Libra ‘coin’ created there will be a set of stable and liquid assets backing it. This backing, known as the Libra Reserve, helps make Libra more stable so users will be able to sell Libra coins at or close to which they initially purchased their Libra coin. Stability.
The Libra Reserve expands and shrinks according to supply and demand for Libra from the market. Unlike many cryptocurrencies that have a limited supply, or use mining to generate new coins, the Libra supply is ever changing. When people demand Libra – more coins will be created in exchange for the fiat currency used to buy it. When people sell off the Libra – the reserve will shrink accordingly and so will the Libra money supply. There is elasticity to this model.
The initial funding for the Reserve will come from Founding Members of the Libra Association and from users buying the coin once it launches and becomes public. It will be safeguarded by several different custodians, to avoid a centralization risk, and it will be audited periodically.
Another Important ‘Operations Manual’ Note:
The Libra Reserve is not actively managed, it responds to market conditions. There is no monetary policy set by the Libra Association on when to create or destroy coins. Instead, the Reserve acts more like the policies of our Central Banks represented by the currencies in the reservice, such as the U.S. Dollar or the Euro. Can you see where this is going?
The Reserve backs the Libra Coin in full with a goal to always preserve Libra’s purchasing power. This type of reserve discourages a classic ‘run on the bank’. The typical rationale behind a ‘bank run’ is that a coin is only fractionally backed, and there isn’t enough hard cash to go around, if everyone were to decide to cash out at the same time. A fully backed reserve promises that everyone would be able to cash out at any moment, if the market were to panic and every person wanted to sell at the exact same time. Stability.
The Libra Investment Token
The Reserve funds from Libra mentioned earlier will be invested in low-volatility, highly liquid assets like bank deposits and government bonds with low default probability and low inflation expectations.
The yield from the Reserve will be used to support the operating expenses of the Libra Association, but will also be distributed to the holders of the Libra Investment Token.
The Libra Investment Token is a security token issued by the Libra Association which, unlike the Libra Coin, can, and will fluctuate in value. Is this a security, you may ask? When a Founding Member of the Libra Association invests an initial amount in the Reserve, they get the Libra Investment Token in return. This token can be considered as a ‘share’ in the Libra Association.
If the Libra Reserve generates a profit it will be distributed to the Libra Investment Token holders. Since the Libra Investment Token is considered a security, it will be available only to Founding Members of the Libra Association and to accredited investors from the general public.
Keep in mind, that since the Reserve is invested in very low risk and low yield assets, it’s planned to make a substantial profit only if the Libra Project were to truly take its visionary course. The Reserve needs to be large enough to generate substantial profits even from low interest rate investments, which it can do providing there is cooperation and interest from the retail and institutional investor segments.
It’s now time to talk to your CFO, and prepare for another accounting model in your Accounts Payable & Receivable Departments. The world is shifting and so should you. The models and wallet systems that your consumers will have exposure to, will demand for you to adapt, adjust and innovate. This is why, Smart Community Technologies (SCT) is your virtual tour guide. You need SCT to direct you with compass like precision where your companies ‘True North’ is when it pertains to being nimble in the growing digital economy.
In Part III, we will take a closer look on how you can seize these digital opportunities and lock-in on clear and defined objectives and paths with the help of SCT, so that you can lock-out your competition. The digital landscape is going to get very competitive in 2020, and you want to fortify your company with proven and strategic planning today.