Will Libra Allow Facebook to Print Money For Its Business?

Facebook has window-dressed its Libra initiative as a noble mission to help the world’s unbanked population. But it could have a more-than-noble impact on its bottom line.

While details about the project have not been released, analysts and commentators have noted that Libra gives Facebook the license to print “even more money” to boost its revenues and make the founding members of the Libra Association, the Switzerland-based nonprofit governing the blockchain and cryptocurrency, rich.

In a WSJ column, James Mackintosh does some rudimentary math and comes with an estimate of $600 million as the interest that the association’s founding members could earn on a yearly basis from their initial investment of $10 million for Libra Reserves. Mackintosh has assumed interest rates of 1% but writes that those returns could be even higher, if the rates go up or if Libra becomes successful. He also pointed out the absence of sufficient incentives for founders and backers of the cryptocurrency to not take investment risks with the reserve amount in order to multiply returns. (Jerry Brito from Coincenter has also pointed out a similar problem with the governing board’s motivations.)   

Citigroup analyst Mark May recently called Libra a “watershed moment” in Facebook’s history and released a note titled “Facebook’s Path to Printing Even More Money” after the social media network launched its cryptocurrency. According to him, Libra could become a “meaningful new product and profit stream” for the company.

How Will Facebook Earn Money?

A bulk of those revenues will come from Facebook’s messaging platforms – Whatsapp and Facebook Messenger.

While they are wildly popular, those messaging apps hardly generate much revenue. Advertising is the bread and butter of Facebook’s business. Small businesses and large organizations pay Facebook to display custom advertising to cross-sections of users based on their personal data and browsing history. But that part of Facebook’s business is increasingly being threatened by privacy concerns. Governments are cracking down and calling it to account for its practices. Regulator attention on Facebook could result in advertiser defection away from the platform.

With their emphasis on decentralization and privacy, blockchain and cryptocurrencies offer Facebook a way out of the privacy imbroglio. Harshita Rawat, analyst at Sanford C. Bernstein, said payments might be not generate much revenue for the company. David Marcus, a former Paypal executive who now heads Facebook’s crypto initiative, has already said the company intends to charge “tiny” transaction fees from small businesses for payment transfers.  “The actual use case is getting people into the habit of doing financial transactions on the platform, and then start to roll out other e-commerce-related activity,” said Rawat.