Facebook has revealed ambitious aims for its currency, whose stated mission is to enable ‘a simple global currency and financial infrastructure that empowers billions of people."

Thanks to the high expectations about Libra, investors have flocked back to digital currencies after a painful year in which Bitcoin and other coins seemed to have reached the end of the road. Bitcoin has zoomed past $13,000 in a vigorous rally since April. Although it is well below the peak of $20,000 it once hit, the way it has picked up steam in the last few weeks has cheered the votaries of a decentralised currency order, which eliminates the role of central banks.

Facebook’s entry into the alternative currency universe is widely seen as a game changer, especially coming as it is after the social media giant had refused to carry cryptocurrency advertisements apparently as it did not want to be seen endorsing a revolution that ran counter to the established norms in currency exchange. But Libra is expected to incorporate some of the characteristics of currency as a means of exchange.

While the crypto enthusiasts are lustily cheering the new developments, rating agency Standard &Poor’s is not yet convinced. But the fact that the rating agency has found it fit to take a second look at alternative currencies shows how exactly the entry of Libra is changing perceptions.

S&P, however, thinks Libra is unlikely to become a reserve currency and it bases its doubts on financial and macroeconomic stability concerns. It also believes that national governments may prevent it from becoming a parallel source of credit creation outside central banks' monetary policy setting. In that sense, S&P likes to believe that Libra can be seen as more like a payment system, similar to PayPal or WeChat, but with a blockchain and a currency.

The rating agency believes that, if Libra takes off, it will be subject to a substantial regulatory approval process. We And it expects some divergence in the regulatory stance across the globe, similar to that for other cryptocurrencies. Although the founding members of Libra are targeting a first-half 2020 launch, this level of scrutiny could imply either delays or limited scope in the initial roll-out, according to S&P.

Interestingly, no banks are among the original list of 28 founding members of Libra. In S&P’s view, this is either an indication of skepticism regarding its potential success and concerns about the risks associated with it, or a sign of the potential negative effect Libra could have on banking business and revenue.

At the same time, the rating agency feels that Libra could resolve some of the main issues currently underpinning the marginal expansion of cryptocurrencies. Traditional cryptocurrencies do not meet the two basic requisites of a currency--an effective means of exchange and an effective store of value. This is because first, they are still not widely accepted as payment instruments; and second, the volatility in their valuation and market cap is the most meaningful evidence that they fail the test of value storage.

One difference between the Libra and other cryptocurrencies is that it will be backed by a reserve of assets intended to keep its value stable. According to the Libra coin white paper, this reserve will comprise a basket of ‘safe assets’, that is, bank deposits and short-term government securities. Libra as a currency will thus be similar to currency boards, pegged currencies, or the IMF's special drawing rights (SDRs), according to S&P. In this way, it is also potentially infinite, while some cryptocurrencies are finite by definition.

Libra's founding members include large payment companies, technology firms, marketplaces, and even some service companies. Global brands such as eBay, Uber, and Vodafone are on the list. This is expected to help create an ecosystem that results in wider acceptance compared to other cryptocurrencies. What's more, the use of blockchain and Facebook's broad reach, with about 2.4 billion users, means the Libra will potentially benefit from a wider audience and strong traceability.

"By opting for a ‘pseudonymous’ approach, we understand that the founding members' intention is to allow external monitoring to avoid illicit activities--another challenge the Libra faces,” says S&P.

But S&P believes Libra has the potential to disrupt a number of financial services activities. The extent and timing of disruption will depend on its acceptance by various stakeholders, including users and goods and services providers, but most importantly, regulators and governments.

According to the rating agency, payment and money transfers are likely to be affected most. It estimates that these activities represent on average between 10% and 15% of banks' total revenue globally, but their role in terms of customer relationships can in some cases be even more crucial.

First, the Libra's backing by several large payment companies could potentially increase its acceptance from inception, and embed it within the existing fiat financial system. Moreover, some technology, market-place, and service companies would likely immediately accept it as a means of payment.

Libra could also resolve problems related to the speed and cost of executing international money transfers. According to the World Bank, more than $600 billion is sent to various parts of the world every year. Reducing the costs related to these remittances is even one of the UN's Sustainable Development Goals. (IPA Service)