Tuesday, May 21, 2024

Facebook’s Libra: Better Than an ETF?

Facebook Libra
Facebook Libra

Facebook’s Libra could offer key advantages over traditional ETFs. While Facebook has spared a lot of details with regards to Libra, information provided sheds some light on the potential advantages if it operates as intended.

Like an ETF but on Facebook

Like an ETF, a basket of currencies can be invested in through the Libra project. A class of investors are able to create and redeem blocks of Libra which is very similar in nature to an ETF. Additionally, a mechanism is designed to create a claim to a pool of assets on the platform. A fund will be able to invest not only in the US dollar but also in other currencies such as the Euro and Japanes Yen.

One of the main issues that stands out with Libra is the fact that unit holders are not entitled to receive investment income from Libra. This could make Libra far less competitive than other ETFs that are able to offer unit holders investment income and more.

The portfolio management of Libra may not be as clear cut as existing ETFs. The fund is managed by the Libra association which has many entities in multiple industries. More entities are set to join the association, further complicating the structure of the portfolio management. Existing ETFs on the other hand, have clearer investment mandates to track specific indexes.

Regulation, Regulation, Regulation

Unlike existing ETFs which are for the most part, compliant with regulators Facebook’s Libra is certain to face many regulatory difficulties in the future as its billions of users across the world inadvertently drag it into different regulatory and legal waters. Libra has already come under fire from policy makers. From the Bank of England to France, cautionary statements have been expressed.

While this is a project with potential for global impact,its just a stated goal at the moment. Much has been left unsaid, perhaps on-purpose. Whatever the case may be, initial reactions from key markets have been disappointing. India’s government which is strongly against cryptocurrencies, . The People’s Bank of China has stated that Libra needs to be controlled by central banks. It is likely that Facebook will experience a  significant amount of undue pressure from regulators.

Precedent for ETFs

If Libra successfully allows transactions on the blockchain, other operators of ETFs could be encouraged to join in. Selling securities, for many people is slow and antiquated. Current trade and settlement systems are past due for a change. If Facebook is able to set the precedent effectively, a lot of progress could be made for the ETF industry as a whole.

Facebook has zero experience in finance. It is a great tech company that has connected the world in incredible ways. It has provided new streams for the transfer of information which many could be grateful for but it has zero experience in finance. In the realms of e-commerce, it is not a big hitter. E-commerce could have been the testing ground for Facebook and it’s Libra project. The truth of the matter is the pressure from the board is probably weighing in on the team. The project is too centralised. Regardless, Mark Zuckerberg is a genius and will always be. If Libra succeeds, the world could step into a new phase of finance which will redefine how people, save, invest, and interact on a daily basis. The risks are higher than ever but so are the rewards.


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