Why Libra makes me even more bullish about Bitcoin

This post was originally written on June 19th, 2019 on Medium

On June 18, 2019 Facebook finally unveiled Libra their cryptocurrency project to the world.

The announcement has drawn the attention of the entire cryptocurrency industry, media, technology industry, and even public markets. After diving into the technical whitepaper and talking to industry insiders. My conclusion is — While Libra itself is not that interesting, it makes me even more bullish on Bitcoin than ever.

In this tweetstorm turned blogpost I want to lay out the reasoning on why I think this is the case. Keeping in mind Libra is not officially being launched until 2020 so many of these assumptions can change between here and then.

The bull case for Libra (& Crypto at large)

Before laying out why Libra is not very interesting, I do want to highlight a couple of the more interesting aspects of the project.

Cryptocurrencies are serious business
One of the largest internet companies in the world is launching their own cryptocurrency and their own blockchain is a huge validation point for everyone. Back in 2013 when I first started in this space, this fact would have been unimaginable.

David Marcus and team are real operators with real experience scaling large companies. Facebook is bringing their A team to the cryptocurrency market, this isn’t some small innovation team experiment for them.

Basket of fiat outside of USD
Libra is not just a fiat-pegged currency but rather a basket of fiat currencies. Facebook wants to create a global currency rather than just a USD replacement.

The Libra project is essentially a programmable stablecoin that is backed by a basket of fiat currencies & governed by all of its members. If Facebook keeps their promise to not control more than 1% of the network, it could be a real alternative rail for some types of payments.

Largest potential on/off ramp
The crypto market has an estimated 30M-40M users today (a projection from my post last year) and Libra has the potential to onboard 2B more people into this market. That’s a huge step function increase and cannot be ignored.

If correctly executed, Libra could become the largest on/off ramp for the crypto industry by orders of magnitude. This is also a critical part of the financial infrastructure stack to help enable all other types of crypto applications as well (remittances, B2B payments, etc.).

Identity, KYC, and AML built in
As CZ, the founder of Binance, puts it best, Facebook already has all of your identity info for KYC so users won’t need to input any other data.

On a more serious note if this could be packaged up and portable, this would solve so many of the identity issues in the crypto space and help the industry as a whole move towards a much more compliant future.

There are some major privacy implications of this, which cannot be ignored, which we’ll get into later in this post.

The bear case for Libra

No community or ecosystem
Before they have even launched Libra has already alienated many developers in the crypto ecosystem and much of the top advocates in the industry. The majority of the people who have been building products and services in this ecosystem are not excited about Libra. We did an informal poll at our crypto event yesterday and not one developer was excited about Libra’s release.

On top of this Facebook has a consistent track record of treating its developers unfairly, changing rules on its platform, building their own competing projects to compete with developers, etc.

Existing crypto users won’t use it
Arguably the dominant use-cases in the crypto space today are: exchanges, mining, trading, and store of wealth. For all of these existing users who use crypto extensively today, I do not see them switching over to Libra for the overwhelming majority of use-cases.

There is no way someone storing their wealth in Bitcoin (non-sovereign, censorship resistant, unseizable asset) would ever move their assets over to Libra. To help illustrate this point here is a comparison chart of Bitcoin, Libra, and some of the other major cryptocurrencies.

Targeting the wrong customer segment
Given the two points above, Libra is fundamentally betting their distribution advantage will help them win a whole new segment of users (more “normal” users) for new use-cases (remittances, etc).

Given Libra is backed by a basket of fiat currencies, you are in essence giving up the upside of investment while subject yourself to volatility (FX & exchange risk). People will never 10x their money by buying Libra so at most it can only be a valuable bridge currency.

Comparison chart of USD, EUR, GPB, AUD, NZD

Emerging countries have many other market dynamics
Given most people in developed countries would not convert their fiat currencies to Libra, they would mainly be targeting emerging countries.

Along with Facebook’s big vision to “bank to unbanked” one of the main markets Libra is touted to be going after is the remittance market. While in theory this is a large ($550B) and underserved market I’ve looked deeply into the remittance market and I do not see Libra playing much of a role here. The reality of remittances is — 80% of the worldwide remittance volume is handled via cash payments which requires money transfer operators (MTO) to have both physical presences & cash inventories.

Photo by the Nikkei Asian Review

While in theory Libra can partner with organizations to facilitate these cash transactions, nothing in their announcement shed any real details on how they would approach this. Crypto companies as a whole have not reached any significant volume in the remittance market.

On top of all of this, crypto is banned in India & China. Given Libra would have to comply with local regulations which cuts out 2.7B of their target demographic.

Regulatory risks for Libra
Facebook itself is already a very unloved company (it has an NPS score of -19, which is lower than all of the banks), is facing multiple lawsuits, is at the center of major privacy violations, and is in the political hot seat for its role in influencing elections around the world.

I forecasted that there would be no way Facebook would be able to launch their cryptocurrency initiative quickly, and already we are starting to see international and domestic politicians react to their announcement.

Moving fast and breaking things might have worked when Facebook was starting up, but I do not believe they will be able to take this same approach if they are trying to move into core banking/money services.

I predict that Libra will have to delay their 2020 launch date, not for technical reasons, but rather political and regulatory reasons.

Why Libra makes me even more bullish about Bitcoin

My personal takeaway is Libra at best will be a core fiat gateway for Bitcoin, and at worst case will be a closed & permissioned network that violates the privacy of its users to an even greater extent.

On the other hand, Bitcoin is aiming to become a worldwide store of value asset. Bitcoin is also moving towards this goal without a billion dollar company behind it, without the need of member organizations, without a leader, and without a large existing install base.

It is achieving all this purely through the incentive structure of Bitcoin itself and forming a large international ecosystem behind it. To me Bitcoin is far more revolutionary in its intent and is addressing a much larger total addressable market and for those reasons Libra makes me even more excited about Bitcoin.

Remittance Market— Primer and Landscape

This post was originally written on May 25th, 2019 on Medium.

Note — I originally wrote this writeup on the Remittance industry in April 2019. I’m releasing a redacted version of this writeup publicly. All of the numbers and stats in this article were from April.

An Introduction to Remittances

Remittance is the capital flow between individuals in two different countries, typically by foreign workers to individuals in their home country. According to the World Bank, the total remittance market is comprised of $550B in total flows, 80% of which are within emerging economies.

Because of globalization, remittances have increased sharply worldwide and have increased 5x from 2000 to 2018. Remittance is a significant activity and can be as high as ⅓ of the total GDP of various countries and is 3x the value of developmental aid.

The global average for sending $200 worth of value between countries is 6.94%. This means that ~$48B is taken directly out from remittance transfers through fees, middlemen, and financial institutions. These exact rates are highly regionalized, and will be discussed further below.

The goal of this document is to give a short introduction to the remittance market, a landscape of existing participants within this market, and how the blockchain could impact this market sector.

Primer on the Remittance Market

Remittances sit within the larger market of cross border payments, which includes all forms of payments between consumers and businesses

Zooming in on the remittance category, the majority of remittances payments are handled by traditional banks & credit unions and specialized money transfer operators (MTO) which specialize in cross border payments. Some of the largest providers in this space include Western Union, UAE Exchange, MoneyGram, and up-and-coming operators such as TransferWise.

Because of the macroeconomic forces of globalization & migration,remittances have been growing 10% on average worldwide. Three key reasons why the remittance market is growing faster than worldwide GDP are:

1. The number of migrants grew faster than world population, in total there are 266M international migrants (240M migrants workers and 26M total refugees). This means they are proportionally more people likely to send remittances.

2. Migrants were able to earn higher incomes, because of relocation towards higher earning countries.

3. It has become cheaper to send remittances, falling from 10% on average to 7% on average. This reduction in cost is likely to have allowed migrants to send a larger fraction of their incomes.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook

For remittances, sending money abroad has traditionally been an expensive task (vs. domestic transfers), with a never-ending supply-chain of middle men, paperwork, and hidden fees. On top of this, it is estimated that 80% of these remittance payments are still handled via physical cash.

Below is a diagram showing just how complex the movement of money internationally can become:

Source: Bank for International Settlements — Cross-border retail payments report

In terms of the overall market, remittances are highly fragmented based on geography and by specific corridors, which is the combination of 2 countries: where the money is sent and received.

Below are the largest receivers of remittances and the top coordinators worldwide.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Source: World Bank — Migration Remittances Factbook

The business model of cross border transactions is primarily a mix of two variables: direct fees and foreign-exchange (FX) fees.

• Direct Fees — Direct fees include all of the fees related to the transfer itself. Examples include: a flat fee, transfer fee, % of transaction fee, outgoing fee, amendment fee, bank-to-bank fee, etc.

• Foreign-Exchange Fees (FX) — The FX fee is the difference between the mid-market rate, and the actual rate money is exchanged into. Many remittance companies charge a premium on top of their internal FX rate and keep the difference.

These two factors combine together to create the ultimate margin the money transmitter takes. Today the worldwide average is about 7%. Western Union, for example, had a split of 70% and 27% between fee and FX revenue respectively in its 2016 results.

Below are some example mixes of fees + FX charges from some of the highest cost corridors in the world.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Remittance Market Landscape

Money Transfer Operators (MTO’s)

MTO’s dominate the remittance market and make up the majority of remittance volume worldwide.

Financial Institutions
For traditional financial institutions & banks, international remittances make up a relatively small portion of their overall product offerings; however, on average, banks charge a much higher rate (11% vs. 7%) for international money transfers.

Fintech Startups
Fintech startups have targeted the remittance market due to their large incumbent market share, although with the exception of TransferWise, very few have broken out. In addition, these startups mostly target digitally savvy customers with bank accounts vs. cash agents — which is the lion share of the market.

Blockchain Specific Fintechs
Blockchain technology has the potential to dramatically lower sending rates and add much needed transparency into the market. Although for the time being it does not seem like any of the new startups have dented the overall market yet.

Incumbent Advantages

Brand, Agents, Cash, Compliance, and Acquisition.

While on the surface, incumbents like Western Union looks like a great target for disruption, there are deep structural reasons why they are still maintaining their lead.

• Brand — Incumbent providers have huge brand & awareness advantages across the globe with 90%-100% brand awareness in all of the top remittance corridors across the world.

• Network — Incumbent providers have a huge embedded network of local MTO operators in countries globally, Western Union has 204 regulatory licenses, 500K retail locations, 100K ATM’s, 150M customers, covering every major currency & corridor around the world today. Many of these retail locations are also binded to exclusive contracts to Western Union as well.

• Cash — It’s estimated that of the total remittance volume worldwide, 80%+ of this is handled via cash payments which also require MTO’s to have both physical presences & cash inventories. For the most part, fintech startups are not serving this segment of the market.

• Compliance — What most startups don’t realize is the cost of transfering money is not the most expensive part, but rather compliance costs. It is inherently difficult to ensure money is being sent compliantly in multiple jurisdictions 24/7, which is why 20%-40% of the remittance cost is due to compliance alone.

• Acquisition — On top of compliance, since the remittance market is an established market, incumbent players are willing to spend $15–70 per customer depending on the specific corridor they are targeting.

Demand Side: Satisfaction?
For all of these costs, fees, and friction in sending money cross-border — users of incumbent services are generally satisfied with their experience.

On top of this, as mentioned a few times, the majority (80%+) of remittance payments are processed via cash — either on the receiving, sending, or both ends. Even when people have bank accounts remittance senders prefer cash for a few reasons:

• Many migrant workers are undocumented.

• Many migrants are afraid of being deported

• Avoiding taxes by sending cash to family members

• Not wanting to fill out paperwork to setup bank accounts

Core Value Proposition
In my opinion, most startups are touting cheaper fees, when that is not the main motivating factor for most remittance senders or receivers. Instead new startups should focus on:

• More transparency (TransferWise)

• Ability to track payments

• Lower compliance costs

• Unique acquisition channels

• Focus on underserved corridors

The biggest strategic questions any new startup needs to decide on is if they want to focus on more affluent customers first (where all the startups are today) or focus on the larger (but harder) cash market.

Why now?
In the ideal world, sending money cross border should be as easy as sending a message via WhatsApp to anyone across the world. In theory you can send a digital currency, like Bitcoin, quickly and at low cost; however, anything that interfaces with the banking system (especially cash) adds many complications and cost.

There is a massive opportunity to roll up all of these regional players into one large international payments company. Expanding from there to business payments, etc. also massively expands the total adjustable market these new companies can service.

Appendix

Future Evolution of Remittance
Remittances today is most commonly thought of in the most basic function — sending money overseas.

As this fundamental layer is solved digitally, new services can be offered to this customer base, blurring the lines between remittance, checking, and business accounts, etc.

Average Transactions Amounts by Providers
Among remittances specialists, average transfer size is much smaller depending on core customer segments. For CurrencyFair and TransferWise that mostly target expats from developed countries, the average transfer size could be few thousands of dollars. For money transfer companies targeting migrants from developing countries, the average transfer size is usually a few hundreds.

• CurrencyFair — $5,500

• TransferWise — $2,300

• Remitly — $500

• Transfergo — $400

• WesternUnion — $300

• WorldRemit — $200

• Large banks

• JP Morgan — $15,000

• BofA — $10,000

• Citi — $7,000

• Wells Fargo — $2,000

Additional reading

• Cross-border retail payments (By the Bank for International Settlements)

• A vision for the future of cross border payments (by McKinsey)

• Global payments 2018: A dynamic industry continues to break new ground (By McKinsey)

• Migration and Remittances: Recent Developments and Outlook (By the World Bank)

• Migration and Remittances: Recent Developments and Outlook Presentation (By the World Bank)

• Migration and Remittances: Fact Book (By the World Bank)

• Western Union: permanent leader of international money transfer (By SaveOnSend)

• Money Transfer Startups: race against time? (By SaveOnSend)

• Xoom Money Transfer: The Disruptor That Wasn’t (By SaveOnSend)

• MoneyGram: whack-a-mole of money transfers? (By SaveOnSend)

• Western Union: Investor Day Presentation 2016

• Western Union: Investor Day Presentation 2016 (Cross Border Platform)