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Facebook's Libra May Use Stablecoins Pegged to Currencies

Zacks Equity Research

Facebook FB is open to the idea of using multiple stablecoins backed by currencies like the dollar, euro and sterling pound instead of the synthetic cryptocurrency it initially proposed.

Per a Reuters report, David Marcus, head of the Libra project, recently told a panel at a banking seminar that Facebook’s objective is to create and establish an efficient cross-border payments system globally. To achieve it, the company is open to look at alternative approaches for the currency token it would use.

Notably, currency-pegged stablecoins have not been Facebook’s preferred option. Pegged to government-backed currencies, these digital currencies are aimed at reducing the volatility associated with currencies like bitcoin.

However, the Group of Seven wealthy nations consider stablecoins as a threat to the world’s monetary system and financial stability, per a recent Reuters report.

Facebook, Inc. Price and Consensus

Stablecoins Likely to Aid Libra Initiative

Facebook’s Switzerland-based Libra Association has met with fierce regulatory pushback from global authorities, which anticipates the digital currency to potentially be used for money laundering or terrorist financing.

Additionally, earlier this month, several founding members including PayPal, eBay, Stripe, Visa and Mastercard dropped out of the Libra Association, apparently due to stern regulatory scrutiny.

Nonetheless, the remaining 21 partners, comprising Coinbase, Uber, Spotify, Vodafone, Lyft, among others, recently inked a deal in Geneva to be part of the Libra Association — the governing body of Libra.

Moreover, per a CNBC report, peers like International Business Machines IBM are open to work with Facebook on digital currency efforts based on blockchain technology.

Additionally, Libra’s focus on creating a stable, low inflation currency backed by a reserve or real assets is a differentiator.

Furthermore, use of currency-pegged stablecoin is expected to provide faster, cheaper and more inclusive payment services in-line with Facebook’s strategy. Libra’s low transaction fee is likely to attract consumers.

Regulatory Scrutiny to Boost User Confidence

Facebook’s Libra is expected to hurt the revenue model of banks and financial institutions worldwide. Libra’s low-fee transaction is most likely to encourage consumers to hold and use the digital currency.

Facebook is also expected to use Libra to penetrate the underbanked population in regions like South-East Asia, East Africa and Latin America. This will further limit opportunities for banks in the long haul.

Although regulation and scrutiny can act as hurdles, we believe intense scrutiny will improve consumer confidence in Libra.

Facebook’s initiative can be a game changer. Even if a fraction of the company’s user base of 2.4 billion adopts the cryptocurrency, it will boost Libra stablecoin’s credibility to a massive extent when compared with digital currencies like bitcoin.

A potential competitor to Libra in developing countries could be China’s yuan-backed Central Bank Digital Currency (CBDC), which can operate through the likes of WeChat, AliPay and UnionPay.

Zacks Rank & Stocks to Consider

Currently, Facebook carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader Computer & Technology sector are Alteryx, Inc. AYX and Five9, Inc. FIVN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Long-term earnings growth for Alteryx and Five9 is currently pegged at 17.62% and 10%, respectively.

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