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What Everyone Should Know About Facebook's Foray Into Cryptocurrency
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[Image: https%3A%2F%2Fspecials-images.forbesimg....it%3Dscale]
Even though the company continues to perform well financially, the past few years have undoubtedly been the roughest in Facebook’s history. From its manipulation by Russia during the 2016 U.S. election to multiple breaches of consumer privacy and trust, the company is struggling to demonstrate that it deserves the trust placed in it by its over 2 billion users.

Facebook is now trying to restore its reputation by recommitting itself to the privacy of its users.  Yet at the same time it is raising the stakes by moving aggressively into the financial services space. A steady stream of informationhas come out in recent months indicating that Facebook is building a cryptocurrency system that will support payments not only within Facebook’s suite of applications, but externally as well. Codenamed Project Libra, the exact solution will be a “stablecoin”, i.e. an asset that maintains a consistent price peg, which goes by the moniker “GlobalCoin” internally. According to reporting from the BBC, this new token will initially launch in “about a dozen countries by the first quarter of 2020.”

If true, and there is enough smoke surrounding this story to suggest that it is, it represents a key inflection point for not only Facebook, but the financial services space as a whole. Here are a few things that everyone needs to know.

GlobalCoin Will Be Very Different from Bitcoin

Although GlobalCoin is being called a cryptocurrency it will bear very few similarities to bitcoin. Bitcoin is revolutionary because it enabled any two parties to transact scarce digital value without an intermediary. Based on the information that we have today, Facebook’s variant will differ from it in at least two significant ways.

First, it will be a stablecoin. Stablecoins rose to prominence in response to the high volatility that plagued the crypto market in recent years. To effectively function as money, cryptocurrencies need to trade within a narrow band, which is something that has eluded bitcoin, ether, and other leading assets. Most stablecoins achieve this effect because they are directly backed 1:1 by fiat currency held in a bank. GlobalCoin would not be the first stablecoin in existence, as there are several with market capitalizations over $100 million. However, given the size of Facebook’s customer base it has the potential of dwarfing them all.

Second, it is unlikely to be purely permissionless like bitcoin or ether, as there are expected to be some access restrictions to GlobalCoin. Mark Zuckerberg and other executives are meeting with financial regulators in the U.S., U.K., and other key jurisdictions to explain their proposed system and understand their regulatory obligations, which are a bit nebulous given the fact that Facebook is not a bank. Therefore,  it is probably more accurate to compare GlobalCoin to other internal blockchain-based payments systems such as J.P. Morgan’s JPM Coin, Signature Bank’s blockchain-based Signet system, or the Blockchain World Wire program being launched by IBM.

GlobalCoin Is Reuniting Mark Zuckerberg with the Winklevoss Twins

Apparently, time heals all wounds. As dramatized in 2010 film The Social Network, Mark Zuckerberg and the Winklevoss Twins had an acrimonious falling out over who was the true creator of Facebook. For years, it seemed unlikely that they would ever work together again. However, to the surprise of many in the space the three of them met recently to discuss GlobalCoin.

Why would this happen? Well, it turns out that there is much that each of them can gain from working together. 

From Facebook’s point of view, users of GlobalCoin will need to have the ability to trade in and out of their positions, and the company needs a custody solution for coins not in circulation. Through their exchange Gemini, the Winklevoss twins operate one of the most stringent and compliant operations in the world. They have a long history of dealing with financial regulators, and you can be sure that Facebook wants to take advantage of their goodwill with governments and regulators.

[Image: https%3A%2F%2Fspecials-images.forbesimg....it%3Dscale]
Cameron Winklevoss, left, and Tyler Winklevoss attend the world premiere of "Ocean's 8" at Alice Tully Hall on Tuesday, June 5, 2018, in New York. (Photo by Evan Agostini/Invision/AP) EVAN AGOSTINI/INVISION/AP


From Gemini’s point of view, the opportunity of bringing a system of GlobalCoin’s size onto their platform is probably too enticing to resist, even if this collaboration comes with some public backlash from users opposed to Facebook’s past conduct. Additionally, despite the Winklevoss’ crypto fame, Gemini is losing ground to some of the larger exchanges in the world and its own stablecoin project, the Gemini Dollar is struggling compared to its peers. Therefore, this could be beneficial match for both sides.

GlobalCoin is a Significant Public Relations Gamble for Facebook

Mark Zuckerberg has spoken eloquently in recent months about blockchain technology and its privacy-enhancing features. He has even brainstormed about the possibility of users using blockchain-based login credentials as opposed to the centralized “Facebook Login” service that we are familiar with today.

However, he and his company are still looked at with reservations amongst crypto enthusiasts and jaded users, and if the GlobalCoin is not as decentralized as suggested, the entire project could be perceived as a self-serving public relations stunt. Facebook became profitable because it perfected a centralized model of vacuuming up data, photos, and information and utilizing an ad-placement engine to show users targeted advertisements. This operating model is the antithesis of blockchain technology and cryptocurrencies, and it remains to be seen how consumers will react.

This is not to suggest that Mark Zuckerberg is being disingenuous in his paeans to privacy, just that the public will be skeptical about it at the outset.

GlobalCoin Will Struggle to Be Profitable

In one report that got a lot of attention, a Barclays analyst noted that Facebook’s cryptocurrency efforts could yield anywhere from $3 billion to $19 billion in additional revenue by 2021. It goes without saying that this would be a sizeable figure, which would actually be half of Facebook’s $40.6 billion in total revenue in 2017, almost all of it from advertising.

However, it is far from a given that this will be successful, as there is not a clear answer on how the company will make meaningful profits on this project. The selling point to merchants will be that accepting GlobalCoin will eliminate the high interchange fees that they pay to current card networks Visa and Mastercard. This will increase the profitability of each transaction and perhaps drive revenue. However, for this to happen Facebook will either need to subsidize the system at the outset in a loss-leading strategy or make miniscule profits from each transaction.

Then the question becomes whether or not the company will make up the lost revenue with volume, but they will be challenged to do so without utilizing the data that they have on their users, which would limit the private nature of the system, alienating customers.

Conclusion

With all that said, this is not the first time that Facebook has come through an inflection point stronger on the way out. Remember, that Mark Zuckerberg was criticized to focus the company on mobile devices years ago, which come with less space for advertisements, but in retrospect this decision was prescient.

That said, the stakes are higher this time, as are the risks.





by Steven Ehrlich
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