5 reasons to worry about Facebook’s cryptocoin

May 3, 2019 11:58 AM

Facebook’s pursuit of a crypto-based payment system would seem to be filled with potholes and red flags. The social network’s stealth project isn’t much of a secret, and another Facebook virtual currency has already failed years earlier. But Facebook also has a lot in its corner — enough to threaten the e-commerce and payment processing establishment, should its crypto project take off.

The social network hasn’t publicly discussed building a cryptocurrency payment system, though its corporate moves would appear to make a launch inevitable. It transferred David Marcus from his post overseeing Messenger to a job heading Facebook’s blockchain development. Facebook founder Mark Zuckerberg has said blockchain could be the basis of a wide range of innovation.

There's also news of a stablecoin for usage on WhatsApp, internal executive moves beyond Marcus’ transfer, and this week word that Facebook is courting up to $1 billion in investments from large payment firms such as Mastercard, Visa and First Data, among others. None of these companies would confirm this news, and a Facebook spokesperson said Facebook is “exploring ways to leverage the power of blockchain technology.”

Facebook is massive

According to Pew Research Center, 68% of Americans use Facebook — among social networks, only YouTube comes in higher, at 73%. By comparison, only 24% of Americans use Twitter. And of the Facebook users, 74% use it daily and 50% use it several times per day, according to Pew. Facebook’s users are also a goldmine for targeted marketing. As many as 80% of consumers aged 18-49 use Facebook, a prime age demographic for e-commerce advertising and shopping.

And that’s just a drop in the bucket. Facebook has more than 2.3 billion users globally, and Facebook has more potential for growth in non-U.S. markets, making a cross-border blockchain play a possibility. There are about 3.3 billion Visa cards in circulation globally, and PayPal has about 276 million active accounts.

In payments, the enrolled base is important because it gives the enrolling party more control over user data, partnerships, and content. “There are 3 billion plus users who could each get their own Facebook digital wallet and custody solution, which can facilitate P2P transactions,” said John Dwyer, a blockchain research analyst at Celent.

Facebook already has payments and merchant services

When Facebook Credits faded out about six years ago, part of the reason was Facebook didn't offer other financial services to go along with the virtual currency.

Since that time, Facebook has added transaction capabilities to Messenger, attracting partnerships with PayPal and others who use Messenger as a customer service tool; and WePay, which uses Facebook as a security mechanism.

Facebook does not make revenue off of P2P payments through Messenger, but the app is fertile ground for building merchant relationships. Messenger has also become part of Facebook's larger business strategy, as Facebook uses Messenger to promote ads and sponsored messages.

Facebook has also reported 800 million people visit Facebook Marketplace monthly. Facebook Marketplace has become a major building block for merchant services, adding artificial intelligence and improved links to customer service and buy buttons.

Talent pool

Facebook has hired several executives with deep experience in payments and payment disruption. David Marcus, who is leading Facebook's blockchain unit, was the founder of Zong, an early mobile payments company. Marcus then became president of PayPal, one of the oldest and most well-known digital payment companies. Marcus was at PayPal when it acquired Braintree, a deal that gave PayPal access to Braintree's Venmo app and a range of developer tools that helped PayPal catch up to its own competitors. Marcus then took his talents to Facebook, where he has overseen much of Messenger's transformation into a transaction venue.

Facebook's executives also include Deborah Liu, another former PayPal and eBay executive who is the vice president for Marketplace at Facebook.

And Facebook earlier this year hired staff from Chainspace, a London fintech whose senior staff has a direct background in building payment use cases for blockchain. Chainspace was building "smart contract" technology, or the automatic triggers that execute blockchain payments when certain conditions are met. Such technology would likely be part of any cryptocurrency or blockchain-based payment system at Facebook.

Facebook doesn't want a volatile currency

Much of the discussion about Facebook's cryptocurrency and cryptocurrency payment system has focused on the use of a stablecoin.

Stablecoins are pegged to traditional currency and as such are not prone to the massive swings in value that bitcoin and other cryptocurrencies are known for. Stablecoins are part of many initiatives to encourage merchant acceptance of bitcoin payments, because they act as a hedge. That's also made stablecoins popular with venture capitalists.

“The idea of stablecoins is an interesting one, getting the benefits of the cryptocurrencies without the downsides of price volatility,” said Zil Bareisis, a senior analyst at Celent. “The question is whether any of the existing contenders will rise to the top, and which model is more likely to succeed. Is it a 'private' stablecoin such as Facebook, or a more 'open loop' model such as the CENTRE Consortium.”

Facebook’s scale gives it an advantage in this case, Bareisis said. “As a large marketplace, Facebook already has relationships with many consumers and merchants, so is in a better position than many others to build a network.”

It's about more than retail payments

Facebook doesn't have to use its currency for just e-commerce or retail payments. Blockchain-powered systems have gained ground in international payments, expanding geographies and exposing more shoppers to far-flung merchants.

That would make Facebook Marketplace a venue to enable international virtual currency transactions, or to offer business-to-business payments.

Facebook's project also comes as other Silicon Valley companies are investing in cryptocurrency, creating more use cases. For example, Square Cash's crypto revenue hit a record in the most recent quarter, and Square CEO Jack Dorsey has deepened the company's cryptocurrency strategy.

“Integration of a blockchain strategy is now seen as inevitable by the likes of Facebook given where privacy and technology is moving and Facebook has a number of angles in its favor,” Dwyer said. “Remittances are a huge area and as wealth assets become natively digital, then a broader suite of financial opportunities may present themselves away from payments.”