If any company can take a cryptocurrency mainstream, it is Facebook.
More than 2bn people log into its family of apps and increasingly they want to buy things and send each other money.
Facebook’s answer, according to several people familiar with its secretive “Libra” project, will be to try to launch a “stablecoin”, a digital currency pegged to the dollar.
If successful, the Facebook coin could not only allow payments and transfers within the Facebook empire, but could also be stored on digital wallets and spent in shops, or exchanged into traditional currencies.
“Facebook has all the prospects to propel crypto into everyday lives . . . in the next three to five years,” said one well-known payments veteran, who spoke on the condition of anonymity.
But “there are headaches to be worked out,” the executive added, questioning how small businesses that end up with a stockpile of the currency would be able to account for it on their books, for example.
Facebook declined to comment.
Following in footsteps of WeChat
How the digital currency would be backed is as yet unclear, as stablecoins can normally be purchased and redeemed for dollars at a fixed 1:1 ratio. It is also not clear how the coin will be issued, stored or transferred, and what role blockchain technology will play.
Many interpret the move as a bid to follow in the footsteps of so-called “superapps” such as China’s WeChat, that allows users to send money, shop, order taxis and play games without ever having to leave the one platform.
According to an earlier report by the Wall Street Journal, Facebook may encourage transactions by rewarding its users with the currency if they view ads on the platform, in a similar way to the collection of loyalty points.
Experts expect this type of network to encourage Facebook’s vast user base to spend more time and money on the platform. It could address user concerns over Facebook’s advertising business model — but might also allow the company to collect more data on users, such as spending patterns.
Advertising and ecommerce blend together
Mr Zuckerberg has already said that he sees Facebook’s traditional advertising business model blending with e-commerce, with users discovering products from businesses advertising on Facebook and Instagram and then buying them, while using WhatsApp and Messenger to talk to the sellers.
“Between advertising and commerce, it’s really a continuous spectrum,” he said. “As those products that we build help businesses convert better . . . it will be more valuable to them and therefore that’ll translate into higher bids for the advertising.”
Facebook already allows some big brands to sell directly on the platform through a partnership with PayPal, a feature announced earlier this year. At Facebook’s F8 developer conference last month, the company launched a raft of other products and updates designed to facilitate business-to-consumer interaction.
Deutsche Bank estimates the push into ecommerce on Instagram could contribute as much as $10bn in net revenue in 2021.
“My sense is that the pivot to consolidating messaging and driving commerce and in app purchases reduces ad revenue dependence and cools the [negative] rhetoric” around its business model, said Rob Norman, former chief digital officer at GroupM.
Analysts predict the company will create new ad formats, charging a premium. Facebook will be able to pool data and analytics on customer spending habits, helping them to better target advertising in future. This might include mapping out how a user might have found a particular brand in the lead-up to a purchase.
But some advertisers are wary of losing control of data they can access directly.
“If you’re transacting through their website, [Facebook] will retain greater control of the transaction and the data. If you control your website you have greater control,” said Marco Rimini, global chief development officer of Mindshare, a media agency. “They are powerful sales channel, but how much power do we want to cede?”
Other big tech companies are increasingly experimenting with financial products. In March, Apple announced its own credit card in partnership with Goldman Sachs. Last year, Uber launched Uber cash, an app-specific credits system. Some firms have launched their own mobile wallets: Apple pay, Amazon pay and Google pay.
Technology and regulation hurdles
Some industry experts have questioned whether Facebook’s blockchain-based payments network can achieve a competitive scale, and whether it could process payments in line with potential growth. Most blockchain projects have hitherto been small-scale. Visa, one of the world’s largest payments networks, can handle up to 65,000 transaction messages
“The logistics of it — how many [coins] are going to be in existence, what are the implications of that — from an overall company position, the company must give serious consideration to what would be more profitable,” said Richard Whittle, economics research fellow at Manchester Metropolitan University.
Others point to the regulatory hurdles, arguing that Facebook is not prepared for the high levels of scrutiny it will face. Payments processors need licensing in most jurisdictions in which they operate, for example, and this can sometimes take years. In the US, securities laws regulators are also paying heightened attention to blockchain projects.
“Each time Facebook or its brethren drift into the regulated realm, they soon depart, because the idea of being regulated and operating to the same rules as banks would make it uneconomical for them,” said Richard Crook, former head of emerging technology at RBS and director of Lab577, a fintech start-up.
The company plans to encrypt user’s financial data where possible, according to someone with knowledge of the project. But they may need to share some aggregated and identifiable data with regulators and law enforcement, the person said.
The team has been making compliance hires: this month it hired Jeff Cartwright, formerly the director of regulatory risk at major US crypto exchange Coinbase.
Project needs partners
There are also broader competition concerns. “How desirable is it for one company to expand horizontally across multiple verticals?” said Daniel Murphy, senior associate at the Milken Institute’s Center for Financial Markets.
Analysts expect Facebook to partner with other payments companies, which could also help provide some of the licences, technology and infrastructure for the project.
There are signs that Facebook are trying to do this. According to the Wall Street Journal, the company has had discussions with Visa, Mastercard and First Data Corp in a bid to raise $1bn in investment for the project, for example.
Any partnerships would also lend the project credibility at a time when Facebook is facing public backlash, fines and investigations into data breaches, including the Cambridge Analytica scandal, analysts say.
“If Facebook tries to do this themselves they are probably going to fail. Because the likelihood of them being successful in all facets of payments — managing regulatory Copyright The Financial Times Limited 2019. All rights reserved. compliance, security, and building consumer trust — is very low on its own,” said Lisa Ellis, payments analyst at research company MoffettNathanson and a blockchain expert.
“If they are really spearheading in a collaborative way . . . I believe that type of initiative has a huge amount of potential,” she said.
Hannah Murphy in San Francisco and Philip Stafford in London
Financial Times | May 23, 2019