Facebook's cryptocurrency ambitions could transform the global financial system.
Early last month, the Wall Street Journal announced that Facebook is planning to launch a new cryptocurrency payments system, nicknamed ‘Project Libra’ and referred to internally as GlobalCoin. The cryptocurrency seems to be what is known as a ‘stablecoin’: a digital currency that is tied to the value of a traditional asset, such as the US dollar or pound, in an attempt to mitigate the wild fluctuations seen in the values of other cryptocurrencies such as Bitcoin. The BBC recently reported that Facebook has already spoken to both the Bank of England and US Treasury, as well as Western Union and the cryptocurrency exchange Gemini, but little remains known about the specifics of the coin.
The Wall Street Journal article indicated different ways Facebook might use this coin: checkout options for purchases; a modified mining structure if users interact or shop with advertisements (mining refers to the way new digital coins are generated by users solving algorithms with specialised computer software, essentially rewarding users for their increased interaction with the system); easier movement from advertisement to purchase; and elimination of card processing fees for vendors using the Facebook platform. Yet most of the details of this endeavour remain unknown. Concerned by the relative mystery of this proposed system, and especially following Facebook’s recent data security breaches, members of the US Senate Committee on Banking, Housing, and Urban Affairs penned an open letter to Mark Zuckerberg, Facebook’s CEO, calling for an explanation of how the coin would work and how Facebook would ensure both the security and privacy of its users as well as maintain compliance with existing financial regulations.
The stablecoin would be able to be sent between users and allow transactions across Facebook platforms and the greater internet. While this would certainly come in handy for some smaller companies, who might otherwise find it difficult or expensive to process online payments, the more interesting use would come in transactions or purchases between individuals, as Facebook is currently used by roughly one third of the world’s population. Given WhatsApp’s (owned by Facebook) predominance worldwide – and especially in Asia, Africa and Latin America – if it is integrated, a stable cryptocurrency has the potential to change the face of the worldwide financial system, if only because it would be so ubiquitous. However, it faces a multitude of practical issues, and Facebook’s anticipation of these problems will be the key test of its financial product.
Certainly, being able to message a relative in another country and a moment later send funds without switching applications or entering bank details would be an incredibly easy way to transact globally, especially as WhatsApp already has a presence in areas that are underserved by traditional banking institutions. But users already distrust Facebook’s footprint on many aspects of their online lives, and it may be a struggle to persuade people to hand over access to their financial records. And even if they do, this currency does not appear to solve recurring problems found in cryptocurrency usage: the questions of who will hold the funds, and how users can know their money will not be hacked. If the system underpinning cryptocurrency is a decentralised one, will Facebook be acting as a third party in moving or holding the funds? Will all vendors online accept Facebook’s coin? How can it be turned into fiat – namely, legal tender, government-backed – currency? Furthermore, in underbanked parts of the world, how will it be able to be turned into cash?
None of these questions have answers, at least not until more is known about the system itself. Yet looking at them effectively illustrates the difficulty with cryptocurrency, especially ones attached to large multinational companies. Facebook does appear to be attempting to assuage investor and government concerns in advance of the release of its proposed currency; the company has recently hired two former compliance managers for Coinbase – a digital currency exchange – although neither they nor the company have responded to the US Senate’s Banking Committee’s letter.
Easily accessible, reliable and scalable solutions that serve unbanked customers remain elusive despite the increasing importance of financial inclusion. Given the ubiquity of Facebook and WhatsApp, such a solution could serve to improve both the cost and speed of global remittances, if the cash-out and compliance concerns are addressed appropriately.
Similarly, in a possible attempt to ‘give back’ to consumers, Facebook’s mining structure could alleviate some of the pressure put on the company by users who feel cheated out of their information or data security with no recompense. Should Facebook decide to send users fractions of coins as rewards for clicking on advertisements, buying advertised products, or otherwise interacting with sponsored posts, users would likely feel less harassed by the constant barrage of targeted content. Operating like a loyalty points scheme, this may serve to both increase activity on the platform as well as spur interest by advertising entities.
Companies often use loyalty schemes to push customers to interact with their brand and continue to choose the brand over comparable alternatives. In Facebook’s case, those alternatives would obviously be competing social media or payment platforms. With the rise of a multitude of other social media networks, Facebook may find success in offering monetary incentives to users who remain both loyal and active on their site.
Right now, there are still more questions than answers about Facebook’s system, questions that are unlikely to be resolved until the specifics of the coin have been revealed. But it is safe to say that this has the potential to rapidly become a major player in the global financial system – if executed effectively.
In March, Ross Sandler, a Barclays analyst, estimated that the stablecoin project could yield anywhere from ‘as much as $19 billion in additional revenue [to Facebook] by 2021’. With numbers like that, it certainly seems as though we will be hearing more about this soon enough.
Kayla Izenman is a Research Analyst at RUSI’s Centre for Financial Crime and Security Studies.
The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.