Is Facebook about to bring millions of users to crypto?

During the past weeks, it has been reported that Facebook is quietly making advances to use blockchain and cryptocurrencies in their apps, starting with rolling out a cryptocurrency for payments in WhatsApp. It’s funny, during the bull market, news that a tech giant like Facebook was entering the space would have monopolized the conversation for weeks; but now they didn’t get the attention they deserved because, in my opinion, we are tired of announcements of new features and partnerships from projects that don’t deliver. But this time it’s different: if there is a company in tech that has a demonstrated track record in delivering is Facebook, and with their 2 billion of users the impact in the crypto space can be massive. Let’s analyze it.

Finding the clues

First, one month ago The New York Times reported that Facebook is planning to launch a cryptocurrency for Whatsapp users, a stablecoin backed by dollars, euros and other fiat coins held in Facebook’s bank accounts.

A few days after, The Block reported that Facebook’s blockchain team tops 60 employees, and they are on a hiring spree, presumably to build this stablecoin and the necessary tools around it.

Finally, Mark Zuckerberg talked in a post about probably the most crucial change of Facebook’s direction in recent years: the whole company is pivoting to a privacy-focused platform. I find particularly interesting this quote:

People are more cautious of having a permanent record of what they’ve shared. And we all expect to be able to do things like payments privately and securely.

And this one talking about future use cases built on top of messaging:

We plan to build this the way we’ve developed WhatsApp: focus on the most fundamental and private use case — messaging — make it as secure as possible, and then build more ways for people to interact on top of that, including calls, video chats, groups, stories, businesses, payments, commerce, and ultimately a platform for many other kinds of private services.

Let’s pause a moment here to connect the dots:

1. Facebook is rolling out a cryptocurrency that represents fiat money in their bank accounts, let’s call it Facecoin, that will be used for native payments in WhatsApp.
2. WhatsApp, Facebook Messenger, and Instagram Direct Messages will be connected, and users from a platform will be able to communicate with users of another one.
3. They plan to put all their messaging platforms on the center of an ecosystem that allows payments, commerce, and other use cases, on top of them.

If everything goes well, in a year or two, we will be able to enjoy Facecoin, a cryptocurrency that can be sent to +2 billion Facebook users regardless of which platform they use or which country they live in, and use it for payments in businesses connected to Facebook through their messaging services.

The implications are far-reaching: rolling out Facecoin in Whatsapp not only will educate millions of users about cryptocurrencies, but it also means their backend and app will be ready to store and send cryptocurrencies, which opens the doors to other cryptocurrencies in the future.

I banned cryptocurrencies’ ads, but can we still be friends? — Source: Cointelegraph

But why does Facebook want to roll out its own cryptocurrency?

Facecoin is not the only effort Facebook is doing to enable native payments: as early as 2011 they created Facebook Credits, a virtual currency to purchase in games (remember FarmVille? So many hours lost!). In 2015 they launched Facebook Messenger Payments in the US, enabling users to send dollars after connecting their debit card, expanding to France and the UK in 2017. And three months ago they started to test WhatsApp payments in India using the government’s payment system.

As we can see, Facebook is making a massive effort to offer payments in different countries, and they are progressing. But to launch payments, they have to overcome a lot of obstacles: they have to comply with local laws and banking regulations, deal with every government requests, integrate their apps with the domestic banking system, and sometimes even acquire a banking license. Every time they want to add a new country is a new battle, with new peculiarities. For example, in India they still can’t offer payments to all users because the government requests that payments are processed in India instead of on Facebook’s servers. In Spain, which is a country that shares the euro and banking system with France thanks to the European Economic Area, Facebook obtained an electronic money license two years ago, and still, no payment’s integration is expected in the early future.

Meanwhile, rolling out Facecoin requires neither a banking license nor a government’s approval. The recipe is simple: Facebook locks fiat money, i.e., dollars or euros, in their bank accounts somewhere, and then they create Facecoins that represent that money. Facecoin is a stablecoin: is backed by real money, so its price will be pegged to those fiat currencies’ prices. And once Facecoins are created, Facebook can enable global user-to-user and user-to-business payments with no limitations, because no fiat money is transferred, only their representation. Users would have a balance in their WhatsApp or Facebook Messenger app that can use freely, and Facebook becomes a global bank that controls and uses those funds. A bank where every Facebook user can be a client in two taps.

A new approach brings new challenges

But rolling out their own cryptocurrency also brings new challenges: how can users buy Facecoins? When they receive Facecoins, how they can redeem them to fiat money? The simplest solution would be accepting purchases with debit cards and withdrawals to bank accounts, but to offer this, Facebook would have to deal again with every country government and regulators. We have seen how painfully slow are those processes, so they need another solution.

Here is where it comes the magic of programmable money:

• They can use an existing protocol instead of building one. For Facebook it doesn’t make sense to develop a decentralized protocol to support their own cryptocurrency; it’s much easier to build on top of an already existing one. Thanks to this, wallets are already developed and tested, transfers between them implemented, and the protocol is already secure enough thanks to the incentives’ system it’s using (i.e., proof of work).
• They can reuse wallets and integrations already built. To integrate a wallet inside WhatsApp, they only have to adopt one of the already existing ones. And if they allow sending the money outside their apps, users can send Facecoins to their hardware wallet or trusted wallet.
• It can be listed very easily on exchanges. Once an exchange’s system is ready for a protocol, it’s ready for every cryptocurrency built on top of it. This, that is one of the reasons that explains why almost every ICO is done with an Ethereum’s ERC20, would allow Facebook to offer their cryptocurrency to users of every country, outside their platform.

This last point is the most important for Facebook’s interests, and The New York Times reported they are already exploring this possibility. Listing Facecoin in exchanges would allow a Facebook user to go to one of those exchanges to buy Facecoins with cryptocurrencies or fiat money, and send them to their Facebook’s account to use them there. As the purchase is made outside Facebook’s platform, it doesn’t matter whether Facebook supports payments in that user’s country or not. And they also avoid having a bank account in that country: as we saw earlier, Facecoins are backed by fiat money when they are created, but when they are transferred that fiat money remains in the bank accounts.

But wait, there’s more! Listing Facecoin in exchanges also allows users, or even businesses in the future, to receive payments in Facecoins knowing they can redeem them for fiat money or other cryptocurrencies on an exchange. They are not forced to spend them on Facebook, where the possibilities will be more limited so that they can use Facecoin as their main currency.

Other option to offer Facecoins to users from countries where Facebook can’t deal with fiat money could be signing agreements with well-established local companies to accept Facecoins as payment so that Facebook can rebuy them for fiat money. For example, a freelancer in Nigeria could accept Facecoins for some online commissions, and then use them to buy electronics in a local ecommerce. This kind of deals are tremendously difficult to sign for a startup, but Facebook can take advantage of their strength to pull this off.

If everything goes well, Facecoin becomes a currency…

• …that can reach 2 billion possible users.
• …that unlocks user-to-user and user-to-business payments.
• …that can be used outside of Facebook and bought and sold at hundreds of exchanges.

And Facebook is not alone

Enabling global payments to other users or even businesses is very tempting, and Facebook is not the only one that has come up with this idea. So far, almost every relevant messaging service is experimenting with cryptocurrencies and blockchain to power up their payment’s systems. No one wants to use another company’s solution, so all of them are developing their own:

• Telegram. Famous during 2018 because their ICO raised $1.7 billion from accredited investors before canceling the public sale, they are using those funds to develop Telegram Open Network, a blockchain-based platform for their +200 million users to extend Telegram with payments, file storage, dapps and more. Recently they reported to investors that work is 90% complete, and it will be released in the coming months.
• Line. With +500m users, mainly in Japan and other Asian countries, they own a crypto exchange since July 2018 (which volume is not remarkable, but still), and they recently launched LINE Token Economy, their platform for dapps (decentralized applications). This platform is built on top of LINK Chain, their proprietary blockchain, and uses LINK, a token that users can get for interacting with those dapps.
• Kakao. The most popular messaging app in South Korea unveiled the past October Klatyn, their blockchain platform to offer their users a way of guarding and transferring crypto without having to deal with private keys and other technical complexities. These days they are in the news because some Korean sites reported that it’s rumored that 44 million of KakaoTalk app users will be able to opt-in to have a crypto wallet soon.
• Signal. As far as we know, the privacy-focused app is not working with blockchain by themselves, but they are partnering with MobileCoin, a startup that raised $30 million to offer mobile payments, advised by Signal’s creator.

Conclusions

It’s still too early to know how serious Facebook’s efforts to bring cryptocurrencies to WhatsApp and their other messaging services are, or even whether their users are interested in using blockchain-based services or not. But what it’s clear is that Facebook is working hard to unlock the full potential of blockchain and cryptocurrencies. They are not arriving at the crypto space lured by the ICO mania or to add blockchain to their list of cool technologies: they are rolling their own cryptocurrency because they believe it can be one of the right solutions for payments.

In my opinion, this is a giant step towards cryptocurrencies’ mass adoption. It could be the killer app that everyone is waiting for: Facebook has the resources to build a payment service that delivers value to their users without exposing them to the current technical complexities of cryptos, but at the same time educating them about wallets, transactions, exchanges, etcetera. A service that can be used by billions of people only in Facebook apps, and millions more if we take into account Telegram, Line, and others.

At the same time, there is a question we should ask ourselves: is Facebook the company we want to lead mass adoption to crypto? They have promised to shift towards privacy, but they still have a long record of breaking their users’ rights, selling data and putting their revenue before everything else. Can blockchain’s transparency force Facebook to be accountable for their actions? Is decentralization the right solution to avoid Facebook having too much power over their users?

I don’t have answers to these questions, but I’m eager to see what happens next. Exciting times!

W hat’s your take on this? You can find me on Twitter: @raulmarcosl.