Facebook vs Bitcoin

What is Facebook Coin (FBC)?

Facebook is scheduled to release the whitepaper of their new crypto currency this week, called Libra. Here is what we think we know. (Because of the release of conflicting information on the exact details of the new Facebook coin, we will start with a few concepts as givens, even though we cannot be certain of anything until Facebook makes an actual disclosure).

Who am I to make all these guesses?

I am Jonathan Caras, CTO of Lionschain Capital, a long short crypto hedge fund. My thoughts around Facebook’s plans are my own. I have no inside knowledge or crystal ball related to Facebook’s plans, but I do spend all day researching the crypto market, and attempt to understand, why someone would want to invest in Crypto, Have we bottomed, Where we are going, and What is interesting happening in this space. This is not investment advice.

I plan to release a follow up article once I get to spend time reviewing the upcoming release of the Facebook Coin Whitepaper.

What we think we know about FBC:

• Proof of Authority private network controlled by an association of international companies
• Members of the association get some say over governance
• FB is purchasing currencies and yield generating assets to act as a backing for FBC
• These assets will include a basket of currencies, bonds, debt, and possibly other commodities
• The price is designed to be stable, but gain slowly over time vs state backed currencies
• FB is working with government regulators to get approval for the creation and distribution of this currency
• FB will comply with all current laws including AML (Anti Money Laundering) and KYC (Know Your Customer requirements).
• FB wants to launch FBC in 2020
• FB will partner with ATMs to create an easy off ramp to fiat
• FBC will integrate with FB, IG, and WA and potentially include integrations with the services provided by the other members of the association

Let’s break each of these down into more details

Proof of Authority private network controlled by tech companies

Facebook is partnering with companies like Paypal, Visa, Mastercard, Coinbase? and Stripe to join the FBC Association. Facebook is rumoured to be charging $10M from each international company to join the association. Facebook is planning on raising a total of $1B which will be used to fund this project. Some members of the association will have the right to act as validators for their upcoming independent blockchain. This approach is often referred to as “Proof of Authority”.

This means a few things:

1. Only pre approved companies can validate transactions
2. The blockchain will be run by a small group of organisations, which can easily collude.

Members and Validators get some say over governance

Facebook will be launching the blockchain as an independent association. By paying $10M, members of this new association will have the right to some level of governance. It is unclear exactly what the governance model will be, but we can assume it will include, which countries are supported and which assets are included in the reserve pool backing the Facebook Coin.

FB is purchasing yield generating assets to act as a backing for FBC

Facebook recognised that one of the attractive value propositions of Bitcoin is a hedge against unsustainable government inflation. Since the Gold Standard was removed from most world governments, there have been over 50 cases of government’s crashing their economy through hyperinflation. The value of the USD has decreased roughly 95% over the last 80 years due to inflation.

Facebook is (presumably) including yield generating assets to help mitigate the loss of value caused by government debt and inflation.

The price is designed to be stable, but gain slowly over time vs state backed currencies

There are two attributes to money that attract a general consumer:

1. People prefer to be paid in a currency that has roughly stable buying power over the short to medium term.
2. People prefer to store their wealth in low risk assets that gain value over time instead of losing value over time.

Facebook recognised this and chose to create a coin that is relatively stable, but grows in value year over year when compared to other major fiat currencies.

FB is working with government regulators to get approval for the creation and distribution of this currency

Because of the public nature of Facebook, and the investors backing this project by money, reputation, or infrastructure, this coin must be approved by the countries it plans to operate in. This approval means that the Facebook Coin will essentially be a fiat currency, existing only because the world governments allow it to exist.

If there comes a time in the future where the US government or other major powers decide to ban it, Facebook and the other network participants and backers will be forced to concede and implement a censorship program, blocking massive populations of humans from accessing the network.

FB wants to launch FBC in 2020

This is a very aggressive timeline for the launch of such a large project. There will be many hurdles, technical and political. We can assume that Facebook is investing a massive amount of capital and resources to try and hit this timeline.

FB will work with ATMs and other money changers to create an easy off ramp to fiat

This may be the most interesting aspect of this project. The ability to enter and exit the crypto market is one of the biggest challenges to mass adoption today.

Whatever happens with Facebook Coin, if Facebook succeeds at reducing the friction around the ramps, they will create a turning point, which will go down in history as a positive impact in the crypto space.

FBC will integrate with FB Mobile, IG, and WA

It is estimated that there are less than 10M people worldwide that actively use crypto today. Putting a crypto wallet in the hands of 2B people will have a massive positive impact on the industry as a whole.

General Feature Comparison

Below we list a few of the general features of the different payment networks. Later we will address some of these features and why they are important in more details.

The historical transition from commodity money to fiat money

In the past the US Government and essentially all world governments created a virtual currency created from an advanced technology called paper. This was designed to act as a virtual representation of “real” money, ie gold. For every 1 unit of virtual money they created, it would be 1–1 backed by “real money”.

“Real Money” had a few attributes:

1. It was scarce,
2. independently verifiable,
3. not issued by any individual, nationstate, or organisation, and was
4. considered valuable because of social consensus and market demand, not force.
5. Real money creation required a proof of work called “gold mining”. The more you mined, which required real world resources, the more “real money” you created.

As governments introduced a virtual money ie. paper money, they committed to backing the virtual money via the real money they kept safe in a vault. Over the years, governments realised they could simply produce more virtual money and nothing was preventing them from reducing the 1–1 ratio of virtual money to real money. This led to an increase in the creation of virtual money without an increase in the pool of real money backing the virtual money.

Eventually the real money was retired and governments enforced the use of only the virtual money. This is called fiat.

What does it mean for a virtual money to be backed by real money?

If a 3rd party, or a group of 3rd parties have the ability to determine if your virtual money can be redeemed for real money, then you cannot build a trustless system, you must have complete trust in these 3rd parties.

In this system, you cannot trust the virtual money network to provide remittance, you can only trust the organisations that oversee the virtual money network, and these 3rd parties provide remittance.

There was a time in the United States where anyone could bring to a bank virtual money and trade it in for real money. During this time period, it could be said that the virtual money was backed by the real money.

After the US Government stopped enabling the redemption of virtual money for real money, it could be argued that the virtual money never was backed by real money, it was backed by the good will of the US Government.

What is backing Bitcoin?

The decentralised, censorship resistant blockchain, powering the Bitcoin network is essentially what “backs” Bitcoin. To hold bitcoin, you need not get permission from any third party. To transfer bitcoin, you need not get permission from any third party.

Access to a censorship, non seizable value transfer and storage network is valuable, and the exact price of that access is determined by market demand, denoted in the exchange rate between Bitcoin and an individual’s local government enforced currency.

Part of what makes bitcoin valuable is that it is not backed by a commodity that exists off the blockchain. As we have noted above, when you attempt to back a crypto currency by an asset not controlled by the blockchain, you essentially reinvent the current financial system, one of complete trust in a group of 3rd parties to define, approve and enforce the value of the system.

Where does Facebook Coin compete with Bitcoin?

Features relevant to a general consumer

What is the goal of Bitcoin, and does Facebook compete with this goal?

Bitcoin’s main goals can be described as censorship resistance and inflation resistance. These goals are achieved through strong decentralisation, and a closed system, where the blockchain acts as the remittance layer itself.

Is Facebook Coin good for Bitcoin?

One of the main challenges Bitcoin has had since inception has been around creating a consumer experience ready for mass adoption and subsequently on-boarding a mass amount of users through low barrier onramps.

There is significant reason to believe that Facebook will achieve both of these goals. Introducing a crypto wallet to 1–2 Billion humans via their cell phone and apps they already own will bring a massively large, new user base to the crypto space.

The mission and vision of Bitcoin is not being addressed by the creation of Facebook coin, and as more general consumers get exposure to Facebook Coin, they will become more exposed and may be attracted to the value offering of Bitcoin, and choose to store a percentage of their net worth in Bitcoin to gain access to that value offering.

As Facebook builds out better on ramps and off ramps between the general crypto market and the traditional fiat market, the friction to investing in Bitcoin will be reduced, thus bringing more money into Bitcoin.

Given these assessments, it seems clear to me that Facebook’s play in the crypto space will act as a huge positive catalyst for Bitcoin over the short term and long term.