In launching a crypto-coin next year, Facebook has an opportunity to create a new way for people to interact with money and their social graph. Technically, they have a few high-level choices:
- Launch a new token that gets its value from the Facebook ecosystem.
- Launch a dollar token.
- Launch a fully collateralized stablecoin.
I want to look at each of these possibilities in light of our current regulatory regime, then I’ll look at the market opportunities.
A New Facebook Token
Like ether, this would be a newly created token that has no intrinsic value and is not backed by any assets. Similar to what the Kik coin was supposed to be. This kind of token has to be produced in a limited quantity or it’s worth nothing. Unfortunately, regulators see this kind of token as a security (see the A16Z update on the Kik SEC case).
A Dollar Token
There are a lot of ways to make a token that’s worth a dollar, but the only way Facebook will try is that it is backed 1-to-1 by dollars in the bank. You would send your money to Facebook, and they would give you dollars to put into your account. Such tokens exist, but there are legal and security issues. For example, the USDC coin by Circle/Coinbase is only sold and redeemed by companies with the proper banking licenses to make that trade. However, they don’t watch the coins move, so they could be used for “nefarious purposes,” after which they may be difficult to cash out, depending on circumstances.
The bad news is that AML laws a) don’t work at all, b) prevent innovation, and c) you go to jail for violating them. It would be nice if Facebook would work with people like me and others to advocate for smarter securities and banking laws because we could really use some help. In the meantime, these kinds of tokens are seen by regulators as electronic money and must be monitored. I predict USDC will eventually have to change because it’s too easy to get in trouble with this coin as it is. I don’t think Facebook can do anything different unless they are willing to watch the movement of the coin for suspicious activity, and that would probably not go over well in the press.
A Fully Collateralized Token
The New York Times reports that “Facebook is looking at pegging the value of its coin to a basket of different foreign currencies, rather than just the dollar.” As Bernard Lunn says, a single currency would be more vulnerable to regulatory capture, whereas a multi-currency token would probably have a better chance (his argument of “greater stability” is relative to where you live and which currencies are in the basket).
This would make sense. Regulators would see a coin that isn’t worth a dollar as either a commodity or some kind of FX product and would regulate it differently. This is critical because they won’t have the legal obligation to monitor the movement of the coins. In this case, they would be smart to peg them to some other value than the price of a particular currency. Pegging to some average or weighted average of a basket of currencies could avoid death by regulation.
Many speculators say they will roll it out slowly and control which countries’ citizens will have access to this coin. So whether it’s subject to AML or not, we will probably see fairly tight control over the movement of these coins. Since FaceBook only has a few million users in China, we won’t see it there. But Facebook’s largest market is India. It’s a safe bet we won’t see it rolled out there initially, but I would expect they are designing it to eventually go to big countries like India and Brazil. I doubt we will see it in small struggling countries or places with hyper-inflation and a desire for alternative currencies. In other words — the countries that need it most.
Whether it is seen as electronic money or not, Facebook is likely to treat it as money and pretend AML is in effect, which is sad. Just because an international regulatory framework is widely accepted doesn’t mean large companies should promote the myth that it is the right thing to do. When large companies start acting like countries, it’s time to ask whether we might need something new.
The main markets here are transfers, payments, and remittances.
For transfers, they are going up against Venmo and PayPal, which are formidable, but so is Facebook. This is what I would call the Share and Pay market — where are the social transactions that Facebook is missing today? Splitting the bill at a restaurant is an example. Gifting is another use case. Group donations. Ride sharing. Paying for someone else’s scooter rental. Couchsurfing. Paying the grocery bills together. Etc. These may materialize, but I believe this is not the first market to go after because people are already used to frictionless transfers.
For payments, they would be going up against Stripe and Square, which I think are vulnerable. They both use the banking system, which is too antiquated and expensive for near-frictionless commerce. In this approach, once people load their Whatsapp wallets with this new coin, the coins move near-frictionlessly within the system and rarely come back out.
Once it’s popular, there will be a Facebook card that activates the network and doesn’t touch the banking system. If enough vendors accept this card, Facebook will grab a huge market share for payments. A low-fee payment system would be welcome. Mark Zuckerberg controlling it would be less welcome.
For remittances, you are including FX charges, and that changes the game. Here there is a clear business case. If Facebook’s coin can become the standard for international payments, that would be a big deal, because that would eliminate the banking system entirely. It’s a complex topic, but if Facebook’s coin can scale up quickly, then people may just accept it and re-use it, rather than cashing it in. Then it would morph from a unit of exchange to a unit of account, and that could be a new form of money. It all depends on the scale, and whether people will want to hold it or cash it out. Clearly, there is game-changing potential here as well.
Facebook can afford to launch its own blockchain. They could do a lot of innovative things, like let Facebook account holders become proof-of-stake mining nodes and let them validate transactions if they want. They could control the entire chain. Or, like Stellar and DASH, there could be a controlled number of validators with the intent to become more decentralized over time. As many commenters have noted, there are good reasons to fear Facebook’s centralization of a cryptocurrency.
It’s also possible they will just use the Ethereum blockchain. That would be good for the crypto community. But don’t forget, someone has to pay the fees, and on the Ethereum blockchain, the fees are out of Facebook’s control. Not only can the fees spike, but the transition to proof-of-stake could give the Facebook team some reservations.
What Would The Fees Look Like?
Unless the blockchain fees are somehow paid by advertising (imagine having to watch an ad to get your trade to settle), someone will have to pay the fees, and they can spike. They could set up payment channels, and that can reduce fees, but at some point, you have to settle, and that means someone pays the blockchain fee. These fees are likely to be far less than PayPal, but remember that PayPal and Venmo both offer frictionless transfers to friends and family. Somehow, there will be fees, and the fees will have to be very low.
For payments and remittances, assuming the fees are dramatically lower than what we have today, this really could be a game changer. The good news is that Facebook has the scale and clout (and legal team) to make it happen. The bad news is that it’s Facebook.
Michael Spencer concludes:
The currency will need to overcome numerous technical and regulatory hurdles before it can be launched. However, Facebook has a proven track record of duping regulators, deceiving consumers and defrauding businesses via its digital Ads monopoly, so I’m pretty sure it’s going to be okay.
On the one hand, regulatory agencies are now criminalizing innovation. AML laws do not work, yet we must all comply with them. The new Facebook coin is very likely to not be worth a dollar.
On the other hand, it’s not good if large companies with centralized control of our data make it so we depend on them more and they get more of our data. This increases the surveillance economy and increases the power of large companies like Facebook. I would like to see Facebook challenging and pushing the legal boundaries, joining us in the fight against idiotic and ineffective regulation.
What I would really like to see is an open-source alternative to Facebook, LinkedIn, Twitter, and the rest of our social ecosystem. Oh, hey, haven’t I been proposing that for about twenty years?
Assuming the Facebook coin comes out and is some kind of success, will that be good or bad for crypto? I think the answer is: good for crypto, not very good for the people who need it most, and likely less good for decentralization. In any event, it’s possible that in just a few years, this coin will be part of everyday life. Good for Facebook shareholders? Certainly. Good for the world? Yes. But it would be even better if it were done as a nonprofit.
This is an opinion piece. My opinions are not those of any company I have founded, and I have no inside information.