Facebook’s big bet on crypto

In recent weeks, everyone has been getting very excited about Facebook’s digital currency, the unimaginatively named “GlobalCoin”.

The theory goes that Facebook is going to plug this cryptocurrency into its global audience, enabling users all over the world to transfer money to each other free of charge and make online purchases. Like many of Facebook’s ventures, this might seem like a side project, one that is bolted on to the all-pervading social network and, merely, a new revenue line in a business that revolves around advertising.

But in reality, serious resources are being poured into this initiative, suggesting that Facebook is enacting a wholesale pivot from social network to fintech. This development poses several observations that are worth delving into.

What is Facebook up to?

Facebook reportedly plans to launch a crypto-based payments system in “a dozen countries” by the first quarter of 2020, with trial beginning by the end of this year. It’s calling the initiative “Project Libra” and they’ve sought input from senior people at the US Treasury and the Bank of England on the regulatory challenges, which are formidable, to say the least.

Zuckerberg & Co have also been speaking with various crypto exchanges, presumably because they’re looking for regulated platforms where users can store and trade its coin. There was excitement when Facebook talked to Gemini, as it’s run by Facebook alumni, the Winklevoss twins. It has also been working with high-frequency trading firms Jump and DRW, and payments firms, including Western Union, Visa, and Mastercard.

The range and diversity of potential partners suggest that Facebook is taking a collaborative approach to building an ecosystem for crypto-based payments rather than trying to do it all themselves. Interestingly, this is reminiscent of the approach Apple took when building out Apple Pay.

An existential crisis

On the one hand, this seems like a big validation of cryptocurrencies. When the world’s biggest social network jumps on the crypto bandwagon, it has to have a future, right?

But, crypto is still nascent and has a long way to go before they can rival fiat currencies as a medium of exchange. Look beyond the impassioned debate over the future of money, and there is also a tech giant seeking to re-establish its raison d’etre and remain relevant in a world that’s rapidly changing. It’s much more likely that this latest move tells us more about the state of Facebook than the state of crypto.

People have started asking, “Do I need Facebook?” This goes beyond the prolonged period of bad publicity and concerns over privacy and Facebook’s business model. It’s a deeper query about the role of social media in our lives and the way we interact with each other online. Senior management at Facebook have presumably come to the conclusion that the social network cannot remain relevant to billions of users globally by limiting itself to photo sharing and viral content.

Money makes the world go round, and the path to user retention and growth, is to integrate with payments. Despite recent failings, Facebook is in a position of great strength here. It is well placed to succeed in the payments arena, as the critical challenge for all currencies is critical mass and adoption. With 2.4 billion users, Facebook has the scale to make a new currency work and the technological infrastructure to execute.

Reinventing the wheel

However, the question remains, why a cryptocurrency?

GlobalCoin will be its own currency, so, presumably, it will be subject to some currency fluctuations, even if it is pegged to a basket of other fiat currencies. Also, it’s not immediately obvious what GlobalCoin can do that Paypal, and others cannot. If the goal is to send money overseas, Transferwise does the job. Indeed, I can sign up to that service in one click using my Facebook account! And given that GlobalCoin will ultimately need to be converted back into other fiats, users will still need a bank account in every country where they want to make the switch.

Success in Emerging Markets?

Details are still scarce, so it will be fascinating to see how they walk the long road towards launch. It feels like the kind of thing that may ultimately find success outside of the developed world (where Venmo, Paypal, bank transfers and other existing payment solutions all work fine), where Whatsapp is used for a whole lot more than chatting. M-Pesa is a fascinating example of how mobile technology can facilitate commerce in an unexpected way, and given how ubiquitous Whatsapp has become in places like India and Southeast Asia, I can potentially see it working – maybe.

But we are going to have to wait in order to find out why Facebook has gone down the crypto route. The answer isn’t obvious and the use case doesn’t seem to be robust, which is never a good thing when it comes to launching new fintech products.