(Listen to our latest podcast here. It is with Dhruv Bansal of Unchained Capital, and it is proving to be a sleeper hit! In case you just want to read the summary notes, you can find them here).
After months of speculation about Facebook’s new cryptocurrency, there is more confirmation that the social media giant is reportedly working closely with a consortium of financial institutions and e-commerce merchants for the launch of Libra - its native stablecoin for payments.
More than a decade after its launch, Bitcoin - the largest cryptocurrency by market cap - is still fighting to become a reliable payments mechanism, partly due to the underlying technological challenges that limit throughput and partly due to the fundamental view of the Bitcoin Core community that Bitcoin’s properties make it a better fit for “Digital Store of Value” like gold than for payments. In 2018, about $2.4 billion in Bitcoin transactions were processed by payment processors, which equates to a tiny sliver of the $2.8 trillion e-commerce sales worldwide in 2018. Lightning Network, which is a layer 2 solution built on the top of the Bitcoin protocol, is expected to propel Bitcoin into mainstream payments, but the adoption of Lightning is going to take at least years from now. Bitcoin’s spinoffs and copycats that have tried to sell themselves as decentralized payment networks are yet to make an impact.
With e-commerce sales expected to grow at a healthy clip for the next few years, Facebook’s cryptocurrency could finally help Facebook fight for its share in the fast-growing e-commerce pie. A variety of use cases for Facebook’s cryptocurrency are being speculated, but the most important use case that is grabbing everyone’s attention is the use of Facebook’s coins for e-commerce payments instead of credit cards. Credits cards have become ubiquitous these days with a majority of transactions being paid for using cards, especially in the developed world. Credit card service providers usually charge a small flat fee and variable processing fees of 1-3% from both users and merchants. We believe that Facebook aims to upend the traditional credit card business model by eliminating the fees altogether. For example, at the time of checkout, you can log into your facebook account to pay for the transaction using your facebook coins instead of using a credit card. Taking a leaf out of WeChat’s playbook, facebook coins can be used for micropayments and p2p payments, which are not targeted by credit card companies due to the prohibitively expensive cost of using a credit card for small-token payments.
How will Facebook benefit from providing zero-cost payments? Facebook could leverage its zero-cost payments to gain finer insight into its users purchasing patterns, which will undoubtedly be of paramount value to its advertisers.
We break down some pros and cons of facebook’s crypto plans, following on from an earlier piece on this from a few months ago.
Centralization is a big plus for UI/UX, which is one reason a decentralized Uber is still some distance away, for instance. As the response to XRP/Ripple has shown, the 99% do not, at least yet care about true decentralization, and prefer convenience over decentralization
. So even a private Facebook coin, if well executed and packaged and marketed in the way that only Facebook and maybe one or two other companies can, will gain a massive amount of adoption, especially given the large user base that Facebook commands.
The customer base, and the merchant base, and the global reach lend themselves to multiple use cases, each of which are multi-billion dollar opportunities. Facebook could airdrop its tokens, and give discounts to users that pay through these coins. Obviously merchants would immediately want to convert this to fiat, so the stablecoin strategy could be crucial here, capturing value/driving lock-in on the merchant fiat off-ramp side as well. Facebook could make a play in remittances, which is a multi-trillion dollar opportunity globally, with India, where whatsapp is hugely popular, a key hub for inflows. Facebook could also just incentivize user behaviour, and drive them to do things like watch ads, or like promoted campaigns, in return for Facebook coins.
The amount of user transaction data so generated will be massive, and will likely be far more useful than standard messaging data from something like whatsapp for gaining insights that can be used by a range of financial service providers.
Regulation, both in the US as well as domestic regulations around the globe, will be a critical challenge especially with respect to something that involves some form of value transfer. Each of these markets, whether it be p2p payments, ecommerce payments, or incentivizing user behaviour, it will face challenges. In each of these areas, tech giants (Amazon, Google etc) as well as others in their domains (JPMorgan, Goldman, Visa, Mastercard, Western Union) in addition to entrenched crypto native solutions (Coinbase, Ethereum) will provide stiff competition.
Centralization can also be a disadvantage, and there will always be key concerns around the company’s ability to manage user financial behaviour data that is in many respects even more valuable, vulnerable and private than general user data. Like Amazon, Facebook has the ability to use its clout get into a range of extremely high-potential market spaces, and paradoxically, into all sorts of trouble, especially at a time when there is increased scrutiny on the modus operandi of the valley tech giants, both from regulators as well as, more importantly, in the court of public perception, as pliant as that might be to the tech giant’s considerable, but not-always-innocent charms.