Why Facebook is Launching a New Currency and How it Compares to Bitcoin

What would it take to unite Facebook founder Mark Zuckerberg and the Winklevoss twins? You know, the college mates who got a $65 million cash and stock settlement from an intellectual property theft case, against Zuckerberg. Well, the answer is a new currency.

The official announcement is not out yet but Facebook is launching a new cryptocurrency, and it might just have the ingredients bitcoin has been missing for widespread payments adoption.

Reports from the Financial Times show that Facebook is in talks with cryptocurrency exchanges, including the Winklevoss-owned Gemini. Exchanges ensure that users are able to store cryptocoins and exchange them for other currencies.

The Clues

A series of moves by Facebook including the buying of smart contracts company Chainspace, fueled reports throughout 2018 that the social media company was developing its own cryptocurrency. In May, former PayPal president David Marcus was brought in to head a new cryptocurrency team that included the then Instagram VP of Product Kevin Weil.

In June of the same year Facebook reversed its advertising ban on cryptocurrencies and in the same month, Bloomberg reported that Facebook was developing a stablecoin (more on that ahead) to be used within WhatsApp. According to Reuters, Facebook Global Holdings registered a company named Libra that deals in blockchain, payments and analytics in Switzerland and slowly the crumbs have been adding up to a big piece of Facebook ‘cryptobread’.

Why Launch a New Currency?

After all the flack that cryptocurrencies like Bitcoin have received, including being a facilitator for illegal purchases, many wonder why Facebook would choose to go into the crypto-world now. For instance, in January 2018, Facebook banned the advertisement of cryptocurrencies on its platform.

According to the company, the ban was necessitated by the fact that people were advertising initial coin offerings, binary options and cryptocurrencies that were deceptive and unsafe to its users.

However, five months later the company partially reversed its ban, allowing cryptocurrency ads but maintaining the ban on initial coin offerings and binary options adverts.

After the unearthing of the Cambridge Analytica scandal and heated public debate about the misuse of user data. Facebook’s data reliant advertising model has come under increased scrutiny and threat from legislative action. In its 2019 first quarter financial report, the company estimates that investigations by the US Federal Trade Commission over data privacy violations could cost them up to $5 billion in losses That’s not taking into account possible fines or legislative action. At the moment, going into fintech could represent a way for the company to diversify its revenue streams and take some pressure off its advertising model.

Making Use of its Large Network

Thanks to steady user growth and a series of acquisitions, Facebook has access to one of the biggest networks of people by any company. Its 2.8 billion users, coupled with WhatsApp’s 1.5 billion and Instagram’s 1 billion users; according to data from Statistica, provides the incentive to enable financial transactions within the network. Additionally, with efforts underway to integrate the three platforms’ infrastructure and achieve interoperability, the new currency will have the ability to utilize those numbers.

Expanding from social media into fintech is not new, popular Chinese app WeChat has done it and it’s 2019 first quarter financial results show a quarter of its revenue coming from fintech and business services.  WeChat Pay, it’s fintech product, has 900 million transacting users, and if the same works for Facebook the potential could be even bigger.

Source: Tencent, Bloomberg Opinion

What Makes Facebook’s Coin Different from Bitcoin

One of the biggest hurdles to universal adoption that cryptocurrencies like bitcoin have faced is price volatility.

Sources: Buy Bitcoin Worldwide, 99bitcoins, CoinCodex

For instance, in mid-December 2017, bitcoin’s value stood at $20,000 per coin, its highest value ever. A year and a half later and at the time of writing this article, the price stands at $8,772, its highest value since May 2018.  This means that if people had been heavily using bitcoin for financial transactions in 2017, then those who bought a house at a value of $20,000 per bitcoin, will suffer a depreciation rate of more than half the value of their house in less than two years. And that would be independent of any changes in the real estate industry. To get a sense of just how volatile it is, google ‘the price of bitcoin today’ and do the same in two days and see the difference.

On the other hand, Facebook’s currency will be free of such fluctuations as it will be launched as a stablecoin. This is a type of cryptocurrency that has its value pegged on an asset: gold, the dollar etc. and is, therefore, more stable as well as independent of cryptocurrency speculation.

Ideally, if you pay for a $100 Facebook ad using Facebook’s stablecoin, you won’t wake up the next day having lost money because the coins you spent have quadrupled in value. That can only happen if the value of the dollar which it will be pegged on, also fluctuates as much (which is very unlikely) This stability, coupled with Facebook’s 4 billion users network, makes the currency ripe for widespread usage. This is hump bitcoin and other cryptocurrencies have struggled to get over.

Leave a Comment

Your email address will not be published. Required fields are marked *