Not just a pretty stablecoin: What’s Facebook’s crypto play?

Is crypto lending an accoutrement of Facebook's stablecoin ambitions?

According to the BBC, Facebook is aiming to launch the "GlobalCoin" cryptocurrency by early 2020. It's expected to be a stablecoin pegged to a basket of international currencies, which will allow money transfers through WhatsApp and other services.

At the same time, Facebook has set up a new company in Switzerland called Libra Networks, focused on blockchain and payments, Reuters reports, citing Geneva's commercial register.

Insiders have been saying for a while that Facebook is building a collateralised stablecoin to carve itself a slice of the remittances market, and Switzerland is known for offering a friendly regulatory environment to blockchain and cryptocurrency projects, and for being a great place to hold lots of fiat currency. Both are potentially very useful for a collateralised stablecoin.

Plus, Libra is a great name for a stablecoin.

Facebook has remained publicly close-lipped though, even as the US senate wrote the company an open letter requesting more information about Libra and Facebook's crypto ambitions.

Questions and concerns

The letter lays out multiple concerns and asks several questions about issues including:

• How exactly it's going to work and whether it's been cleared with regulators.
• What privacy and consumer protections users will have.
• What consumer financial information Facebook has and what it does with it.
• How and whether this may impact other aspects of a user's financial life, such as insurance and credit scores.

The concerns are valid given the incredible range of data breaches and other privacy issues that have alighted on Facebook in the recent past, and that might be one reason to hold it to a higher standard than, say, Gemini or Coinbase, both of which have already released their own stablecoins.

But it appears that Facebook is being held to higher standards than other stablecoin issuers. That might be because of its storied history or sheer scale, or maybe it's because Facebook's plans very likely go well beyond simply using stablecoins for remittances and right to the heart of an entirely new blockchain digital currency-based consumer financial services platform.

Thinking big

Facebook's "small" blockchain team comprises dozens of people already, and it's currently advertising positions for almost 30 more. Even adjusting for puffery, the job descriptions suggest something a little more intensive than WhatsApp stablecoin payments.

It's thinking big.

"Our ultimate goal is to help billions of people with access to things they don't have now - that could be things like healthcare, equitable financial services, or new ways to save or share information," it explains to prospective content strategists, threat analysts and others.

Meanwhile, data scientists get to "build intuitive, secure products to solve some of the most challenging problems, at a scale that few companies can match" which "will have massive global impact".

These kinds of promises aren't unusual in the blockchain space. It's an area where many of the most experienced developers never have to work again, so anyone who wants to hire the industry's top talent needs to offer more than money alone. This may have been exactly what happened when Facebook bought out the Chainspace blockchain firm for the sole purpose of hiring on four fifths of its team members.

It's safe to say that in the not-so-long run, Facebook's goal is to leverage blockchain technology in order to become a hub of a wide range of consumer financial products. A stablecoin for seamless digital payments would be an excellent centrepiece for broader blockchain ambitions.

But where to begin? How about a Facebook peer to peer cryptocurrency lending platform?

Facebook's crypto lending platform

There are a few indications which tentatively suggest that Facebook could be exploring a lending platform.

One of them goes back to something called the Silicon Valley kill zone. It refers to the space in the shadow of today's tech giants, such as Facebook. When a young tech startup walks into the shadow of the giants with a product they perceive as useful or dangerous, they'll typically try to absorb or quash the upstart.

The first step is generally to just buy it out, as Facebook did when it paid a mind-boggling $19 billion for WhatsApp even though it already had a perfectly semi-adequate messaging app of its own.

But if the startup proves to be more of an upstart, and refuses the offer, the giant will just aggressively copy the startup's product instead. For example, Snapchat declined hefty buyouts from both Facebook and from Google, then subsequently found itself losing market share to the Facebook-owned Instagram, and being imitated by Google Stamp.

With that background, let's re-examine last year's rumours that Facebook was thinking of buying out Coinbase.

The price is right, with Coinbase being valued somewhere in the range of a thrifty $8 billion. But gut feelings also say that Coinbase, as an oldschool cryptocurrency organisation, would not say yes to any amount of money.

Furthermore, Mark Zuckerberg is often quoted as saying, "Facebook has not once bought a company for the company itself. We buy companies to get excellent people." And now we've seen a range of people leave Coinbase for Facebook's blockchain team.

And Coinbase clearly has more than a passing interest in crypto lending. Within just hours of the creation of its venture capital arm, Coinbase made a hearty investment in the Compound crypto lending platform.

Let's not forget the nature of the US congress letter to Facebook either. It's clearly expressing concerns over Facebook becoming a fully fledged bank with access to user financial data, credit scores and so on – not just in general but specifically in connection with cryptocurrency. The letter specifically says, "Facebook is recruiting dozens of financial firms and onloine merchants to help launch a cryptocurrency-based payment system using its social network."

But you can conjecture 'til the cows come home. The main reason it's reasonable to assume Facebook wants to get into crypto lending is because barring regulatory obstacles (gotta poach enough compliance officers) it just makes sense.

It's also fun to imagine what this could look like in tandem with a collateralised stablecoin, as the foundation of a Facebook cryptocurrency ecosystem.

A Rube Goldberg machine for money

We start with the collateral that backs the stablecoin. It hangs around and earns its keep by pulling in a portion of the small transaction fees that accompany each movement of the stablecoin – let's call it Libra.

Libra is mostly seeded into the world by people connecting their Facebook and bank accounts, at which point they can start making Libra payments digitally, sending money anywhere instantly and cheaply. When they make a payment, the amount is automatically subtracted from their bank account and held aside for safekeeping.

You now have Libras matriculating into the wider economy, as a coin that functionally degrades piece by piece with every transaction as those fees are gradually extracted from it. Banks will periodically end up with Libra stashes which they can in turn use for their own seamless digital payments.

The great thing is you now have instant, seamless digital payments and each transaction is also generating a little bit of revenue. Libras can be moved much faster than old bank money, and can make many more payments in a much shorter period of time than your traditional bank money, so the returns actually aren't bad. But only if they keep moving.

This puts you in an interesting economic position, because Libras are at their most valuable when they're being transacted the fastest and most frequently. But real life doesn't work that way, and in addition to being an instrument for transactions people also need Libras to be a store of value. At the same time, if Libras aren't being moved they're not earning revenue.

That's where Facebook cryptocurrency lending inevitably comes in. You need a way for people to lock up their Libras to essentially say "hey, I'm not using these right now", at which point the banks know they can use the backing funds for other more profitable purposes.

And you want to actively encourage people to mark any Libras that aren't being used, because Libras only generate profits as long as they're being spent. The solution is to share the interest that comes from the bank investments with the Libra user who locks up their funds.

You now have a global bank with a seamless digital currency. You've brought cheap, instant digital payments to life, and helped foster the financial inclusion of anyone who ever receives a Libra, because they can now use Facebook just like a bank.

To optimise the efficiency of the system, by making sure all Libras are either being invested or actively used, you can use the magic of fractional reserves on the bank side of things to act as a buffer between imperfect amounts of collateral and Libras. But that's assuming anyone will ever want to cash out their Libras.

Which makes you wonder. What would happen if a collateralised stablecoin became so widely used that its fiat backing became unrecognisable and worthless?

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Disclosure: The author holds BTC, BNB, ATOM, IOTA at the time of writing.

Picture: Shutterstock