Facebook is developing its own cryptocurrency for payments, according to at least two reports, a move that has the potential to make the social networkbillions of dollars while also helping to eliminate fake news and bots.
Although the social media giant has not publicly commented on reports from Bloomberg and The New York Times, it did acknowledge it’s exploring the distributed ledger technology (DLT).
“Like many other companies Facebook is exploring ways to leverage the power of blockchain technology. This new small team is exploring many different applications. We don’t have anything further to share,” Facebook said in a response to a Computerworld request for comment.
While details are few, the reports based on unnamed sourses claim a cryptocurrency would allow users of Facebook’s WhatsApp messaging platform to send money to contacts, similar to how Venmo or PayPal allow cross-border payments; the difference is that there would be no middleman (i.e., a central bank or clearing firm).
According to the Times‘ article, Facebook has already spoken with cryptocurrency exchanges about selling its crypto coin to consumers; others believe the social media firm would not tie payments to a strict “cryptocurrency,” opting instead to use a stable coin backed by U.S. dollars and other fiat currencies.
“They’ll get exchanges to onboard customers with the KYC [know your customer] process and enable them to buy the currency,” said Avivah Litan, a Gartner vice president of research. “The details are sketchy, but my guess is they increase ad revenue and offer users a PayPal-like experience…and they don’t get regulated much.”
Stable coin networks require operators to keep collateral in a bank, so that if $1 billion in digital coin is issued, an equivalent amount must be available on deposit or reserve, according to Litan. Cryptocurrencies, such as bitcoin that aren’t backed by fiat currencies, have no intrinsic value other than supply and demand.
In a note to investors this week, Barclays internet analyst Ross Sandler said a “Facebook Coin” could net the social network as much as $19 billion in revenue by 2021, according to a report from CNBC.
“Merely establishing this revenue stream starts to change the story for Facebook shares in our view,” Sandler told CNBC.
Because blockchain-based payment networks eliminate the need for central banks that enable payment processing, the time and fees associated with payment, clearance and settlement can be cut. DLT also has the added attraction of avoiding regulation, which has yet to catch up to the blockchain industry.
The Facebook interest reflects gathering interest in using blockchain-based networks to move money around.
In February, the largest U.S. bank by deposits, J.P. Morgan, launched its own stable coin. JPM Coin, as the bank is calling it, has the equivalent value of one U.S. dollar.
“When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars, reducing the typical settlement time,” JPMorgan said in an online FAQ. “The JPM Coin is based on blockchain-based technology enabling the instantaneous transfer of payments between institutional accounts.”
And just this week, IBM launched a payment service using a stable coin for international money transfers.
On Facebook, users who want to purchase advertised products must currently type in credit card information – not big deal on a desktop computer, but a somewhat more arduous experience on a mobile device that leads to people dropping off the site, according to Litan.
“I’ve talked to someone who uses Facebook extensively for advertising and business and he said [blockchain] is good for advertisers because it’ll convert more customers because it’s a one-click pay,” Litan said. “So, [customers] will have a currency where they’ll just pay and that way [Facebook] will keep all the payments within their own network and with more conversions and higher advertising rates.”
Jack Gold, president and principal Analyst of J. Gold Associates, believes Facebook is interested in entering the “lucrative” the mobile payments market, where it will compete with Apple Pay, Google Pay, Samsung Pay and others. “They have a huge installed base and if they can leverage a payment opportunity it could generate some pretty big revenues for them,” he said.
Facebook, however, could also cash in on blockchain’s native cryptography, which enables network operators to authenticate users through hash keys once they’re registered; the process keeps identities private but means there’s an authentic user on the other end and not a bot.
“It can also be used to enhance their ability to fight… ‘fake news’ by requiring that everyone posting be registered and have an audit trail,” Gold said.
Blockchain technology creates an immutable record where a file or “block” of data is inextricably tied to the previous one through a hash; it’s a write-once, append-many technology.
Because of its cryptography capabilities, blockchain could also help Facebook comply with new international privacy laws, such as the EU’s General Data Protection Regulation (GDPR), which targets citizens’ personally identifiable information (PII), providing transparency around its use and giving people the right to restrict its use or request it be deleted all together. If a user deletes their hash key, their information is no longer accessible, meaning cryptographic deletionis just as effective – if not more so – as traditional data deletion.
Today, registering with blockchain is hard due to the need to confirm the identity of the users (e.g., requiring them to have an ID, picture, etc.), Gold said via email. “So the person can be confirmed and it’s a very manual process. But that could potentially be simplified for Facebook needs.”
There is however, a downside to collecting user information in order to authenticate them; it means Facebook now becomes the repository for a lot of personally identifiable information.
“But I suspect there will be a lower bar on identity for Facebook users that can still offer some level of identity without all the serious identity confirmation needed in financial transactions,” Gold said. “Although any payment system might still need that, so there may be levels of identity confirmation.”