Social media giant Facebook Inc. (FB) may become a formidable player in the rapidly growing markets for digital payments and cryptocurrencies when it enters both arenas early next year. Given its massive estimated base of about 2.375 billion monthly active users (MAU) in virtually every nation worldwide, Facebook could immediately become a major competitor to banks and payments processors such as Mastercard Inc. (MA), Visa Inc. (V), and PayPal Holdings Inc. (PYPL).
Facebook's plans, including the creation of a large open cryptocurrency system, are sure to draw intense scrutiny from regulators in the U.S. and abroad. “An open cryptocurrency system is more likely to encourage commerce over the Facebook system than a closed crypto system, because an open crypto is more liquid (easier to exchange to/from fiat currency, so more likely a consumer is willing to use it),” as Lisa Ellis, an analyst with research firm MoffettNathanson, wrote recently, per Barron's.
Facebook, which also owns WhatsApp and Instagram, plans to launch its payments platform in about a dozen countries by the first quarter of 2020 even though its cryptocurrency, provisionally called GlobalCoin in internal communications, reportedly will be under testing as early as this year, the BBC reports. The company has discussed its plans with regulators including the U.S. Treasury and the Bank of England (BoE), per the same report.
GlobalCoin may be used in a variety of ways. Facebook, for example, may issue the cryptocurrency as a reward to users of its social media sites who look at ads, according to The Wall Street Journal.
The table below summarizes key aspects of Facebook's venture.
Facebook's GlobalCoin: Key Facts
- Part of so-called Project Libra
- Facebook seeks to make money transfers faster and cheaper
- A key target market is people without bank accounts
- The payments system will use a digital currency, now called GlobalCoin
- GlobalCoin is intended as a means to make payments secure
- Users will exchange dollars or other currencies for GlobalCoin
- Facebook is working with online merchants to accept GlobalCoin
- Launch is planned by 1Q 2020
Facebook reportedly is working with banks and brokers to set up an association based in Switzerland that will facilitate the swapping of traditional national currencies, such as the U.S. dollar, U.K. pound, euro, and Japanese yen, etc., for GlobalCoin. However, given that GlobalCoin is intended to be a medium of exchange rather than a speculative asset, Facebook must do two things: gain widespread acceptance among merchants, and find a way to stabilize GlobalCoin's value.
On the first issue, the BBC indicates that Facebook is in discussions with a number of online sellers, with lower transaction fees being a focal point. On the second issue, "Normal people don't want to deal with a currency that's going up and down all the time," blockchain expert David Gerard told the BBC. To overcome this hurdle, Facebook may seek to make GlobalCoin a so-called "stablecoin," which is linked to the value of a traditional government-issued currency, The Wall Street Journal suggests. That currency is likely to be the U.S. dollar, according to the Financial Times, which says it's unclear right now how Facebook's digital currency will be issued, stored, and transferred.
Existing cryptocurrencies such as Bitcoin have failed to gain wide acceptance as media of exchange partly because of their widely fluctuating values. As for the name GlobalCoin, it is likely to change since there already is a digital currency with this name that was launched in 2012.
While Facebook's venture is designed to disrupt the competitive landscape, the company has been working with existing payments processors such as Visa, Mastercard, and First Data Corp. (FDC), as well as global money transfer leader The Western Union Co. (WU), to facilitate the launch of its own payments systems, the Journal indicates. Moreover, Facebook is seeking a total investment of about $1 billion for this project from a consortium that would include some of those firms plus various e-commerce companies, the report adds.
Merchants are eager to cut current transaction fees of around 2% to 3% that are charged by banks, payment processors, and payment networks. However, it is unclear why those in the latter camp would want to participate in a project aimed squarely at undercutting their competitive position.
"Facebook has all the prospects to propel crypto into everyday lives...in the next three to five years," a well-known veteran executive in the payments processing industry told the FT on condition of anonymity. "There are headaches to be worked out," he added, in matters such as accounting for accumulated GlobalCoin on a business' books.
Regulatory and Privacy Concerns
Facebook may face strong regulatory scrutiny as it moves to introduce and expand the use of this new currency. The social networking giant already is under fire for privacy issues related to user data, which has been compromised by numerous data breaches. An added concern is that, by sponsoring a payment system based on its own digital currency, Facebook will have the ability to mine data on users' spending patterns.
The U.S. Treasury reportedly is concerned that GlobalCoin could be used as a tool for money laundering. Meanwhile, the U.S. Senate Committee on Banking, Housing, and Urban Affairs has sent a letter to Facebook CEO Mark Zuckerberg that raised a number of privacy issues, as summarized in the table below.
U.S. Senate Questions For Zuckerberg
- "What privacy and consumer protections would users have?"
- "What consumer financial information does Facebook have?"
- "Does Facebook share or sell any consumer information?"
- What sort of personal credit information is Facebook collecting?
- Is Facebook complying with the Fair Credit Reporting Act?
Source: U.S. Senate Banking Committee, May 9, 2019 letter to Facebook CEO Mark Zuckerberg
These and other concerns may slow Facebook's plan to make GlobalCoin ubiquitous in many nations around the world. In fact, the company already faces a big challenge in India, the world's second-most populous nation, where the government has clamped down on the use of digital currencies, the BBC notes.