Will Facebook Coin be a gift to the crypto space, or a Trojan horse?

Will Facebook Coin be a gift to the crypto space, or a Trojan horse?

By now you’ve probably read that Facebook is no longer just dabbling in crypto, but is making a full-fledged push into the space, complete with integration of their own stablecoin into WhatsApp, a $1B outside fundraise and maybe even a listing on crypto exchanges. And that’s just what is known publicly — your guess is as good as mine what’s going in the secret Facebook crypto lab.

This is uncharted territory for crypto; forget Telegram integration, this is a full-fledged tech titan, 5th largest company in the world by market cap, potentially introducing cryptocurrency to 2.3 billion monthly active users. This is almost certainly a net positive for the credibility and awareness of blockchain technology, but how this actually plays out in the crypto markets, and in particular the landscape of stablecoins, is much less certain.

The purported Facebook stablecoin (let’s call it FB Coin for short) would be of the fiat-backed variety, collateralized by USD or a basket or world currencies held in Facebook corporate accounts. In light of that it’s main competitors, i.e. the stablecoins most vulnerable to FB Coin’s introduction, are Tether (USDT), TrueUSD (TUSD), USD Coin (USDC), Gemini Dollar (GUSD), and Paxos (PAX). I’ll refer to these as the “Big 5” of fiat stablecoins for short. I’m generally going to leave Dai out of the discussion since it has utility in DeFi applications that FB Coin and other fiat-stablecoins can’t hope to replace in their current form.

So how does this all play out? Assuming for a moment that FB Coin is successful from a technical and regulatory perspective (meaning the thing works, it can handle the required transaction volume and settle near-instantly, and regulators don’t crush it, all big assumptions), the potential outcomes fall into three broad categories.

Scenario 1: FB Coin launches but usage is mostly isolated to WhatsApp (and/or other FB platforms)

In the most achievable scenario, Facebook successfully integrates FB Coin into WhatsApp, first in it’s proposed pilot in India and then globally, then into other Facebook platforms like Messenger and Instagram. This by itself would be a monumental achievement; with sufficient penetration among their 2.3 billion monthly active users, Facebook could practically eliminate the need for any fiat or bank connection. Think Venmo in the U.S. or AliPay in China, but every individual and business you know uses it — all of the sudden you can handle a significant portion of your daily economic activity completely outside the traditional banking system, and without concern for national borders!

Sure, you could argue that this is somewhat possible with the existing services from Venmo/AliPay/etc, but FB Coin has two massive advantages. First, its adoption has a huge headstart with FB Coin built into an app that 1/3 of the world (and significantly more among the developed world) already uses daily. Second, using a cryptoasset with potential fiat on/off ramps throughout the world, it can operate cross-border in ways that simply aren’t possible between banking systems of different countries (ex., I can’t withdraw my Venmo balance to a Japanese bank account, nor connect my U.S. bank account to Alipay).

In the absence of an independently transferrable (and tradeable) cryptocurrency, the crypto space largely ignores FB Coin and sticks with the existing stablecoins. The Big 5 are safe, with Tether still making up 90% of usage because apparently people enjoy systemic risk.

Scenario 2: FB Coin achieves the above adoption in WhatsApp/Messenger/Insta, but also lists on crypto exchanges

In this case, FB Coin would be listed alongside the other fiat-backed stablecoins, competing for usage and mindshare among crypto traders. Let’s assume for a second that Facebook uses some of their $10 billion cash on hand to ensure that FB Coin is listed on all the major exchanges like Coinbase and Binance. With FB Coin as an option, who in their right mind would still want to to trade USDT? Consumers will likely go for the stablecoin that is most widely-used and has the greatest name recognition. On both points the winner will be FB Coin — you will see Walgreen’s accepting FB Coin through WhatsApp long before they are accepting Paxos or Tether. Among stablecoin issuers, Facebook also has by far the longest track record, biggest balance sheet, and the most to lose from a reputation standpoint.

With FB Coin on all or most major crypto exchanges, the only thing the Big 5 have left is inertia. They will mostly fall out of usage, with perhaps USDT remaining useful on the crypto exchanges too shady for FB Coin to touch.

DAI (and/or other crypto-native stablecoins) survives as the choice for DeFi applications, people who will never trust Facebook, and ETH maximalists.

Scenario 3: FB Coin becomes de facto world payment currency

By virtue of it’s Day 1 visibility to 1/3 of the world’s population, FB Coin quickly becomes the global go-to choice for daily consumer purchases, online commerce, and international transfers. Because it’s pegged to a basket of global currencies (perhaps including BTC/ETH/etc.) rather than a single fiat currency, it’s not beholden to the monetary policy of any one nation. Not content with replacing merely the fiat stablecoins, FB Coin’s price stability and globe-spanning install base lead to mass adoption/usage, dwarfing the use of all other cryptocurrencies combined. Crypto enthusiasts rejoice, until reality sets in that FB Coin taking over the world will not lead to a price increase in their altcoin portfolio.

FB Coin now dominates financial transactions in both the traditional fiat world and crypto space. Soon Facebook offers a range of banking and financial services across borders, and begins acting as an extranational economic entity, with newyen… I mean, FB Coin as the unquestioned global payment currency. Good for Mark Zuckerberg, not so good for freedom. As much as I’m fond of cyberpunk as a fictional setting, a Facebook megacorp controlling global commerce is not a promising vision of the future.

Conclusion

I mean scenario 3 mostly in jest, but there is an important message here. FB Coin (or a similar crypto offering by Google, Alibaba, etc.) should be a frightening prospect for crypto enthusiasts, not one to cheer on. I’m less concerned about FB Coin replacing USD or other fiat, which governments can rather easily take measures against. What I worry about is the crypto community embracing the Trojan horse of a FB Coin, then waking up one day to find a majority of crypto commerce/transactions/value dominated by a single company in Menlo Park. Maybe it plays out differently and Zuckerberg is committed to decentralization and economic freedom after all, but given his historical decisions (retaining unchecked control through separate share classes, sharing user data without user permission, and general authoritarian tendencies) I tend to expect the worst. A dominant cryptocurrency run by Mark “I’m CEO bitch” Zuckerberg is probably not what Satoshi had in mind when he endeavored to take power away from the traditional finance system. Let’s recognize Facebook for taking a bold step into the crypto space — it’s a strong indication that mainstream tech is starting to appreciate the massive potential of cryptocurrencies. But let’s not throw open the gates for them until we’re sure Facebook is really on our side. Beware of g(r)eeks bearing gifts!

Published at Fri, 19 Apr 2019 06:28:12 +0000