Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
Crypto enthusiasts are fired up with the news that the world’s paramount social media giant is going to jump into the space, something they hope “will do wonders for crypto adoption.”
I hate to be the one to throw cold water on their flames. But if you’re among them, just stop and ask these simple questions:
1. Will Facebook create a true crypto-asset … or simply a blockchain version of PayPal, Apple Pay or credit cards? In other words …
2. Is Facebook really moving into the cryptocurrency space … or is it merely porting some crypto technology over to the traditional fintech industry?
All indications are that it’s going to be the latter.
That’s not necessarily a bad thing. But let’s be realistic. Beyond a passing salute to Distributed Ledger Technology, it’s unlikely to do much for open, permissionless distributed ledgers like Bitcoin, Ethereum, EOS, Cardano or Holochain.
The Entire Concept of a Facebook “Bitcoin” Is an Oxymoron
But here is what the folks at Facebook could do …
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1. Survey the current global financial system to identify inefficiencies.
2. Among those, recognize that large swaths of the globe are underserved by traditional financial players, often left out of the system entirely. Many have no bank accounts whatsoever.
3. Also recognize that existing payment systems are often too vulnerable to hacks and thefts.
4. Adopt some key features of blockchain or other kinds of Distributed Ledger Technology to address those inefficiencies and serve as the backbone for a new kind of payment system.
Is Facebook prepared to go in this direction? One clue that they might be comes from a recent report that they’re looking to launch their new venture in India first; and it’s no coincidence that India is home to the second largest unbanked population in the world … second only to China.
Could they deliver user-friendly financial services to millions of users who have virtually no other access to banking? Sure. And if they do, it will be a major improvement.
But make no mistake: The Facebook coin is not competition for cryptocurrencies. Here’s why …
First, the Facebook coin has nothing to do with Bitcoin, which represents the original concept of decentralized digital currencies.
The fundamental value proposition of Bitcoin and its successors is the notion that the asset involves no intermediaries or custodians.
In a world of endless financial intermediaries and untold counterparty risk, a key reason Bitcoin was created was to help users take direct ownership of their assets, without the fear that someone else could interfere in that ownership.
Other than cold cash, how many asset classes have that feature? Not as many as you might think, and certainly not a Facebook coin.
Second, any Facebook coin is likely to be centralized and controlled by management.
This flies in the face of two foundational principles of crypto assets — decentralization and censorship resistance.
Why? Because Facebook is looking to provide payment services to its customers. To do so, it must act as a counterparty and custodian for every payment that goes through its platform. It must have the last word on any payment users make or seek to make. Just like a bank, credit card company or PayPal.
Third, unlike Bitcoin, any Facebook coin could potentially be manipulated for the benefit of Facebook owners and to the detriment of users.
Since Facebook decision-makers control the company that manages all transactions on their platform, it stands to reason that any activity they deem “illegitimate” — for whatever reason — could be banned; the actors, blocked from the social media platform; their funds, frozen.
Again, this flies directly in the face of real cryptocurrencies, where only the true asset owners get to decide what to do with them.
How might Facebook manipulate its coin? It’s too soon to say. But two examples that come to mind are:
Re-allocation of funds for undisclosed purposes. It’s rumored that Facebook is planning to create a so-called “stablecoin” — an asset backed by fiat money in the company’s bank account.
If so, in addition to controlling the coins as a custodian (holding them in your name), Facebook could use the money, supposedly backing the stablecoins, for another purpose.
That’s essentially no different from what most banks do today.
Privacy invasions. Much as Facebook sold users’ personal data, it’s also possible they could sell users’ financial data. Remember: Facebook’s entire business model is about harvesting user data — often without user knowledge — and selling it to the highest bidder.
Thing is, up until now, their data has mostly revolved around user preferences — likes and dislikes. By moving into the fintech space, Facebook could add financial data and spending habits to its already large database.
Facebook coin: A new layer atop an old system.
Bitcoin: A new system entirely.
In sum …
The Facebook coin will compete with established payment processors. Cryptocurrencies, like Bitcoin or Ethereum, are built from the ground up to disrupt them.
The Facebook coin will be another layer built atop the existing financial system — another intermediary, another counterparty, plus all the corresponding risks. Bitcoin and other cryptocurrencies are slated to render every one of those layers obsolete.