When Facebook finally confirmed that it will launch its own cryptocurrency, it was quickly labeled a potential ‘Bitcoin killer’ in the media. Taking a closer look, however, it is clear that Facebook’s new online payment system is an unlikely threat to the world’s leading decentralized digital currency. It’s a different story for banks, fintech and payment processors, however.
On June 4, Facebook’s Head of Financial Services & Payment Partnerships Northern Europe, Laura McCracken, told WirtschaftsWoche that the company will release the whitepaper for its digital currency on June 18.
McCracken also stated that the company’s GlobalCoin will be a stablecoin but will not be pegged against the US dollar as previously assumed. Instead, the digital currency will derive its value from a basket of fiat currencies.
The Information reported that Facebook’s digital currency will enable users to send money to each other via Messenger and WhatsApp and make purchases at a range of retailers that Facebook has been in discussions with for some time.
To build trust in the new digital payment system, the social media giant has been engaging financial institutions and technology companies to join a foundation that will be tasked with governing the digital currency to appease financial regulators.
The initial roll-out, which is scheduled for 2020, will take place in a number of emerging markets where the company plans to market its new digital currency aggressively. Facebook also plans to install physical ATMs to enable users to exchange the digital currency for fiat currency and vice versa.
Is Facebook’s GlobalCoin a cryptocurrency?
Bitcoin advocate Andreas Antonopoulos stated in an online Q&A: “What Facebook […] is proposing is not a cryptocurrency. It doesn’t have any of the fundamental characteristics of a cryptocurrency.”
A cryptocurrency by definition is open, public, immutable, neutral, borderless, censorship-resistant and decentralized. Facebook’s currency is centralized and will not meet these criteria. Hence, it should not be considered a cryptocurrency.
Facebook’s digital currency will be under close scrutiny by financial regulators and will have to adhere to strict AML/KYC requirements in each country it operates in. It will, therefore, not be censorship-resistant. Aside from the legal and regulatory aspects of running a payment system, Facebook’s track record of censorship of content will also likely roll over to censorship of its planned payments service.
Additionally, Facebook’s aim to make its payment service borderless will be impossible because as a regulated payment service, the US-based company will not be able to serve customers on the U.S. sanctioned countries list.
Facebook’s currency will also not be public as the company will likely sell user payment data to third parties as it has done with personal user data on its social network. Even if they wanted to make their payments public, they would not be able to for legal and regulatory reasons as they will have to adhere to strict financial privacy laws as a money transmitter.
Finally, Facebook’s currency will not be open. The multinational company will always play a role in each transaction and it is likely that the coin will not be able to be used outside of the Facebook ecosystem due to the centralized nature of this digital currency venture.
Since Facebook’s GlobalCoin is not a “real” cryptocurrency, it cannot be considered a threat to Bitcoin. While the coin will likely see a much larger user uptake, Bitcoin will in many ways remain the superior digital currency because it enables users to make censorship-resistant, fast, borderless payments without the need for a bank account or ID verification.
Additionally, Facebook’s digital currency will be a stablecoin so it will not attract investors, traders, and speculators who have been among the main bitcoin buyers in the past decade.
PayPal, mobile banking apps, and banks should be worried
While Facebook’s digital currency is unlikely to become a threat to bitcoin, online payment providers such as PayPal, fintech banks, and traditional banks should be concerned.
Facebook has up to two billion active monthly users, which means two billion people will (eventually) be able to use the social media network’s native payment system to make low-cost digital payments without the need for a bank account.
This will directly affect the go-to online payment services, such as PayPal, Stripe, and Skrill, especially if Facebook delivers on its promise to offer low-cost digital payments. PayPal, for example, charges a three percent transaction fee, which takes a substantial cut out of businesses and freelancers who use their payment service for the majority of their transactions. Unless PayPal and its peers lower their fees in response to the new competition from Facebook, they could end up losing substantial market share.
The ‘fintech banks’ that offer easy-to-use, app-only mobile banking services, should also be concerned. If everyone with a Facebook or WhatsApp account will be able to use low-cost mobile and online banking, there will not be much need for mobile banking apps. Of course, this will not happen overnight. Facebook will need to successfully integrate its payment system with the broader financial services industry to enable users to pay bills and make in-person payments. This could take years. Should they succeed, however, fintech banks will likely end up consolidating.
Traditional banks will also be threatened. If Facebook manages to onboard two billion users to its payment service, there is no reason why the next generation will bother with banks that require a mountain of paper documents to open accounts when they can just log onto Facebook, fill out a few documents online, and start banking.
While Facebook is poised to become a serious player in the financial services industry, it is unlikely to directly compete with bitcoin, which is increasingly seen as digital gold. If anything, it may help legitimize digital currencies and in turn, attract more people to bitcoin.