The story is that Facebook might launch a new cryptocurrency codenamed “Libra”, backed by other currencies, in the next few weeks. (Currency backing prevents value fluctuations like Bitcoin’s, improving stability.) The sheer lack of hype so far doesn’t encourage or debunk this rumour. The idea, however, is viable enough.
Quite a lot of information has been accumulated by the media on the subject of new Facebook financial moves, including setting up a company in Switzerland called Libra Networks as a financial service, which is interesting because the code name for the new cryptocurrency is Libra. No red herrings could ever possibly be involved in a new financial initiative, of course, particularly one about which the company is saying so little.
Meanwhile, the idea is basically good and has credibility as a working revenue earner for Facebook.
For example:
• Facebook has extraordinary market reach.
• The company has been working consistently to develop as many sources of revenue as possible.
• An on-platform currency would add real value for users.
• A Facebook cryptocurrency could easily be extended to other platforms.
• Using blockchain would improve transaction security, although cryptocurrencies are not immune to security problems.
• One of the current theories about the new Facebook cryptocurrency issues is that it can be used to pay for Facebook advertising, charitable donations, and similar basic uses. I think that idea is far too limiting, although it may be a good starting position for the cryptocurrency in the short term.
Those rather simple points equate to billions of dollars in possible business for Facebook.
There are a few strategic reasons why a Facebook-only cryptocurrency might also be a very good business move. Having a universally available cryptocurrency could allow Facebook to move into roughly the same position as Amazon and/or PayPal without the bother and costs of a full spectrum order and delivery system. A Facebook cryptocurrency could be a working exchange currency across the board.
… So what’s wrong with the idea?
If the overall idea is good, the mechanics of the idea may be a problem:
• Taking on the challenge of running a global cryptocurrency is no minor issue. The data loads are enormous, the back end is complex and highly expensive to set up on this scale. In short, it’s a lot of work and outlay with no clear picture of returns.
• Facebook’s various other battlefronts, security, privacy, et cetera, would also be extended to the working machinery of a cryptocurrency. That is not necessarily anyone’s idea of a great image, particularly when large amounts of money may be involved.
• Using a cryptocurrency makes Facebook a third party to transactions. The legal possibilities of this situation are almost endless and potentially highly complex.
None of these problems are insoluble, but it is a rather daunting range of potential hazards. I have no doubt that Facebook’s legal experts would ensure that Facebook is protected as much as possible from any fallout regarding transactions, but it’s still a very big deal.
Profitability
Even on the most basic structuring, Facebook would definitely make a lot of money operating a cryptocurrency. Profitability isn’t so much an actual issue as a whole new metric for the market to bitch about.
The mainstream market didn’t quite know what to make of Facebook when it first listed on the NASDAQ. The market still applies conventional business values to the company regardless of the fact that it is so very obviously not a conventional business.
This means that expectations from a cryptocurrency will be very high, and make it is very likely to react negatively to anything less than spectacular profits. In real business parlance, the market’s neuroses are neither here nor there in terms of hard money, but it is another potential issue for Facebook management.
(The market has a very bad habit of expecting to win the lottery every day on profit results. Some of the strange moves you see in market prices for companies like Facebook, Apple, et cetera are based entirely on those unrealistic expectations. The immediate effect is to hit margins, which does upset a lot of people, particularly smaller investors and large institutions which apparently can’t be bothered to find out the facts.)
So the whole idea of a Facebook cryptocurrency comes with quite a lot of baggage. I’d be surprised if Facebook jumped into this new swamp of issues without thoroughly modelling and checking all aspects of it. At best, I would say the Facebook cryptocurrency is still in beta testing, and should be there for quite some time yet. Unless they have already done the required testing and modelling, it could be a very bumpy ride.
