Podcast | Digging Deeper : All you need to know about Facebook's cryptocurrency

Rakesh Sharma

Moneycontrol Contributor

Let's start with the familiar: Facebook has 2.5 billion users in the world. Facebook-owned WhatsApp has over 1.5 billion users worldwide, with over 200 million users in India alone. India has 480 million internet users, second only to China. and according to Forrester Research Inc., the number is projected to grow to 737 million by 2022.

But here is something that may be unfamiliar, and something that is bound to make Indian mothers everywhere very proud indeed: India leads the world in remittances — people sent $69 billion home to India in 2017, and according to some estimates, $80 billion in 2018.

Put two and two together, and the answer you find is why-not-use-WhatsApp-to-send-money. It's not cryptic, it's cryptocurrency... well, stablecoin, to be specific. The New York Times and Bloomberg reported recently that Facebook is working on making a cryptocurrency that will allow users to transfer money on WhatsApp, with the initial focus on the vast remittances market in the vastly WhatsApped country of India.

The Facebook stablecoin; what we know about it so far; what kind of advantages the social media platform might have over other conventional cryptocurrencies; will Facebook succeed after all and is this a cryptocurrency after all ? These are the questions I, Rakesh Sharma, will address on this edition of Digging Deeper with Moneycontrol.

What's the latest?

The New York Times reported on the 28th February that the world's biggest messaging companies are hoping to succeed where cryptocurrency startups have failed — Bringing mainstream consumers to the alternative world of digital coins. PayPal revolutionised the way we think of money transfers; Venmo has made money transfers by phone almost an everyday part of life in America. Additionally, both can move across international borders. Zuckerberg wants in on some of that aciton. The Times spoke to five anonymous sources who, it claims, have been briefed on the super secret project.

Facebook, Telegram, and Signal are among the companies that want their respective fingers in the digital currency pie. The intended customer bases are, to put it mildly, massive —2.5 billion for Facebook; 300 million for Telegram. Signal — a chat platform popular among technologists and privacy advocates — has a coin in the works, as do the largest messaging platforms in South Korea that is Kakao and Japan, that is Line. The reach that these messaging platforms have is bound to give a distinct edge to them over the other cryptocurrencies in the market.

The subject of our discussion is the Facebook project; it is also, by a long mile, the most anticipated one of the lot. Although rumours about a Facebook digital coin have been swirling in tech corridors for a while, in fact Bloomberg wrote about it in December, it is only with the NYT report that there is a confirmation of what is coming. Facebook is developing a stablecoin — a type of digital currency pegged to the value of traditional currencies — to minimize the volatility we have come to see in other cryptocurrencies. It is, in that regard and ironically enough, similar to Gemini Dollar, which is a tradeable token pegged to the American Dollar, introduced by the Winklevoss twins — Zuckerberg's arch enemies (time, perhaps, to rewatch The Social Network). Reports indicate that Zuckerberg wants to go bigger than the dollar. The Times said, "Facebook is looking at pegging the value of its coin to a basket of different foreign currencies, rather than just the dollar, three people briefed on the plans said. Facebook could guarantee the value of the coin by backing every coin with a set number of dollars, euros and other national currencies held in Facebook bank accounts."

So is this a kind of cryptocurrency? The strict answer would be 'not sure yet' because we do not know whether Facebook would cede control over this digital currency. The certain departure with stablecoin is of course that it would allow consumers to hold it and pay for things without worrying about the value of the coin rising and falling, a feature that makes it unattractive to speculators, who have been the main audience for cryptocurrencies thus far. Stablecoins have proved to be popular recently, the failures of Tether and Basis notwithstanding, because the value of these coins only fluctuates at the same rate as the currency they are tied to do, which in most cases is the American dollar, or maybe in the case of the Facebook coin, a basket of currencies eventually.

According to the Times, Facebook has gotten far enough into the process to approach multiple crypto exchanges about potentially listing the currency. But what the Times does not tell is how Facebook plans to resolve the tradeoff between decentrallisation and accessibility — a bane that has troubled all existing cryptocurrencies.

The wheels running behind the coin

In a statement, Facebook did not directly address its work on a digital coin. But the Times report talks about the work that has gone behind it — it seems straight out of a thriller (maybe not, but hey, I love a bit of corporate intrigue). It is no secret that Facebook has been wanting to make a mark in financial services. This stablecoin is not its first offering in the space — it had earlier moved fast and broke some of the things it built because, well, they simply did not take off. Facebook Credits was launched in 2011, and went bust two years later; Facebook Gifts came about to be in 2012 and came about to not be two years later. Then there was Messenger Payments which was launched in 2015 in the US and expanded to Europe two years later. That one still seems to be breathing.

So, what is new about this digital currency then? Well, it's on blockchain. That is the big difference. But is blockchain even necessary for this? Couldn't a traditional, centralised system — much like PayPal — have been sufficient? We will address that in a bit, but let's get into this clandestine operation that seems straight out of a John Grisham novel.

The Firm has already recruited a team of fifty engineers to work on this project. Industry website, The Block, has been keeping tracking of the steady stream of new job listings for the project. David Marcus — the former president of PayPal — was hired by Facebook to run its Messenger app in 2014. In May, Marcus became the head of the company's blockchain initiatives — details about which have not been discussed in public ever. Last month, the company acquired the team behind Chainspace, a blockchain startup. Clearly, Facebook has been doing the peacock dance about its interest in blockchain. "Like many other companies, Facebook is exploring ways to leverage the power of blockchain technology," a company spokesman said in a statement. "This new small team is exploring many different applications. We don’t have anything further to share." Precious.

Facebook is also looking to overhaul its messaging infrastructure thereby connecting three of its biggest properties — Messenger, WhatsApp, and Instagram. That integration could take more than a year, and in the end, would extend the reach of Facebook's digital currency across the 2.7 billion people who use at least one of these three apps each month. This monolithic chat structure comes with its own set of problems, but that is another story for another day, but as far is this stablecoin on blockchain is concerned, we have to ask the inevitable question.

Par problem kyaa hain?

Assuming that the stablecoin ends up being used by a vast section of humanity, there are some problems we can already expect. Of course, there is the real possibility of the whole venture being a flop — there is precedent for it. Remember Facebook Gifts? Facebook Credits? For the purposes of our exploration today, let's assume that the world takes to the Facebook currency. What are the problems? Let's address the three biggest:

First: the essence of cryptocurrency is decentralisation. And the transparency of transactions. Will the Facebook currency be decentralised and transparent?

The New York Times addresses that question: "The big question facing Facebook is how much control it would retain over the digital coin. If Facebook is responsible for approving every transaction and keeping track of every user, it is not clear why it would need a blockchain system." One reason why blockchain could be less regulatory burden on the company. "Working with cryptocurrency exchanges would take at least some of the regulatory burden off Facebook, since the exchanges would be responsible for holding the digital coins and vetting customers. But if Facebook goes with a coin it does not entirely control, it will be harder for the company to make money from transaction fees and easier for criminals to use the coin for illegal purposes."

Also, Facebook putting out a product it cannot control does not sound like Facebook. As Phil Chen, the man behind the HTC Exodus 1 blockchain smartphone told The Independent, "Mark Zuckerberg doesn't have an idea how to implement it where Facebook doesn't own it. Cryptocurrencies are open, decentralised, censorship resistant and borderless – this is completely antithetical to the current business model of big technology companies, whose walled gardens mean they essentially own their customers."

Blockchain networks like Bitcoin or Ethereum are truly decentralised, meaning, the onus of securing their coins against loss or theft rests entirely on the users. Remember the case of Gerry Cotton, the CEO of the Canadian cryptoexchange Quadriga, who died and took with him the keys to access $137 million of cryptocurrencies kept in "cold" storage to mitigate the risk of hacks? If the hard drive containing your coins gets damaged and that is the only copy you have, those coins are lost forever. If a hacker gets a hold of your keys and steals your coins, there is no reversing it. Clearly, participation on such platforms requires a little more tech knowhow and savvy, but when you are Facebook, and you are offering this service to hundreds of millions of users, can you expect them to have the same savvy, and the tolerance to accept the lack of recourse in case of misuse? I imagine that's a hard No. My mother uses Facebook, and to her blockchain is what she would go to the jeweller for, and not my software engineer brother. And if she is given access to this stablecoin, and something goes wrong, I assure you, Zuckerberg will hear about it. (Convenient, considering she spends half the year adjacent to Menlo Park, CA.)

Facebook will have to police the payment ecosystem for fraudulent activities. Regulators from across the world will no doubt demand that Facebook vet its users, make records accessible to law enforcement, undo fraudulent transactions, and comply with banking regulations much like any other conventional payment networks would have to. Facebook will clearly have to address these issues — it will also mean that going on blockchain, ostensibly to shed regulatory burden, is not going to serve its purpose after all. In view of all these issues, I am still not sure why this is built on a blockchain. As Wired noted, "In any case, a stablecoin backed by real money is inherently centralized to an extent: The supply of the coins would have to be matched by Facebook’s ample coffers, and carefully managed." (Why blockchain then? Any answers from blockchain-nerd-tech-savvy readers/listeners please?)

Second, privacy. Facebook does not exactly have the greatest reputation for respecting users' privacy — something that has come up time and again only to reach somewhat of a climax during the 2016 American presidential elections. If users were to end up buying Facebook currency on exchanges, Facebook will have to conduct due diligence in some form of KYC in pursuance of regulations across the world before it can let users send or receive coins across the Messenger-WhatsApp-Instagram integrated platform. It follows that users will then have to dole out even more information to Facebook than they already have — address, ID proof, and so on. How will Facebook justify asking for more personal information when what we have already provided to the company has been so catastrophically misused?

Alex Stamos, former Facebook security chief, weighed in on the matter on Twitter: "On one end, a completely private and encrypted messaging service tied to an open, Zerocoin-like, zk-SNARK backed cryptocurrency and backed by a tech giant would instantly become the go-to mechanism for global money laundering, tax evasion, and just general criming. On the other, without mathematically-backed privacy features having all of this data in one place would be a massive source of security and privacy risk, and a huge boon for countries with leverage over FB to get data access. Wow, gonna be an interesting couple of years."

"This explains how Facebook plans to monetize a unified, 2 billion user end-to-end encrypted messaging service. I can't think of a tech project with a more important privacy/safety balancing act than this one. I hope my friends working on it start public discussions on that," he said.

There's a saying that goes, "if you are not paying for it, you are the product." Facebook's whole MO for wealth generation is advertising ("We run ads, Senator. That's how we make money": remember that chilling line from Zuckerberg during the congressional hearings?) The business model of the company relies almost exclusively on monetising the extraordinary amount of data it gathers. In this scenario, the inevitable question it will have to answer is: "Is this yet another ploy to grab more data?" And that is not an invalid question.

Third: Is Facebook standing at the cusp of being the world's largest central banking system?! It looks a lot like it, doesn't it? Just before the Civil War, and way before the Federal Reserve came to be, there were 8,000 different kinds of money. Imagine buying a quart of milk in those times — too confusing; might even have pushed you into becoming a trailblazing vegan. Everyone from private banks to drug stores to coal mines to railroads offered their own kind of currency. Cut to the 21st century, the tech barons have taken on the roles of the robber barons of those days.

Lance Ng, asks: "What do banks do? They print money backed by a basket of foreign currency reserves. If Facebook decides to back the value of its own digital with a basket of foreign currencies, then it could potentially become the largest central bank in the world." Joshua Gans, a professor of management at the University of Toronto asked whether Facebook could achieve its reported aims without starting to look a lot like a private central bank. It’s tricky to maintain a peg to undulating real-world currencies, he points out, and to police the network to make sure people don’t game exchange rates or make a run on the currency. “Basically if you were Facebook, you’d want to go to former Federal Reserve Chair Janet Yellen, and say can you run this? And nothing less than that would be acceptable,” he said to Wired.

What are the advantages though?

Sure, the trouble with stablecoin is, not many businesses accept them as of now, so there is still a need to convert them into fiat currency in order to actually buy things like that quart of milk or your pumpkin spice latte or posh pani puri. Facebook could offer goods and services for purchase themselves in exchange for Facecoin, but how would that be any different from the failed Facebook Credits?

Facebook has thought about this. Which is why they are trying it out first with Remittances, where they see a distinct advantage. It's a half trillion dollar business, a sixth of which involves diaspora Indians sending money back home (more on this in a bit). If Facebook could make remittances cheaper and faster, that would be revolutionary, and indeed a recipe for success. But once you send those FaceCoins home to India, wouldn't I still have to convert them into rupees? Yes, and that is still a hassle, but one that can be overcome in one of two ways:

1. Establishing partnerships with companies who will accept the Facebook currency themselves thus making the currency valuable and legal tender outside of Facebook's walled garden;
2. Establishing relationships with cryptocurrency exchanges worldwide, or better yet, become or sponsor exchanges themselves (this nugget from Tech Crunch's very entertaining Jon Evans). Imagine if your relative could send Facebook currency to your Phone Pe or PayTM or whatever else you use, and et voila, digital money in your wallet at the speed of the internet. The local exchange partner converts the Facebook currency to the rupee, and it functions like much any other digital wallet would.

Having access to a stable basket of currencies on your phone could be a godsend to people living (and suffering) in countries like Venezuela or Zimbabwe.

As a corollary to point b. I raised earlier, you know what else could get easy as one-two? Shopping. E-commerce is likely to get a huge boost should Facebook clear all the several hundred hurdles along its way — see something, like something? Hit Buy, pay by Facebook Coin. Two step process. No intervening third party sites. No entering debit/card numbers, no more waiting for OTPs, no more remembering PayPal account details. What we could be looking at, if all goes well, is the integration of social networks, instant messaging, money transfers, and e-commerce on a truly large scale.

As for the cryptocurrency market, some analysts feel the Facebook currency may normalise the idea of crypto and blockchain applications and drive mainstream adoption. "In fact, it may be just the boost that crypto needs to push the whole market forward."

For now, India is slated to be ground zero for the latest exercise in what we will no doubt hear a whole lot more about.

That's a primer on what could become a gamechanger for both Facebook and its audience, increasingly all of the world. If the world is a global village, it appears increasingly, that our medium of interaction, currency of exchange, terms of engagement, and the village pool by which to gather and share, will all be dictated by a book of faces. If Moses brought a tablet of commandments from the burning bush that altered the life of man, Marcus, in the 21st century, brought us a book of faces from a Harvard dorm that may have just altered the life of man just as much, if not more.