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Facebook banking on cryptocurrency

Hardy Graupner
June 18, 2019

The world's biggest social network has indicated that it wants to move into the payments industry by launching its own cryptocurrency next year. DW looks at what's behind Facebook's not-so-cryptic plan.

Facebook logo
Image: dapd

Why would Facebook want to have its own cryptocurrency in the first place?

Boasting more than 2 billion users across its platforms, including WhatsApp and Instagram, the world's largest social network aims to guide cryptocurrencies away from the fringes of the current financial system and into the mainstream.

A virtual currency of its own would enable Facebook users to send funds through the company and would make online purchases with retail websites more efficient by bypassing credit card payments.

The initiative could further facilitate shopping and gaming. "It may prove to be one of the most important moves in the history of the company to unlock new engagement and revenues streams," says RBC analyst Mark Mahaney.

Perhaps most importantly, Facebook's knowledge about who buys what would increase tremendously, helping the firm advance its major business — targeted advertising.

"Facebook wants to add new revenue streams, but also mine more user data on our behavior to find out what drives us in our purchases online," Lisk marketing head Thomas Schouten told DW.

What's in it for Facebook's users?

For the cryptocurrency to become a success, Facebook certainly needs to make sure that users are happy using it.

One advantage will become obvious right away. The currency could be used for payments between friends or family members at lower costs than what people would have to pay for conventional transactions. Or Facebook could offer payments at no costs at all in an initial phase.

Avoiding credit card transaction fees would also make it cheaper to pay online merchants, experts believe.

Does the social network have sufficient support for its plan from other market players and regulators?

Facebook has already done quite a bit of preparatory work to eventually make its plan a reality. It set up Libra Networks earlier this year, a financial technology firm based in Switzerland and specializing in investment, payments and blockchain, according to Reuters. Libra could also be the name for the planned currency.

Mark Zuckerberg
Facebook's Mark Zuckerberg will tell users their financial data will be in the safe hands of the consortiumImage: picture-alliance/dpa/AP Photo/J. Sanchez

The Wall Street Journal reported that Facebook has secured the support of a dozen companies including Visa, Mastercard, PayPal and Uber, which are willing to invest about $10 million (€ 8.94 million) each.

The companies in question have founded a special consortium to get the plan off the ground and answer questions from regulators.

Cryptocurrencies have experienced a rollercoaster ride in recent years. Does Facebook have a plan to avoid excessive volatility?

Very much so. The consortium is reported to be managed externally. Aware of Facebook's recent data privacy scandals, it will bend over backward to build trust among consumers, and it will do so mainly by pegging the network's cryptocurrency to the US dollar or even a basket of currencies including the euro.

That, at least, will see it avoid the huge volatility that the likes of Bitcoin and Ethereum have had to grapple with.

What's Facebook likely to focus on straight after introducing its own cryptocurrency?

Low volatility is key to appealing to developing countries that have experienced the downsides of unstable local currencies. Bloomberg believes that Facebook might initially set its sights on the remittance business in India, with the nation's market for payments sent home being among the world's largest.

Online portal Wired points out that Facebook will obviously need to have access to a secure basket of matching fiat money and/or deposit some of its own reserves in commercial banks.

Will the social network's move have any impact on virtual currencies that have been around for years?

There's ample reason to believe that the introduction of a Facebook currency will have a positive impact on other cryptocurrencies such as Bitcoin.

The latter has recently surpassed the $9,000 threshold again, but Facebook could help it move a lot closer to its peak of $20,000 dating from late 2017.

Facebook's move could certainly help cryptocurrencies become more mainstream.