According to a February 28th report released by The New York Times, Facebook is developing a stablecoin pegged to a basket of different foreign currencies that WhatsApp users can transact with. On April 8th, the Times journalist posted a follow-up tweet noting that Facebook is aiming to raise US$1 billion from venture capitals for its ambitious cryptocurrency project.
Facebook’s foray into digital currencies has not come as a surprise. Mark Zuckerberg was reportedly looking into cryptocurrencies in early 2018, mentioning that he was interested “to go deeper and study the positive and negative aspects of these technologies.”
Critics had derided Facebook’s move, partly due to the notorious reputation of the tech giant in regards to user privacy and their previous pessimism about the future of cryptocurrencies. However, in terms of both short-term competition and long-term strategy, Zuckerberg is likely to figure out a solution to fix Facebook’s privacy crisis.
Since Facebook acquired WhatsApp for US$22 billion in 2014, the social media juggernaut has been confronted with a major dilemma: How can WhatsApp be profitable without relying on advertising and subscription models, while simultaneously ensuring significant user growth, high DAU (Daily Active Users), and high user retention rates?
For Facebook, the best possible solution to this problem is cross-border payments.
According to the latest data from the World Bank, the number of cross-border remittances amounted to US$667 billion in 2019. Just a few years earlier in 2017, WhatsApp was the most popular messaging app in four of the top 10 countries in terms of global cross-border remittances, among which India stood out at US$69 billion per year.
If cross-border payments were to be integrated into WhatsApp, Facebook could offer a more efficient, lower-cost alternative for foreign workers to send money back to their families and friends—a notable add-on to the existing messaging app—which could significantly increase its user retention rates.
For merchants on WhatsApp, cross-border payments would allow them to convert revenue into cash flow.
In January of 2018, WhatsApp launched an enterprise service product—WhatsApp Business—which integrates an array of built-in features like enterprise introduction and auto-reply functionality for frequently asked questions. WhatsApp then added paid consultancy to the product in August, a feature aiming to generate sustainable income from enterprise customers.
If cross-border payments were embedded into WhatsApp, foreign customers would be capable of easily making payments with just a few clicks. This would attract a large number of e-commerce companies to migrate to WhatsApp, which would generate commission fees from every aspect of these businesses, including verification, messaging, and payment.
However, WhatsApp has to demonstrate its advantages over credit cards and existing third-party online payment platforms like Paypal and Venmo.
It’s almost impossible to compete with these counterparts in fiat payments, as service providers have to gain authorization from banks to link their accounts to the online payment system. Cross-border payment services on Facebook would involve a multitude of global currencies, which means it could take years for the tech behemoth to tangle with local banks and governments to gain certificates, which undoubtedly hinders the product’s roadmap.
Cryptocurrency, however, serves as an alternative to fiat money for online payments. While the mainstream cryptocurrencies like Bitcoin and Ethereum are too volatile to satisfy the needs of WhatsApp’s one billion users, a stablecoin pegged to fiat money at a fixed rate provides a feasible solution.
There have been criticisms that instead of developing a stablecoin on its own, it would be wiser for Facebook to collaborate with other stablecoin providers, and simply leverage its advantage as a platform with a massive user base.
However, users would be perplexed attempting to choose from a plethora of arcane stablecoins. It doesn’t make sense for them to randomly pick one without background knowledge or select the most trustworthy one in their minds before conducting extensive research on all the available stablecoins.
Moreover, since WhatsApp is Facebook’s only remaining product that has maintained a positive reputation after the user privacy debacle, Zuckerberg must be extremely cautious about every aspect to ensure the stablecoin embedded into WhatsApp is 100% secure and dependable.
As of yet, no stablecoin on the market is reliable enough to meet Facebook’s required standard.
Tether, a digital currency that is pegged to the U.S. dollar with a 1:1 conversion rate, stood out among the various stablecoins that have emerged since last September. While Tether is seemingly trustworthy and has gained significant market share, it lacks transparency, as the issuing company Tether Limited has never shown sufficient proof that every Tether coin is backed by US$1.
As highlighted in a Bloomberg report last December, Tether released several bank statements in January of 2018 and in September and October of 2017, showing that the cash stockpile in Tether’s accounts matched up with the total market cap of USDT (Tether’s ticker). However, skeptics have never been convinced about where the cash comes from or whether there is actually enough in their banks to account for every Tether coin in circulation.
Bloomberg pointed out that Tether promised to do an official audit of its accounts but ended up publishing two unofficial financial reports instead. Making matters worse, Tether and Bitfinex—a cryptocurrency exchange with sole rights to buy and sell Tether—are owned by the same executives, leaving many to speculate on whether there might be shared nefarious interests between the two parties. If Facebook integrated this potentially problematic and controversial stablecoin into WhatsApp, it would suggest that Zuckerberg actually hates WhatsApp and is planning to destroy it once and for all.
At this time, Facebook has no other option but to develop a reliable, built-in digital stablecoin of its own.
A homegrown stablecoin would not only improve Facebook’s capacity to control risks, but also boost its profits. Imagine there is a potential market to warrant the creation of US$1 billion worth of stablecoins on WhatsApp. Facebook could create US$1 billion of a fiat-backed stablecoin by simply taking that amount out of its own US$50 billion revenue and placing it in a credible bank. These issued stablecoins would allow WhatsApp users to buy and sell goods and services across borders at a far more efficient rate than cross-border fiat payments.
To enable the circulation of Facebook Coin and make sure it’s convertible with local currencies, Facebook will also need to seek out collaboration with cryptocurrency exchanges around the globe that have fiat money gateways. By seeking out existing cryptocurrency exchanges that already have good relationships with local banks, it eliminates the need for Facebook to apply for certificates to become a fiat money gateway and payment provider.
Compared to existing cryptocurrencies, a stablecoin backed by a tech giant is more likely to gain trust from consumers, who are usually skeptical about products developed by startups. Once Facebook Coin is available for use within the WhatsApp ecosystem, it will quickly generate a massive amount of cash flow, paving the way for the social media giant to transition into a “payment giant.” This ultimately creates a solid foundation for the growing number of enterprise-focused services on WhatsApp.
Zuckerberg has clamped down since the Cambridge Analytica data breach last year. The British firm—which provided controversial services to the Trump campaign—harvested confidential data from Facebook’s users without permission, and sent tailored political advertisements to targeted users. The scandal consequently resulted in a major plunge of Facebook’s stock, with more than US$36 billion quickly being wiped off its market cap. Months later, Mark Zuckerberg, one of the youngest billionaires in history who has enjoyed many years of glory, was forced to testify before Congress and apologize.
With the social media giant showing signs of weakness, Facebook’s rivals are touting user privacy as their competitive advantage. Telegram and Signal, two encrypted messaging applications popular among technology enthusiasts and privacy evangelists, are reportedly developing decentralized stablecoins of their own that prevent third parties from censoring, stealing, or tampering with any transaction.
Although the total number of users in these apps is less than a quarter of WhatsApp’s, Telegram and Signal have the advantage of privacy. By developing decentralized stablecoins, coupled with their end-to-end encrypted messaging technologies, Signal and Telegram could overshadow WhatsApp’s efforts to brand itself as a “pioneer in user privacy.”
On March 6th, Mark Zuckerberg published A Privacy-Focused Vision for Social Networking, emphasizing the significance of interoperability among the apps under Facebook to strengthen privacy protection. For example, users connected to Instagram or the Facebook Marketplace can receive messages via their preferred messaging app—WhatsApp for instance—without needing to share their phone numbers.
If Facebook succeeds in building a blockchain-based payment method that integrates into their social media and messaging apps, billions of global users will be able to take part in a secure, privacy-friendly online payment solution, moving the company one step closer towards its “privacy-focused” vision.
Zuckerberg’s ambition is not confined to exploring an updated business model for WhatsApp via a cross-border payment approach, but also to rebuild Facebook’s tarnished reputation as it relates to privacy. Given the massive user base and outstanding market share Facebook has accumulated, Zuckerberg has made the calculated—and likely, correct—decision for Facebook to develop its own stablecoin.
About the Author
Steve Wei: Founder & CEO, TOP Network
Steve Wei is a successful serial entrepreneur. A founding employee at WebEx, Steve held multiple key positions at WebEx from 1996 to 2003. In 2004, he founded Cenwave Communications, a video conferencing software company successfully sold to Huawei in 2010. In 2012, Steve founded Dingtone, which operates apps including Dingtone, CoverMe, and SkyVPN that altogether have attracted over 60 million users. In 2017, Steve founded TOP Network, a decentralized, open-cloud communications network powered by blockchain technology.
TOP Network is a decentralized open communication network that provides cloud communication services on the blockchain. Powered by innovations including three-layer network, two-layer sharding, two-layer lattice DAG and PBFT-DPoS*, TOP can process several hundred thousand transactions per second on the blockchain. The long-term mission of TOP Network is to build a public blockchain infrastructure for all Dapps.
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