Just before the Civil War, and long before the Federal Reserve, the United States had 8,000 kinds of money. It was a chaotic, confusing time to buy your groceries. Private banks issued notes with the promise of backing in gold and silver, but their actual value was anybody’s guess. Soon other companies—drug stores, coal mines, and of course railroads, the wealthy connectors of their day—jumped into the fray.
What’s old is new again in the hands of today’s barons of digital infrastructure.
On Thursday, The New York Times reported new details about Facebook’s efforts to produce its own digital coin. Facebook’s first foray into blockchain will reportedly take the form of a so-called “stablecoin,” where the value of its digital currency is backed by the physical kind—in this case, a basket of global currencies. The idea is to tamp down the rampant speculation and tumult that have plagued other cryptocurrencies, like bitcoin, making the coin easier to someday use to buy your gas and meals (or, who knows, your neighbor’s cat tower on Facebook Marketplace).
The company’s blockchain team has reportedly grown to more than 50 people—cordoned off, the Times says, in a wing with restricted key-card access—and expects to release a product within six months. Facebook’s plans have been rumored since April, when the company tapped David Marcus, former head of Facebook Messenger, to helm a dedicated blockchain team.
The new coin would leverage the built-in connections of WhatsApp’s more than 1.5 billion users—and potentially billions more should the coin come to Instagram or Facebook itself. That alone would make it an instant competitor to Venmo (and its owner, PayPal), and to China’s WeChat Pay, which is attempting to make inroads globally, including in the US. Neither of those companies, however, uses a blockchain to send money, or even uses its own coin; WeChat users in China pay in yuan, just as American Venmo users pay in US dollars. Facebook’s clearest advantage, in using a coin backed by multiple currencies, would be to allow users to send payments across borders cheaply. In December, Bloomberg reported that the coin would initially be tested with WhatsApp users in India, where demand for cross-border payments is strong.
The question, however, is what a blockchain-based coin gives Facebook that tried-and-true payment methods can’t? Blockchains present an array of hurdles, especially relating to privacy. Bitcoin, for example, offers a relatively transparent record of transactions, which is no good if you prefer to shop away from the watchful eyes of friends, advertisers, or governments—not to mention Facebook itself. Technologies such as zk-Snarks give other cryptocurrencies, like the “privacy” coin zCash, more anonymity. But as former Facebook security chief Alex Stamos warned on Twitter, Facebook’s size combined with state-of-the-art privacy would turn the coin into “the go-to mechanism for global money laundering, tax evasion, and just general criming.”
Facebook is not likely to let that happen. With a centralized approach, Facebook could sidestep the sluggishness and high costs of decentralized blockchains, like Bitcoin, and keep an eye on nefarious uses of its coin. 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.
But that approach raises another concern, says Joshua Gans, a professor of management at the University of Toronto. He questions whether Facebook could achieve its reported aims without starting to look 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 says.
That’s a particular issue when the coin would leave Facebook’s walls and be exchanged for traditional money. Emin Gun Sirer, a professor of computer science at Cornell, says Facebook might want to rely on others for that task. The Times suggests existing cryptocurrency exchanges could handle logistics like verifying identities and storing some of the funds. But even exchanges that are well-established by the young industry’s standards have run into trouble (see: QuadrigaCX). That raises the question of why Facebook wouldn’t strike off on its own, either by building an exchange or acquiring one.
One hope for cryptocurrency purists is that Facebook could begin with a centralized approach and then gradually loosen its grip—especially as new technology makes decentralized blockchains more scalable. Earlier this month, Facebook acquired Chainspace, a company working on methods to scale blockchains. “We would expect them to test the waters, and not satisfy the purists,” says Sirer, who founded a company called Ava Labs, which also works on scaling solutions. “The question is will there be a catch. Will they embrace the potential of cryptocurrencies, or will they turn it into a walled garden?
“I honestly don’t think Facebook knows yet,” he adds.
To Gans, that walled garden might suit Facebook just fine, especially if one purpose of Facebook’s coin is to encourage more people to use more of Facebook. On WhatsApp, he points out, the coins will pass between established connections, increasing the chance that they remain with friends and family who never cash out. That could also be especially useful as the company increasingly positions itself as a marketplace for goods and services. Facebook has tried a version of that concept before, with Facebook Credits, a virtual money that was used to make in-app purchases on the platform, but couldn’t be cashed out. The company discontinued Credits in 2012.
“Like many other companies Facebook is exploring ways to leverage the power of blockchain technology,” a Facebook spokesperson said. “This new small team is exploring many different applications. We don’t have anything further to share.”
In any case, other social media payment schemes are coming, though none of them quite look like what Facebook is reportedly building. Messaging apps Telegram and Signal are also trying their hand at blockchain-based cryptocurrencies, but the Times reported that they likely won’t be stablecoins. Twitter CEO Jack Dorsey has thus far stuck with the classic: Bitcoin. Last week, he promoted an extension to Google’s Chrome web browser, billed as a “tipping service” for tweets, that lets users exchange micropayments over the Lightning Network\—an application built on top of the Bitcoin blockchain. (Dorsey is an investor in Lightning Labs, which is developing the network.)
Perhaps, if anything, Facebook’s stablecoin will lay the groundwork for other, more exploratory, uses of blockchain. Last week, in a discussion at Harvard Law School, CEO Mark Zuckerberg dangled one possibility: a decentralized version of Facebook Connect, where users—and not Facebook—would control their own credentials and choose when to share them. But as with most things in crypto, the idea, so far, has fallen short of how companies like Facebook actually operate. “I haven’t figured out a way to make this work,” he conceded.