What does Facebook’s new cryptocurrency mean? According to news reports, Facebook will shortly launch Libra, a global cryptocurrency available to users of its suite of platforms (including Messenger and WhatsApp). Presumably any merchant with an account on these platforms could transact in the cryptocurrency with customers who also have accounts—for anything, such as online purchases, and physical-world purchases such as groceries and restaurants. Facebook this week revealed plans to announce details on June 18 and confirmed its cryptocurrency will be a “stablecoin” whose value will be tied to a basket of fiat currencies. Based on Facebook’s statement and several anonymous comments made by people tied to the project in interviews with The Information, here are my six predictions.
- Facebook’s cryptocurrency will be a powerful force for good in developing countries, which is where Facebook intends to market the product.
Why? Because central banks in developing countries are notorious for their lack of discipline in maintaining the value of their fiat currencies, which too often lose purchasing power. The best example among many is Venezuela, which is experiencing hyperinflation worse than that of Germany after World War I. By providing citizens of developing nations with access to a store-of-value that is more reliable than their government-backed currencies, Facebook’s cryptocurrency will indirectly exert fiscal and monetary discipline on developing nations—which will improve the lives of many people globally.
- Facebook will pay interest to holders of its cryptocurrency, and this will eventually lead to populist calls to repeal corporate subsidies to banks at the heart of the US banking system.
I’ll go out on a limb and predict Facebook will pay interest to users of its cryptocurrency. Why? Because the assets backing the cryptocurrency will generate interest income (especially if, according to some reports, that basket includes “low-risk securities”). If Facebook doesn’t share these interest spoils with users, a chorus of critics will loudly publicize how much money Facebook and its partners are pocketing.
What’s the magnitude of the interest income at play? If Facebook parks the entire US dollar balance at the Federal Reserve via one of its bank partners, for example, it could earn 2.35% risk-free—that’s $235 million for every $10 billion deposited into its cryptocurrency. These profits will quickly turn into a new hot potato for Facebook politically, if not shared with users.
But there’s a side benefit—the brouhaha this issue could create would reveal the magnitude of corporate welfare at the heart of the US banking system. The 2.35% number is the actual interest rate the Fed pays its member banks for interest on excess reserves (IOER)—and this year it’s projected to amount to $36 billion of corporate welfare paid to US banks, which equates to roughly half the amount the US spends on its food stamp program. Just imagine how critics will have a field day shouting “corporate welfare for Facebook” if Facebook and its partners simply pocket that amount.
It’s true that other stablecoin issuers almost always pocket the float rather than sharing it with their customers. But Facebook’s stablecoin will probably be too big and visible to get away with this—so it’s unlikely to be able to sweep the issue under the rug. That’s a good segue to the next point.
- Facebook’s foundation will grow to garner big power in global capital markets.
Facebook plans to cede governance control of its project to an independent foundation, which it recently formed in Switzerland. This is a positive—not only does it give Facebook defense against antitrust allegations, but it also helps reduce the degree of its cryptocurrency’s centralization. This foundation is likely to become a huge power within global capital markets relatively quickly—because it will do what central banks do, which is to define the basket weights for the fiat currencies to which the stablecoin is pegged and manage the assets to ensure the peg doesn’t break. There are plenty of powerful “basket-setters” in capital markets, and their power to move markets can be significant—think of the committee that defines components of the Dow Jones Industrial Average Index (DJIA) or the S&P 500 Index, or central banks that peg their currencies to baskets (such as China’s PBOC).
Along these lines, at first blush it struck me as backwards that Facebook is selling the right to participate in its network for $10 million each, since usually the transaction processers (“miners”) in cryptocurrency markets are paid for their services rather than need to pay-to-play. But, remember #2—there’s a big pot of interest income for all of them to divide among themselves, especially if they don’t pay interest to users, and a lot of foreign exchange trading volume is at stake. No wonder why dozens of banks will potentially be involved.
- Facebook will face regulatory uncertainty—which will shed light on many outdated financial regulations in the process.
Is Facebook’s cryptocurrency a security? If it is, will users face the absurdity of needing a US brokerage account to buy a cup of coffee with it? Will Facebook catch breaks from regulators that smaller start-ups haven’t—because of the tax data honeypot Facebook’s project will generate for governments? That’s a good segue to the next prediction.
- Facebook’s regulatory reporting program will open all kinds of interesting discussions.
We may be about to find out how many of Facebook’s 2.3 billion users are real—since users of its cryptocurrency would need to prove their identity and pass know-your-customer compliance requirements. The Information story noted Facebook “plans to provide more stringent forms of identity verification and fraud detection than do most cryptocurrencies.”
This will open all kinds of conversations about the extent of data privacy, financial privacy, overseas asset reporting and tax compliance and reporting burdens—and could potentially challenge the extra-territorial reporting requirements imposed by the US government on non-US businesses. Governments everywhere will view Facebook’s cryptocurrency as a huge honeypot of data about how users spend money—with all the privacy and tax reporting implications that data honeypot entails, because every transaction would be traceable by governments. This would give certain officials what they’re hoping for, which is the ability to trace, monitor and analyze every dollar spent rather than piecing together piecemeal reports (currently, banks file suspicious activity reports for transactions above $10,000). Here’s one example in a statement made during a May 2019 speech by Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence:
“When FinCEN analyzed millions of dollars of remittance transactions with suspected links to terrorism, it found they averaged less than $600 each. In an era where a radicalized suicide bomber can bring a tragic end to the lives of hundreds for nothing more than the price of duct tape, a vest, and supplies, we cannot afford to allow any money to flow to terrorists.” (emphasis added)
Moreover, these reporting requirements are about to grow substantially once the Financial Action Task Force recommends that all financial transactions (including cryptocurrencies) embed data about the beneficial owner in each transaction, for both the sender and receiver.
As I’ve explained in a previous Forbes.com post, I doubt the data dragnet required by US reporting requirements would survive a constitutional challenge. How interesting if Facebook were at the center of such a challenge. Would it fight or cooperate??
- Facebook’s cryptocurrency will turn out, in the end, to be a Trojan horse that benefits bitcoin.
Here’s my biggest prediction: Facebook’s foray into cryptocurrency will end up benefiting bitcoin. It will take time, but Facebook will greatly accelerate the pace of teaching people about cryptocurrencies. And when this happens, more people will turn to bitcoin for one simple reason—bitcoin is scarce, while Facebook’s cryptocurrency is not. People will migrate over time to the most honest ledger for storing their hard-earned wealth—and that’s not fiat currencies or derivatives thereof, including Facebook’s cryptocurrency.
This phenomenon actually happened in Venezuela, as early bitcoiner Nick Spanos recently pointed out to me. When the Maduro regime introduced the ill-fated petro cryptocurrency, the government made a concerted effort to educate Venezuelans about cryptocurrencies—and it correlated to a spike in bitcoin use by Venezuelans.
Facebook’s foray into cryptocurrency will likely end up being a beneficial detour on the path to broader bitcoin adoption. Bring it on!