A new currency, anyone?
But Facebook needs to win people’s trust first
Facebook’s decision to develop a cryptocurrency for payments and transfers on its WhatsApp messaging platform has multiple implications. It imparts fresh energy and direction to a sector that’s suffered in 2018. It implies rebranding for Facebook, which is struggling to overcome mistrust from both users and regulators after the revelations of data misuse. It could also transform the cross-border remittances business. India is said to be among the largest target markets for this new initiative. There are 200 million active WhatsApp users in India and it is the recipient of huge remittances, with over $69 billion flowing into the country last year. Apart from that, there is a large market for domestic remittances, which local payments banks are trying to exploit.
Over the past year, Facebook has put together a blockchain team of some 40 fresh hires, led by a former president of PayPal. It is said to be looking at developing and marketing a cryptocurrency based on the stablecoin principle, which reduces price volatility in cryptocurrencies. Facebook will create a reserve of hard currency assets, much like a central bank’s currency board. It will launch a coin tied in value to the US dollar, or to a basket of currencies. This cryptocurrency would be transferred seamlessly using the WhatsApp platform. Users would be able to buy, sell and exchange the coin, using fiat currency. The instantaneous transfer would impart convenience to users, and Facebook would be able to undercut most players in the remittances market by charging lower fees, because it already possesses much of the infrastructure and the user base, for this to run efficiently. It might possibly consider letting users transact for goods and services, within the Facebook-WhatsApp system using this cryptocurrency. Given a global user base of over two billion, that could mean massive traction.
The key difference between a stablecoin and a normal cryptocurrency such as bitcoin is that the value of the stablecoin is tied at a fixed rate. A stablecoin can be issued only on the currency board principle if the requisite fiat currency is held in reserve. This eliminates the wild swings caused by speculation. Bitcoin and other “untied” cryptocurrencies have taken a hammering in the past year, with prices trending down by 70 per cent and more.
Regulators such as the Reserve Bank of India, the tax authorities, and other central banks would have to agree to allow this mode of operation. Facebook would need to create a network of agents and relationships, on the lines of other payments banks, and entities such as Visa and Western Union, to ensure easy exchange of cryptocurrencies for fiat currencies and vice versa. It would, presumably, need to generate KYC data from every user who gets on board this system. It would need tight audit systems to ensure that the currency board doesn't violate norms and a system for extinguishing coins in case the fiat currency outflows.
None of this will be easy. Regulators are deeply suspicious of cryptocurrencies and stablecoin issuers such as Tether have run into problems in terms of audits of reserves. Facebook itself has caused outrage by selling data generated by users, who may now be reluctant to offer KYC. It has also incurred the ire of governments by enabling the spread of fake news on both WhatsApp and Facebook. So it will need to overcome a trust deficiency and comply with multiple norms.
On the other hand, Facebook has enormous experience in working with regulators and legislators, precisely because it has had such problems. It has the infrastructure and the resources to get such a system operational quickly. And, if it can persuade users to part with KYC data, it will add another set of key variables to its already formidable databases. If this system does roll out, it could cause revolutionary changes in the global financial system.