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Facebook's Cryptocurrency: Risks to Consider

Facebook has been drowning in privacy issues and entry into the cryptocurrency space could help maintain the company’s market cap while leveraging its roughly 2.3 billion users. Despite the positive sentiment around the cryptocurrency, the primary concern for investors is the short-term risks regarding privacy and data. Facebook is not out of the weeds here yet despite the strong emotional market response to crypto.

Info on $FB Crypto:

Over the past few weeks, news has been circulating about Facebook’s cryptocurrency launch. The recent reports indicate that the social media giant has partnered with Libra Association, a consortium of some top companies who would govern the Global Coin (Facebook’s cryptocurrency). According to the Wall Street Journal, the consortium is comprised of some top names such as PayPal, MasterCard, Visa, and Stripe. There are more companies involved, with rumors suggesting some venture firms such as Coinbase, Union Square Ventures, Andreessen Horowitz, and a few non-profit entities like MercyCorp. Source: The Block

An introductory blog post was published this week, which provided insight on precisely what Libra is all about. According to the post, Libra will be developed on the Libra Blockchain which they claim to be a stable, reliable, and secure blockchain. The project will be backed by Libra Reserve, “a reserve of real assets” that will provide Facebook’s cryptocurrency with some features such as low inflation, stability, fungibility, and global adoption. 

In the beginning, the cryptocurrency will be used on Facebook Messenger and WhatsApp, its messaging platform. The cryptocurrency will finally allow Facebook to monetize WhatsApp, a platform it bought for roughly $19 billion a few years ago. To stand a chance against the more established payment platforms, there will be no transfer fee, and Facebook is in talks with merchants to accept the cryptocurrency as a means of payment.  According to The Information, the social media company is looking to launch ATMs that can swap traditional assets for the digital currency. 

The social media company is aware of the privacy concerns raised regarding its operations. Thus, it created the independent foundation to supervise the cryptocurrency and avoid the Big Tech anti-trust issues. Each company in the Libra Association invested $10 million to operate a node, allowing them to validate transactions on the blockchain, thus, ensuring that the cryptocurrency is decentralized. 

Some Risks to Consider:

Facebook and Google have been the leading companies in the advertising space, and they have tried to make changes over the years. They have recorded more failures than success in their many attempts. Google refers to these as “Other Bets” due to the fact that gaining massive adoption for giant tech companies is in most cases, unpredictable. Psychologically, these tech giants don’t hold as much power as investors believe they do because they have used the acquisition of other companies to propel their market, instead of launching their products (Facebook: Instagram and WhatsApp and Android and YouTube for Google vs. Google Glass, for example).  

The members of the Libra Association should not be regarded as partners since they are most likely paying the $10 million to ensure that they remain diversified and have a stake in the project if the Facebook cryptocurrency becomes a success. Similar to every other tech product or innovation, the success of the cryptocurrency will depend on its user adoption. 

While the Facebook stock has experienced a surge over the past week, it will most likely experience a slump mid-year as the privacy concerns persist. The cryptocurrency is too early at this point to have an impact on the company’s earnings. This thesis subject to change by early to mid 2020.

Risks:

  1. There will be problems encountered with the transfer of funds and setting up crypto wallets since Messenger and WhatsApp are not connected to people’s bank accounts.
  2. Facebook’s crypto will experience competition from mobile payment apps whose messaging apps allow users to transfer funds with zero transaction fees and is tied with users’ bank accounts. Moneygram and Ripple are a great example of the partnership that is leveraging the backbone of a big player in transactions rather than breaking ground.
  3. The leading figures in tech and those in support of disrupting the currency trend are not fans of Facebook’s crypto. The #deleteFacebook campaign was prompted by tech insiders, and this poses a sentiment challenge for Facebook. 
  4. Retail giant Amazon and Apple could make better crypto bets. Facebook’s cryptocurrency hasn’t ventured into any payment service before this one. Square’s Jack Dorsey is also hiring a crypto team. Thus, the competition could intensify.
  5. Cryptos are heavily regulated in certain countries, while some governments consider them illegal. Thus, the company will have to rely on foreign governments legalizing the cryptocurrency and allowing them to become a significant crypto player in their regions. This is a major headwind since currencies raise more regulatory concerns compared to regular tech products and services, and Facebook has a poor reputation abroad, especially in Europe. Meanwhile, crypto has a bad reputation, too, in some countries such as India. 
  6. Facebook’s involvement with Cambridge Analytica has seen the two parties in the US work together to regulate the social media platform. On the international stage, Facebook has been used by terrorist organizations. Thus, Facebook has shown that it is prone to fraud and money laundering above other options like Amazon and Apple. 
  7. Regulatory bodies across the globe would need to strictly regulate Facebook similar to what they do to financial institutions, especially how they collect and use data. Gramm-Leach-Bliley Act would be an excellent example to use to help regulate the use of information by companies that offer financial services. 

This month, I will be attending the Bitcoin 2019 Conference in San Francisco. Follow me for updates. 

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