Recently, former Fidelity Investments portfolio manager Gavin Baker gave his thoughts on Facebook’s upcoming cryptocurrency (a stablecoin), which Facebook is reportedly planning to launch later this year.

On March 5th, Baker started a tweetstorm that explained why Facebook’s “secret” new cryptocurrency (which sometimes gets referred to as “Facebook Coin” since there is yet no official name, and which is also how we will be referring to it in the remainder of this article) could pose a major threat to both Visa and Mastercard since Facebook could run this project as a loss-leader (e.g. if they offered anyone owning it a 2–5% discount on all purchases made on the Facebook platform) and still hugely benefit from its adoption:

 Next, he pointed out that if adoption of Facebook Coin took off, this would help Facebook with its goal of becoming more like China’s WeChat, i.e. enable Facebook to become so “sticky” that it would be very hard for Facebook users to leave and go somewhere else:

To @eugenewei point on utility being the ultimate moat for social networks, a widely used stablecoin would be powerful for $FB in terms of making it closer to WeChat level difficult to deactivate $FB. I believe that is what $FB is fundamentally after – Wechat envy is real!

 Then, he described why Facebook Coin did not need to have “standalone monetization” and why this made it a “threat” to Visa and Mastercard:

i.e. A $FB stablecoin would protect and grow $FB’s advertising business – and thereby need no standalone monetization – in the same way that Android and Chrome protect and grow search for $GOOGL. More engagement for $FB explicitly equals more monetization.

“Come for the tool, stay for the network, never leave because of the utility” to once more paraphrase @cdixon. This makes the $FB stablecoin even more of a potential threat to $V and $MA. It is tough if/when your business becomes a loss leader for a company with 1.5b DAUs.

Next, Baker explained that the involvement of some of Facebook’s best executives on this project shows how serious Facebook is about its new cryptocurrency, and that despite what many people think, the real focus of Facebook Coin is not remittances (even though this might be the first use case that gets supported, but paying for purchases of goods/services in Whatsapp, Instagram, Messenger, and any other Facebook properties:

$FB is dead serious about this. David Marcus was the President of $PYPL. Kevin Weil is a fantastic product executive. Some of $FB’s best executives are leading this effort. Every article so far talks about remittances. $FB may start there, but that isn’t the end state.

There is no way they would have this much firepower on a $25b TAM (5% take rate on the $500b remittances market). That is a drop in the bucket relative to the $1 trillion plus (more on this later) ad market and all of their other opportunities (VR/AR, etc.).

Perhaps they start with remittances, then move on to their existing Facebook marketplace and upcoming Instagram marketplace in-line with Zuckerberg’s fairly explicit commentary from the Q1 conference call and CFO Wehner’s commentary at Morgan Stanley in February.

I haven’t seen $FB mention remittances recently (curious for the fact check). They are clearly making off the record comments to reporters about remittances, but I think this may be misdirection aimed at lulling competitors into a false sense of complacency.

If/when the stablecoin was being used broadly – either for remittances and/or on their marketplaces – $FB would begin to roll it out more broadly. Merchant acceptance wouldn’t be a problem with 7m advertisers on their platform. Just make it 1-click.

Of course, just launching Facebook Coin and making it available for purchases on Facebook does not automatically guarantee wide adoption by Facebook users; and so, it is highly likely that Facebook would need to promote Facebook Coin by offering some kind of incentive:

Consumer acceptance is another matter. The existing payments system works well and a smart friend told me last night that he conceptualized it as businesses paying 2% to consumers – through loyalty programs that are valued highly – to shop with a credit card instead of cash.

So $FB will have the same problems faced by everyone else – how to get their stablecoin to the front of the consumer wallet. A 2% discount might not be enough – especially given the consumer love for loyalty programs. Applepay is superb, but I always forget to use it.

A 1-2% discount that makes their stablecoin front and center in every checkout flow? Or perhaps – the loyalty program to end all loyalty programs via the $FB stablecoin. Who knows? I certainly don’t. But this is why Kevin Weil is on the Stablecoin team.

And it is easy to believe Baker when he argues that if Facebook Coin is successful, it will encourage Amazon, Apple, and Google to also create and launch their own cryptocurrencies:

If $FB succeeds, $AMZN, $AAPL and $GOOGL will quickly follow with their own stablecoins. After ApplePay ran on the existing rails and $PYPL agreed to a détente, everyone assumed secular risk was much lower for $V and $MA. This perception could change quickly – iceberg risk.

Baker concludes by saying:

… I think $FB is focused on a stablecoin/payments as a way to create more utility for its products, which is the ultimate moat for any social network.

All of this will only ramp up regulatory risks for $FB, but they – like every other large company – are really good at co-opting regulation to their own benefit. See GDPR.


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