Facebook Steps Toward Cryptocurrencies
Facebook has finally made its long awaited foray into cryptocurrencies, but the project is a shadow of its ambitious initial plans. The company has launched its Novi digital wallet, but without the Diem cryptocurrency, which was supposed to be the cornerstone of the enterprise.
The limited pilot will be restricted to 200,000 users in the US and Guatemala. And with the launch of Facebook-backed Diem still held up by regulatory concerns in the US, Novi will instead allow users to exchange Paxos, a stablecoin whose value is pegged to the dollar.
Promotional material and comments from head of Facebook Financial (F2) David Marcus suggest the pilot is focussed on muscling into the lucrative remittance market. Remittances are payments made by foreign workers to their families back home, and experts say it one of the most compelling use cases for blockchain-based payments. But the pilot represents a significant reduction in scope since Facebook first unveiled its plans for the Libra cryptocurrency (Diem's precursor) back in 2019.
"We started with Libra, which was intended as this all-conquering cryptocurrency that can be used for anything," says Nick Maynard, head of research at Juniper Research. "What we've seen is a repeated scaling back of what they are trying to achieve."
That's likely a reflection of the significant scrutiny the project has received, says Maynard. Despite launching without the Diem cryptocurrency the announcement was met by swift condemnation from US lawmakers, who called for the company to immediately abandon the project in a letter to Facebook CEO Mark Zuckerberg.
The company says it still plans to transition to Diem once it receives regulatory approval. But given the considerable heat Facebook has come under, Grace Broadbent, an analyst at Insider Intelligence, says starting small is a smart approach. And remittances are an obvious starting point, she adds.
Sending money internationally traditionally relies on a complicated network of arrangements between individual banks. That means transactions pass through many intermediaries all keen to take a cut, which both slows things down and increases costs. A cryptocurrency running on a blockchain would allow these transactions to happen on the same shared ledger, which in theory should reduce the number of intermediaries involved.
"We found that blockchain-based remittances is one of the most mature use cases [for the technology]," she says. "A lot of remittances' pain points like complexity, processing costs, speed, really play to blockchain technology's strengths."
It also represents a massive market, says Broadbent-Insider Intelligence forecasts worldwide remittances will be worth $661 billion this year. But Novi seems unlikely to be able to capitalize on that value, as it has committed to charging zero fees for international transfers. F2's Marcus has said the company plans is instead to use free person-to-person transfers to build up its user base, before branching out to become a more general payment provider and making money on merchant fees.
The company's ultimate goal is probably to create a super app in the mould of China's WeChat, says Maynard, which has managed to combine both social and payment features in one place. And while marrying this with a home-grown cryptocurrency might reduce its processing costs, the real ambition is to become the main payments intermediary for it's enormous global user base. "You don't need the cryptocurrency to do that, having the wallet will do all of that for you," says Maynard.
That might be easier said than done though. Getting merchants to accept new payment methods is notoriously challenging, says Maynard, as you not only need to demonstrate that large numbers of people want to use them, but also that you can provide the same kind of fraud prevention and dispute resolution services they're used to from traditional players.
Even with Facebook's massive user base that will take a long time, says Maynard. And it's far from clear that people drawn in by cheap remittances will also use the app for everyday payments, particularly when they have to be made in cryptocurrency rather than local currency.
Running a free global remittance service for potentially millions of users is also an expensive way to build up your user base, says Maynard. He suspects the company may take a similar approach to other cross-border payments services that offer free transfers, but then make money on less than favorable exchange rates.
"Does Facebook have deep enough pockets to do this as a pure loss leader? Yeah, of course they do," says Maynard. "But fundamentally I don't think they could create it on a massive scale outside of a pilot without having some kind of monetization."
Novi's targeting of remittances could also hint at a deeper goal, says Ludovico Rella, a research associate at Durham University in the UK. In certain corners of the tech industry there is an attitude that the Global South represents an empty space where first movers can easily install themselves as the predominant intermediary for everything from payments to Internet connectivity.
"Being the first mover is more important than revenue itself, because it's a matter of becoming the infrastructure, the rails on which data and money flows," says Rella. Facebook was accused of doing exactly this when it tried to set up a free but restricted internet service in India called Free Basics.
If Novi can collect comprehensive data on the financial behavior of its users, it could allow the company to provide other financial services such as credit and insurance, says Rella. And while the company has committed not to share individual's financial information with Facebook's advertising business or third parties, Rella says it could still use analysis of aggregate data from many users to fine-tune its highly lucrative targeted advertising business.
"It will be interesting to see how the promises and the public statements of Facebook will square with the business model they decide to adopt," says Rella.
Facebook did not respond to an interview request.