Facebook’s planned “cryptocurrency” — which almost certainly isn’t one

The New York Times just ran an article on Facebook’s mysterious blockchain unit, and what it might be planning.

Despite journalists Nathaniel Popper and Mike Isaac’s best efforts, they’ve dug up almost no new details — though the piece did kick off a new wave of media interest.

But we can make some educated guesses about what shape a “Facebook coin” would have to take if it were a thing — by the nature of regulation on such enterprises. Because saying “crypto” is not a get-out-of-regulation-free card.

The Facebook blockchain unit is announced

The Facebook blockchain unit was first announced by David Marcus, a vice president of Facebook and a former president of PayPal, in a status update (archive) on 8 May 2018:

After nearly four unbelievably rewarding years leading Messenger, I have decided it was time for me to take on a new challenge. I’m setting up a small group to explore how to best leverage Blockchain across Facebook, starting from scratch.

Everyone scrambled to find out any details whatsoever about what they could be planning. Cheddar published the first statements that looked a bit like information on 11 May — with unnamed sources claiming Facebook was looking at doing its own cryptocurrency and was “very serious” about it.

Morgan Beller, from Facebook’s corporate development team, had started looking into “blockchain” (whatever that is) in mid-2017, to see if it had any uses at Facebook. But Marcus’ effort was more serious, with a team of “less than a dozen”.

Marcus is an early Bitcoin investor, and had joined the board of Coinbase in December 2017.

Nobody knows what the Facebook blockchain unit is actually doing. I asked people I know at Facebook, and no-one inside the company, but outside the unit, has any idea at all.

(More than one person suggested it was something to keep Marcus busy somewhere well away from real work — though the reason Facebook would do that isn’t clear.)

Mark Zuckerberg spoke to law professor Jonathan Zittrain at Harvard last month. Zuckerberg appears interested by the hype around the word “blockchain,” but didn’t seem to have anything specific in mind — he seems to think something blockchainy could manage fine-grained access permissions to people’s data, a job that blockchains don’t in fact do.

The money transmission scheme develops

Facebook spent the rest of 2018 sending staff to crypto and blockchain conferences to recruit experts in the area — they’re hiring as fast as they can. One conference attendee told Cheddar that they were considering how to start a “decentralized” currency for the network’s two billion users.

Back over at Facebook Messenger, the company has been working with banks through 2018 on how to bring banking services to Messenger — plans it’s had in mind since at least 2014.

Bloomberg revealed in December that Facebook is considering a crypto stablecoin for WhatsApp, focusing on the Indian remittances market. The coin would have a fixed value in dollars, or perhaps be pegged to a basket of currencies.

The New York Times put up “Facebook and Telegram Are Hoping to Succeed Where Bitcoin Failed” on 28 February 2019 — with the new bit being that Facebook has spoken to crypto exchanges about listing a Facebook coin.

But why would you make this a cryptocurrency?

Jeremy Kirk from BankInfoSecurity spoke to Nicholas Weaver and I to try to work out what on earth Facebook might be thinking. We think it sounds like Facebook wants to become PayPal. And David Marcus has hired a pile of ex-PayPal people for the blockchain unit.

But why would you do PayPal-but-it’s-Facebook as a blockchain token?

There’s no reason for Facebook to do its money transmission protocol as a cryptocurrency — beyond publicity value — and plenty of reasons not to. The picture painted by the details we have is of a centrally-run payment system. You’d want that to be done as conventionally as possible.

Bitcoin was invented to be “an electronic peer-to-peer cash system,” but it’s been a hilarious failure for consumer use cases. (See chapter 7 of Attack of the 50 Foot Blockchain.) It’s incredibly brittle and user-obnoxious because it was designed with pervasive irreversibility as a fundamental feature, it’s too volatile to price things in (other than altcoins), and Bitcoin holders basically don’t spend the stuff.

There’s a very small merchant use case and a very small money transmission use case — but literally the only part of this job that Bitcoin does well is for Bitcoin whales to send large quantities of bitcoins between themselves, or to themselves. No part of the Bitcoin system that touches the existing conventional currency system can be claimed to work better for legitimate purposes than what we have now.

A stablecoin sounds attractive — move dollars at the speed of cryptos! But even a stablecoin, or an XRP-style centralised blockchain token, has way too much irreversibility and is too fragile for consumers.

The big issue, though, is regulation. Facebook is a large and prominent company, and governments are already unhappy with it — Facebook will absolutely have to be one hundred percent attentive and well-behaved as a money transmitter.

Money doesn’t take days to move internationally because it’s hard to transmit numbers on a computer network. The limits aren’t technical — it’s easy to send numbers around the world — but from regulation — making sure money changers are solvent, reputable and competent. Nobody’s going to risk another Quadriga.

(I don’t think the crypto world quite realises just how concerned the mainstream world is about a $200 million financial institution turning out to be literally just one guy with a laptop. Governments and regulators are looking very hard at how to make sure that nothing like Quadriga ever happens again.)

Banks have to allow for reconciliation, regulatory compliance and reversibility — which the actual financial system considers a feature, so as to avoid the litany of hacks, thefts and fat-finger errors that make cryptocurrencies so disastrously awful for consumers to use as currency.

Regulation can’t be avoided. You can say “crypto” all you like — but if you’re dealing in actual money, you have to work to the rules of actual money. Which are very well worked out.

I can’t see why Facebook would use a blockchain to actually run the thing. Maybe they’ll bolt a Merkle tree ledger on somewhere so they can say they did.

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