Updated: Oct 12, 2020
Media around the globe have recently reported on Facebook’s cryptocurrency project. In response, some observers from different sectors went on to qualify the project as speculation and a failed project which will soon disappear. However, it also called the attention of many who say that the project has potentials to succeed. Moreover, if it does, it will shake up the current global financial system.
Why this project has the potential to succeed?
Yes, Facebook has a vast customer base (over 2 billion), but what does this have to do with the success of their crypto if we can see how other cryptos are doing? It is all about the tech architecture behind the crypto which matters, not the customer base, the strong customer base such as that of Facebook, only helps when the tech architecture is suitable.
It was until recently when I heard about “Stablecoin”, very interesting. I immediately went back to check about the Facebook crypto project only to realise that Facebook’s crypto will be a stable coin which will be tied to major fiat currencies. The idea of “stablecoin” as an improved version of cryptos and a mediation with fiat money. The tie of crypto to fiat currency turns it into normal electronic money which uses blockchain technology, and there already successful use cases of electronic money such as WeChat,
It is also said that Facebook is not alone on this project; it has partners, financial institutions probably. This is another point to appreciate because since the crypto will be tied to fiat currencies, it may distort the current financial system. Also, to ensure the security of Facebook’s crypto users, Facebook will need to hold the matching fiat currencies within the authorised financial institution (central banks, investment banks or IMF). E.g. if Facebook were to issue 10 billion USD cryptos equivalent, it would have to keep the same amount of money in fiat currencies with financial institutions, preferably the respective central banks of fiat currencies (US federal reserves for USD, European central bank (ECB) for EURO, etc)
Will Facebook opt to tie its crypto to one currency, or several major currencies? The later, the better, choosing one currency may call for resistance from the protectors of other major currencies (central banks) as it could strengthen more the chosen currency and increase the dependence of other currencies.
What could happen to other currencies which will not be tied to Facebook’s crypto?
Depending on how users will prefer the crypto over their local currencies, there may be a long term impact to those currencies around the globe if the Facebook crypto becomes popular, and the popularity is predictable for many reasons. Though, all central banks may respond by launching crypto versions of their fiat currencies.
On top of well-known solutions that blockchain offers in general such as transparency and security, users will be able to enjoy standard customer experience brought by the modern technologies such as AI, which many small and medium banks are unable to offer. Time and cost of financial transactions will be significantly reduced (no middleman).
However, since Facebook’s crypto will be tied to fiat currencies, its success calls for support from regulators of those currencies (central banks).
What could happen if those regulators opt not to support the Facebook Crypto project?
If they decide not to support, Facebook can still hold its matching fiat currencies with investment banks and decide on its own which currency/currencies to tie to the crypto. Moreover, the result could be that the concerned currency would still be directly connected to the crypto and regulators may still need to intervene to put in place appropriate policies to ensure the stability of the currency.
Shall other big techs and other big corporations, including major banks, follow the path of Facebook and Launch their Stablecoins? Very interesting. Probably yes, if the Facebook crypto project succeed.