The Facebook GlobalCoin stablecoin won’t kill Bitcoin but many companies should be worried.

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TLDR. Facebook’s move into crypto enabled payments has led to hyperbolic reactions that Bitcoin will be roadkill in front of their thundering truck. This post argues that we are nearing the end of the Facebook era and that the Bitcoin honey badger is not scared of Facebook and that Facebook is moving into dangerous territory where they will be competing with other behemoths.

This update to The Blockchain Economy digital book covers:

  • What we know and don’t know about Facebook’s stablecoin
  • Bitcoin is the honey badger that is not scared of Facebook
  • Big players who will feel threatened by Facebook
  • The end of the Facebook era is coming
  • No, don’t short Facebook, yet.
  • Which companies should be most worried
  • Context & References

What we know and don’t know about Facebook’s stablecoin

The news outlets did a copy/paste on Facebook Press Release. Plus we get the salacious factoid that Mark Zuckerberg spoke to the Winkelvoss Twins.

PR also tells us that all doors are open to Facebook, telling us about conversations with:

  • Bank of England governor Mark Carney.
  • Officials at the US Treasury.
  • Western Union.

Facebook has the clout to talk to anybody on the planet, not matter how high and mighty, but talk is cheap.

What we don’t know:

  • what will be the the real name of Facebook’s stablecoin when it finally launches? PR says it is “internally dubbed” GlobalCoin but that is too close to GlobalistCoin and that does not play well in the cyperpunk/anarchist/libertarian crowd that loves Bitcoin. There is a cute sounding internal name which is Project Libra, which maybe more consumer friendly.

 

  • When Facebook will launch. PR says “first quarter of 2020”.

 

  • Where Facebook will launch. PR talks about “in a dozen countries”. Earlier PR in December 2018 talked about India as launch venue.

 

  • What Facebook will launch. It will be a cross border digital payments system aka a remittances system.

 

  • Which Fiat currencies they will peg to.

There is lots of negative sentiment. You can expect this from the privacy and crypto crowd. It must be more worrying when Bloomberg, which is hardly known for bleeding heart anti establishment ranting, has this headline:

Dr. Evil Would Love Facebook’s “GlobalCoin”. “More than 2 billion users spending one currency, controlled by one billionaire. What’s to worry about?”

Facebook’s strategy in the past with negative sentiment has been to take one step back, issue an apology, then proceed to do exactly as they had planned. However that may not work today, because Facebook’s Stablecoin is between a rock & a hard place. Bitcoin is the rock. The hard place is all the big players who will feel threatened by Facebook. 

First the rock…

Bitcoin is the honey badger that is not scared of Facebook

You cannot shut down Bitcoin. Facebook can lobby Governments all they like and Governments would love to shut down Bitcoin and do deals with Facebook, but you cannot shut down a decentralised permission less network. You need a CEO that you can pull onto the carpet and grill.

Next, the hard place….

Big players who will feel threatened by Facebook 

The hard place is all the big players who will feel threatened by Facebook.

This is a huge move by Facebook. They are moving well beyond their media comfort zone into currencies, payments, remittances and e-commerce. The big players in those markets, including Governments, will feel threatened by Facebook’s move into their territory.

The end of the Facebook era is coming

You can see trend from the chart at the top of this Chapter (based on research by Daily Fintech) – the dominance years are getting shorter. Our thesis is that decentralization won’t lead to one dominant company because dominance is a feature of centralization. In the decentralization era, dominance may go to a leaderless open source protocol (Bitcoin), with many companies thriving within the ecosystem created by that protocol.

I never got the Facebook habit. I am as addicted to social media as the next 21st century human, but my social drugs of choice tend to be blogs, Twitter, Whatsapp, YouTube, & LinkedIn. Occasionally I can only see something online if I have a Facebook account. So I set up a fake account and enjoy the recommendations I get from that fake account where I am a woman born in 1997 in Chiang Mai, who now lives in Mongolia and who studied Thermodynamics at The College of Hard Knocks. My bio says “FB algos do not deserve to know me”.

The usual way that big tech eras come to an end is a mix of:

  • Regulation. That is happening to Facebook in Europe and China and there is even political pressure in America
  • Disruptive Technology. In past eras, the regulators jump on board just when disruptive technology is doing a much more effective job. For example, IBM could manage regulators but could not control PCs, Microsoft got sideswiped by the Web, Google by Social. In the coming transition, centralized services will be replaced by decentralized services.

Facebook the service is no longer cool, even if Facebook the company controls the two biggest competitors – WhatsApp and Instagram. Soon Facebook the service will be a digital landfill populated by:

  • Institutions selling you stuff. Institutions, both political or corporate, use pinpoint personalised marketing to make sure you buy/vote what they want. My little messing with Facebook’s algos is not likely to do them much harm, but billions tuning out ads will damage them at some point.
  • People willing to view ads for a fee. Pay to view ads is desperate race to the bottom by sites with low quality content. Advertisers get the attention of the people with the least money or influence brought in by Mechanical Turk to compete with robot scam traffic.

No, don’t short Facebook yet.

Mark Zuckerberg is one is the greatest entrepreneurs of all time. He has navigated one big disruption before. When mobile threatened the Facebook franchise he solved the problem by buying into the game at great cost with the WhatsApp and Instagram deals.

So, don’t count him out. He could pull it off with GlobalCoin. The odds are against him because this disruption is different:

– mobile changed delivery front end but the core concepts of centralized data to sell advertising remained valid.

– Decentralized Blockchain networks challenge the core concepts of centralized data to sell advertising.

It is inconceivable that Facebook, which has a market cap of over 500 Unicorns (ie over $500 billion), could head into a deep decline. Look at past eras and the dominant company of the day looked equally invincible.

Although Facebook’s long term decline is inevitable, don’t try shorting Facebook stock yet as there is a big difference between inevitable and imminent. 

There are companies that should be worried by Facebook’s move into crypto-enabled payments. They could be accidental roadkill as Facebook searches for relevance in a game that they no longer control.

Which companies should be most worriedWhich companies should be most worried

A. Decentralized social media companies funding via Tokenomics such as Steem and Brave. Content creators will prefer to be paid in either Bitcoin or a reputable Stablecoin from a neutral player.

B. Remittances companies such as WorldRemit and Western Union. The latter may do OK as Facebook will need their off ramp into local Fiat, but that will be a hugely reduced role.

Context & References

Facebook Ambitions in Fintech. Note date (2014); over 4 years ago we were forecasting this move by Facebook.

The PewDiePie deal with Dlive is a big move forward for decentralized Blockchain media.

Why I am closing my Steemit account and why I am a bear on EOS.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Governments with weak currencies may overcome their fear of Bitcoin and so usher in a new global currency

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TLDR. For Governments, the only thing more scary than Bitcoin is getting their country destroyed by sanctions and other heavy-handed behaviour by bigger Governments. Bottom up traction for Bitcoin as a global currency is coming from sovereign countries with weak Fiat currencies; the people are taking action despite what the Government is saying/mandating. This is no surprise because innovation always comes from the edge, from those excluded from wealth & power by the current system. What is interesting now is how this innovation is coming both bottom up (by the people despite what their government tells them to do) and from top down (initiatives from governments to use Bitcoin). The recent news that shows that this top down innovation may be happening is that 3 countries (Afghanistan, Tunisia and Uzbekistan) are telling the IMF that they want to issue Bitcoin bonds.

This update to The Blockchain Economy digital book covers:

  • Innovation always comes from the edge aka the Excluded
  • Bitcoin is totally different from a Central Bank Digital Currency (CBDC)
  • Commodities other than Gold as collateral
  • The critical role of the IMF
  • The dreaded v word – volatility
  • Context from other Chapters

Innovation always comes from the edge aka the Excluded

I have been a fan of John Hagel for a long time. I first talked to him 10 years ago when I was COO of ReadWriteWeb (here is an interview from that era). John Hagel, perhaps best known for his book The Only Sustainable Edge, has been one of the leading strategic thinkers for decades. Today he edits The Edge Perspectives blog as a driver for Deloitte’s Center for Edge Innovation.

Hagel focusses on the importance of the edge as a source of value creation and strategic advantage. This insight – that traction comes from people who have been excluded from the current system – may seem obvious, but so many companies do the exact opposite (they compete to win market share among those who have lots of alternative services).

In the Blockchain Economy, innovation comes from people, businesses and countries that have have not done well from Legacy Finance – the excluded.

Bitcoin is totally different from a Central Bank Digital Currency (CBDC)

A Central Bank Digital Currency (CBDC) means a) government controls supply (ie can still print as much as they like b) transaction verification is done using DLT (Distributed Ledger Technology) rather than in a ledger in the central bank’s core accounting system. There may be some efficiency advantages for the central bank from using DLT and some PR boost, but no real advantage for citizens.

The much more radical alternative is a government issuing bonds denominated in Bitcoin. That means they have no control over supply. Although that loss of  control is scary for governments, it is better than issuing debt using two alternatives as currency:

  • their own Fiat currency which investors don’t want (whether it is settled using DLT or traditional methods).
  • the Fiat currency of another Government (eg USD or EUR) that may be imposing sanctions or taking other actions they deem harmful. 

Commodities other than Gold as collateral

In ye olden days, money was an IOU backed by gold as collateral. In 1971, Nixon changed all that and money became Fiat currency backed by nothing more than a promise to pay.

So a poor country issuing a bond denominated in a currency with a fixed supply like Bitcoin is a really big deal for some investors. Rather than getting paid back in a depreciating currency that could spiral into hyperinflation, investors are repaid in a strong currency.

This begs the question, what if the country does not repay the loan aka sovereign debt default.

In ye olden days, investors simply presented their IOU (aka paper currency) and demanded repayment in Gold.  If you are a poor country with a weak currency, such as Afghanistan, Tunisia and Uzbekistan, you cannot simply buy a lot of gold as collateral for your currency. However you may have other tradable commodities that can be used as collateral. For example:

– Afghanistan can use lithium as collateral

– Uzbekistan can use cotton as collateral

The critical role of the IMF

Sovereign Bond Investors have historically demanded very high interest rates to compensate for the risk of a Sovereign Bond from a country such as Afghanistan, Tunisia and Uzbekistan. The idea of issuing a bond denominated in a currency with a fixed supply like Bitcoin and backed by a tradable commodity as collateral is a big innovation.

Last week’s news is only that these three countries are discussing issuing Bitcoin Bonds with the IMF; it is not yet a done deal.

The IMF has a critical role to play because Bitcoin is a global currency so investors will look to a global institution to give the bond issuance some credibility.

Stay tuned – this will be interesting to watch.

The dreaded v word – volatility

The devil is as always in the details, which in this case are:

  • What if Bitcoin increases dramatically in value?  A small increase in value is good news for investors and manageable for issuers. A  dramatic increase in value is, on paper, great news for investors, but such a disaster for issuers that default is likely.
  • What if Bitcoin declines in value? Investors may demand too much interest to compensate for this.

In short, this use case for Bitcoin falls foul of the dreaded v word – volatility

A stablecoin pegged to a basket of currencies could offer a better alternative.

Context from other Chapters

For context please read these chapters of The Blockchain Economy digital book

Some Governments Want To Shut Down Bitcoin But They Don’t Know How

The Path To Mainstream Adoption Of Bitcoin Is Not Through Legacy Finance Institutions It Is Through The Excluded.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).