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Attack Of The 50 Foot Facecoin

|About: Facebook, Inc. (FB), Includes: AAPL, AMZN, BTC-USD, COIN, COINB, ETH-USD, GBTC, GOOG, ICE, SBUX, WMT
Summary

Facebook may find itself competing directly with ICE for dominance in cryptocurrencies.

Coinbase is the curious connection between Facebook and the Intercontinental Exchange, they may have an important role to play going forward.

Private and open blockchains are already in competition, but how will this complexity play out?

Introduction

In May of this year, Facebook (FB) appointed David Marcus to be the head of its blockchain group. Mr. Marcus stepped down from his role as a board member at Coinbase (COINB) afterwards, in order to avoid the appearance of a conflict of interest.

Coinbase's parent company, the Intercontinental Exchange (ICE) made headlines recently when it announced its own plans to launch a new company called Bakkt, with its eyes set on taking cryptocurrencies like Bitcoin (BTC-USD)(OTCQX:GBTC)(COIN) mainstream for investors and retailers alike.

The stage may be set for a massive restructuring of our financial system as private-labeled cryptocurrencies and permissionless blockchain systems compete for market share across the globe. 

The Coinbase Connection

Coinbase, much like Facebook; has been on an acquisition spree. In the last three months Coinbase has acquired Distributed Systems, Paradex, and Keystone Capital. This is an interesting combination if you think about it, because while Coinbase gears up to build a Login with Coinbase platform and perhaps bite into Facebook's business, Facebook is striking back by launching its own cryptocurrency effort headed by Coinbases's former board member, David Marcus that we mentioned earlier. 

Could this lead to classic competition, or perhaps an acquisition in the future? 

Facecoin - It's got such a ring to it

There was an interesting article over on Techcrunch that mentioned a few ways that Facebook could actually use their own cryptocurrency to their benefit. The most simple would be to use their own branded cryptocurrency as a way to lower operating costs and increase ad revenue.

Facebook could build a cryptocurrency wallet with its own token that people could use to pay for things with partnered businesses or that they discover through Facebook ads. Because blockchain can make transactions free or very cheap, Facebook and its partners could sidestep the typical credit card processing fees. That would potentially allow Facebook to offer users “3% off purchases made with FaceCoin” or a similar promotion. - Techcrunch, August 2018

I can't wait...

Image Source: Inglorious Bastards

It doesn't take a leap of imagination to see other uses as well. Facebook has been allowing people to send each other money through their Messenger app for some time. Then there's Facebook Stars, used to promote artists, Facebook gaming credits, the list goes on.

One question I have, is whether or not Facecoin will be allowed to leave the Facebook universe and be traded alongside other cryptocurrencies that live in the wild. I seriously doubt this will be possible, as it would most likely create more of a headache for the accountants and regulators; with the only potential upside being price appreciation in the market should speculators decide to horde the tokens expecting future gains. Facebook would have the Facecoin printing press, putting them in the drivers seat for untold and possibly absurd cash flows.  

Will other tech companies follow suit?

Facebook is still in the early stages of their blockchain plans, if the press releases are to be believed. But you can be sure that Google (GOOG) and Apple (AAPL) are keeping their eyes on these developments. Sergey Brin said that "Google failed to be on the bleeding edge of blockchain," and I get the impression that this type of failure won't be long lived. 

Apple and Google could sit back and let other companies work out the kinks, but with the rapid pace of change these days; that time lost could represent an impairment with staying power.

So what about Amazon (AMZN)? We know that rival company Walmart (WMT), well known for their supply chain, has been using blockchain to track their beef shipments since last year. Some of the brainpower behind their JIT system did actually migrate from Walmart to Amazon, and there are many similarities between Amazon's and Walmart's supply chain management systems (outside the scope of this article). So, I wouldn't be surprised if there was something blockchain related going on behind the curtain at Amazon. Whatever it might be we can only speculate at this point. Still, many have pointed to domain name purchases made by Amazon which may give us a hint.

Amazon has registered three new cryptocurrency-related domains, according to trade publication DomainNameWire. The domains are amazonethereum.com, amazoncryptocurrency.com, amazoncryptocurrencies.com. Amazon already owns the "amazonbitcoin.com" domain name, according to Coindesk.

- CNBC, November 2017

These domain names could be purchased out of defense, we just don't have any further information at this juncture.

The coming war?

Using game theory, we can make some assumptions about what the world might look like if a blockchain arms race did ensue. Consider the following scenario.

Facebook launches Facecoin

What will other tech companies do? We have to start making assumptions here, so let's begin.

  1. Facebook will not launch Facecoin unless they are convinced it has economic value (it will make them money).
  2. If Facebook is making money using their own cryptocurrency or branded blockchain, other players will enter the market.
  3. If other players enter the market, there will be a cryptocurrency/blockchain arms race to build the fastest, most reliable, most user friendly platform.
  4. Large tech companies with existing user bases and huge software development teams will have the advantage on this field of battle.

What will be the impact on users?

If major tech companies enter competition in the space, people will become used to the idea of using alternative currencies, like those based on blockchain technology. After all, people seemed to take to the ability to Gmail money, and to send their friends a $5 Starbucks (SBUX) gift card for their birthday via Facebook without much resistance.

Recall that this is one of Bakkt's objectives, getting crypto into retail.

The next step after that could be using Bitcoin to replace your credit card.

“Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility,” said Kelly Loeffler, ICE’s head of digital assets, who will serve as CEO of Bakkt, in the press release announcing the launch. “We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce.”

...

Using Bitcoin to streamline and disrupt the world of retail payments by moving consumers from swiping credit cards to scanning their Bitcoin apps. The market opportunity is gigantic: Consumers worldwide are paying lofty credit card or online-shopping fees on $25 trillion a year in annual purchases. - Fortune Magazine

What will be the impact on existing cryptocurrencies?

Existing cryptocurrencies, such as Bitcoin and Ethereum (ETH-USD) may be seen at substitute goods at first; but upon closer examination I think a complementary view makes more sense. Let's put on our imagination caps and compare the nonexistent Facecoin to Bitcoin, just for fun.

facecoin vs bitcoin Unless the above assumptions are incorrect, Facecoin and Bitcoin will be quite different. In fact, you might say there is a glaring gap between the target audiences of the two coins; not close substitutes at all.

Next we turn our attention to positive and negative externalities.

Will Facecoin benefit from Bitcoin's success?

Yes. In fact, the better Bitcoin does the better Facecoin will do. Why?

Well, Facecoin can just mention Bitcoin in passing, say it's better and then throw their data collection and marketing engine into gear. Most people will be completely taken by this approach. Shareholders will cheer, and "Zuck" will receive the android of the year award.

Image Source: Gfycat

Will Facebook benefit from Bitcoin's failure?

Yes again. Because here Facebook can control the narrative, winning just by saying they "fixed" the problems with Bitcoin by making their own (wink wink).

So, as you can see, Facebook wins no matter what. In other words, get ready for Facecoin...

Will Bitcoin benefit from Facecoin's success?

Yes. Facecoin's success will lure more companies into the fray, sparking a wave of new projects in the cryptocurrency space. Even though Facecoin is unlikely to contain much or any of Bitcoin's code; this will raise awareness that Bitcoin exists. As Bitcoin's community grapples with its own issues, like scaling and creating a clean UI, it may find users more comfortable with alternative currencies and more willing to give it a try.

Will Bitcoin benefit from Facecoin's failure?

This is unclear. Depending on how Facecoin is implemented, they may or may not actually benefit from their use of a blockchain. Recall that blockchains are slow, annoying databases that can only grow larger over time. Their main purpose is gaining consensus when you can't trust anyone, like in a hostile environment such as the internet. 

If Facecoin fails, then it could serve to validate that Bitcoin's use of the blockchain was the one that made the most sense. However, its failure could also lead people to believe that blockchain really wasn't that great after all, and damage the perception of the technology.

If companies start issuing their own money, then what's to stop non-profits, cities, and counties?

Nothing really. All it takes is for one city to run an ICO to build that bridge that the electorate wouldn't fund. Now they have the bridge, but everyone using it has to pay the people who funded it with "BridgeCoin" or whatever.

Conclusion

Facecoin will probably happen, and if it does other tech companies will follow suit. A world of competing alternative currencies could produce mind-bending complexity as new markets emerge, creating an even more dynamic field of competition for organizations on the bleeding edge.

It is unclear if ICE will use Coinbase as a weapon against Facebook, if Coinbase will continue to develop independently, or if Facebook might just make a bid for Coinbase one day.

I think in the end, we'll see less of a war between cryptocurrencies, rather just the assimilation of all kinds of cryptoassets into regular business processes and investment. War between businesses will continue as usual, and cryptocurrency/blockchain tech will just become a new playground in which they do battle.

Technology being developed now may enable tokens to be traded across platforms and blockchains. The only question will be if Facecoin and its ilk will be allowed to leave their cages and play in the open market. If they are, then it could provide an additional layer of liquidity for Facebook and the already huge tech giants. Isn't living in the future great?

Afterthoughts

I'm launching a marketplace on September 1st called Crypto Blue Chips. If you're interested in cryptocurrency and blockchain technology, this is the MP for you. I just founded a private cryptocurrency investment company, and members of Crypto Blue Chips will have a back stage pass to what we're investing in, exclusive research, and the BVIPE (Bitcoin Value Indicator - Professional Edition). Stop by and check it out.

Cheers,

 Hans

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Disclosure: I am/we are long BTC-USD, ETH-USD.