What Does Facebook’s Digital Coin Mean For Its Outlook?

This week, the social media giant has unveiled its new cryptocurrency project — Libra, its highly anticipated digital coin that probably will shake up the global finance industry.

 

However, the market has shown mixed reactions to the news, as Facebook’s share price dropped 0.81% for consecutive 2 days after the announcement, before rebounding back.

 

So, how will this new cryptocurrency affect Facebook’s future outlook? Will it be a major contributor or burden for Facebook?

 

But first, what is Libra?

 

Facebook unveiled plans for its own digital coin, Libra.
Facebook unveiled plans for its own digital coin, Libra. Image via The Wall Street Journal.

 

Libra is a digital asset built by Facebook and is powered by a new Facebook-created version of the blockchain, the encrypted technology used by bitcoin and other cryptocurrencies. It’s expected to be available in the first half of next year.

 

With this new cryptocurrency and its digital wallet Calibra, anyone with a smartphone will be able to send and receive the cryptocurrency. Users will also be able to conduct transactions with the forthcoming currency.

 

Consumers can spend Libra using the Calibra wallet, a standalone app that will connect directly to Messenger, WhatsApp and Facebook’s flagship app, or participating third-party wallet apps.

 

This new digital coin is being touted to help those who do not have access to traditional banks. The company says that approximately 1.7 billion people or 31 per cent of the global population currently have no bank, and do not have access to modern financial services.

 

It sounds very exciting but the market is not entirely sure that Facebook will dominate the finance industry with this new digital coin.

 

Libra Will Put People’s Privacy & Security At Risk

 

The Libra’s coin even isn’t out yet, but it’s already facing criticism and opposition around the world. Many experts and consumers are concerned Libra will put people’s privacy and security at risk.

 

So,  the stock price falls explained.

 

The overall concern raised by observers of Facebook’s cryptocurrency stem from the social media company’s disconcerting past.

 

As everyone knows, Facebook has faced a number of scandals in this few years over data privacy and security. Two months ago, Facebook admitted to “unintentionally” uploading the email contacts of 1.5 million users without consent.

 

 

Therefore, Facebook has had to disclose several breaches that resulted in its subscribers’ private information being disclosed.

 

Other than the privacy issue, security is another top concern for the users. With a huge user base of Facebook, Libra will be a target by international hackers looking to create new scams to trick senders out of their funds or attempt to steal them.

 

Is Libra A “Monopoly Scam”?

 

Avowed Bitcoin critic Nouriel Roubini, also nicknamed “Dr Doom” criticised Facebook’s Libra project is a “monopoly scam” aimed solely at lifting the social media giant’s profits through its 2.5billion of worldwide users.

 

Roubini is a New York-based economist that famously predicted the US 2008 financial crisis when few considered there might be a threat to the country’s economy at the time.

 

He is also critical of Facebook’s apparent misappropriation of the term “blockchain” to describe the technology that supports the Libra project.

 

He said on his Twitter feed on 18th June:

 

 

Prior to dubbing Libra a monopoly scam, Roubini had started his tirade against Facebook’s cryptocurrency warning of its risks. By virtue of the fact that Libra will be linked to a basket of currencies, Dr Doom cautioned that it will carry a “significant currency risk” for users based in countries with relatively stable currencies.

 

According to Roubini, potential users of Libra from the US or the EU might be turned off by a cryptocurrency that’s also linked to relatively unstable currencies from emerging markets for instance.

 

This is not the first time that Roubini is bearish on cryptocurrencies with his most famous proclamation that a significant majority of digital currencies are “worth zero” despite his claims that he is not against the cryptocurrency industry and is open to any type of innovation.

 

Facebook’s Digital Coin Will Face Regulatory Hurricane

 

In all over the years, cryptocurrencies have raised regulatory concerns in the world, either they are illegal or unregulated in most of the countries.

 

For instance, the People’s Bank of China had banned financial institutions from handling Bitcoin transactions in 2013 and went further by banning ICOs and domestic cryptocurrency exchanges in 2017.

 

 

So, Facebook’s Libra is no exception.

 

US Democratic Rep. Maxine Waters, chair of the House Financial Services Committee, on Tuesday (18th June) requested that Facebook pause its development of Libra until Congress and regulators have examined these issues and take action.

 

In addition, Facebook’s Libra also faces political pushback in European. The European officials quickly called for scrutiny of the plan, raising concerns over whether the project was sufficiently regulated. The regulators are likely to raise questions over Facebook’s data collection and management process.

 

Facebook Will Continue To Monetise Its Shared Social Network

 

However, analysts love the ambitious idea of Facebook. Many analysts give the company “Buy” or “Overweight” ratings as they think that Facebook will create multiple possible new revenue streams by launching new digital coin, with utilising its diversified digital businesses and vast user base.

 

For Facebook, a company that generated $55.8 billion revenue in 2019 almost exclusively by monetising a shared social network, the push into blockchain will unlock new engagements and revenue streams.

 

Currently, Facebook has 2.7 billion monthly active users, giving its digital coin a potential for adoption that competitors can only dream of.

 

Facebook has 2.7 billion monthly active users.
Facebook has 2.7 billion monthly active users. Image via Reuters.

 

With plans to integrate its own cryptocurrency wallet in with Facebook-owned WhatsApp and Messenger when the cryptocurrency goes live in 2020, Facebook will instantly bridge the world’s largest social network with the brave new world of cryptocurrency. All that’s left is for users to use it.

 

Another advantage of this new digital coin is the support from notable enterprises including Visa and Mastercard which may help Facebook win in the global cryptocurrency battle.

 

According to the white paper published by Facebook, it won’t fully control Libra, but instead, get just a single vote in its governance like other founding members of the Libra Association.

 

The Libra Association of the new digital coin.
The Libra Association of the new digital coin.

 

Facebook’s New Digital Coin Will Revolutionise Its Digital Businesses

 

Under Mark Zuckerberg’s leadership, Facebook has grown its businesses significantly and simultaneously into digital advertising, e-commerce, gaming. So, analysts expect this new digital currency will further boost its businesses. In short, continue its domination of the digital world.

 

RBC analysts believe Facebook will use crypto to facilitate a platform for payments, commerce, as well as applications and gaming.

 

“We believe this strategy is a multi-step process, starting with a focus on user engagement through messaging and leading to further monetisation with each subsequent, deeper step – a similar strategy that has worked well for Facebook’s Core Advertising business,” RBC analysts Mark Mahaney and Zachary Schwartzman said.

 

Key Takeaway of The New Digital Coin

 

Libra is touted as a cryptocurrency that is better and safer than Bitcoin, the first decentralised cryptocurrency created in 2009. Libra will be backed by a reserve of real assets and reliable partners including Visa and Mastercard, so it is predicted to not wildly fluctuate like Bitcoin and other cryptocurrencies or serve only as an investment tool.

 

However, Facebook’s past scandals is a key risk for its digital coin. They need to clear key hurdles first, mainly their privacy and security issues if it wants to revolutionise its digital businesses and dominate the finance industry.  

 

All that said, users still using Facebook even with its data privacy and security issues. So, will it be the same for its digital coin?

 

 

June 24, 2019

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