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Three Questions

Three Questions: Prof. Vineet Kumar on Facebook’s Move into Cryptocurrency

Facebook is one of a handful of companies so influential that its every strategic decision is scrutinized both for potential profitability and cultural impact. When you combine that reach with the talismanic buzzwords “cryptocurrency” and “blockchain,” you get a supernova of press coverage and punditry. On June 18, Facebook announced Libra, a new cryptocurrency intended to make it easy for individuals and companies to exchange payments anywhere in the world. We asked Prof. Vineet Kumar why a company that started by enabling people to share personal news is now building an alternative financial system, and whether the move might make blockchain mainstream.

A scale with a bag of dollars on one side and a Facebook icon on the other

Why would Facebook invest in cryptocurrency? How does it fit in their strategy?

Every technology firm is looking for the next large business to ensure they have a driver for growth in the future. Throughout Facebook’s journey over the past decade and a half, they have attempted to create value in connections and then seek to monetize these sources of value. The primary avenue so far has been monetizing user attention by capturing the value it creates for advertisers. 

There are a number of reasons to introduce such a product. First, this gives Facebook an excellent vantage point to identify value, and obtain more accurate attribution of advertising, which continues to be an important challenge for advertisers—publishers as well as platforms. Second, they might want to intermediate more of the value by not just carrying advertising but also serving as a point of purchase. So if someone wants to buy a product from Instagram, this will provide a seamless way to complete the transaction. Third, Facebook sees more value in enabling more commerce or transaction among users, including peer-to-peer money transfers, and between firms and users as well. This cyptocurrency will essentially serve as an infrastructure layer enabling a number of products and services.

 If we can’t trust them with our data, why should we trust them with our money?

Privacy is an increasingly important issue. One approach might be to store the encrypted transactions on a blockchain; will anyone (including Facebook) have access to the original transaction data? They have brought major financial companies like Visa and Mastercard on board, so users may believe that if these financial institutions trust Libra, then they might as well. To some degree, this is similar to what Apple did with Apple Pay five years ago, bringing on board banks and major financial players to ensure increased adoption.  I think we will learn more about the design in the future, and how privacy and security will be addressed, and who will have access to user data.

Could Facebook help turn cryptocurrency into a mainstream consumer service?

Potentially. There are a number of questions to be answered, including how the user experience is developed, and what advantages it offers relative to current options for consumers. For consumers who already pay by credit card, there are a bundle of benefits offered, including the ability to reverse charges, limited exposure to fraud, etc. Will the new cryptocurrency offer these benefits or be more limited in terms of functionality? If it is limited, then it might obtain more adoption at the lower end of the market, perhaps among unbanked populations. It would be interesting to see if others like Apple, Google, and Amazon will partner with Libra or go their own way in developing a cryptocurrency. Either way, this is a very exciting space to watch now.

Department: Three Questions