Friday , November 15, 2019

Payments Companies Sign up to Help Manage Facebook’s Expected Crypto Entry

At least four payments companies are set to participate in a consortium formed by Facebook Inc. to launch a cryptocurrency next year aimed at commerce rather than exchange trading, according to a report Friday in The Wall Street Journal. Facebook is expected to officially announce the initiative next week.

The consortium, called the Libra Association, will manage what will be called the Libra coin, the Journal reported, quoting sources familiar with the initiative. Mastercard Inc., PayPal Holdings Inc., Stripe Inc., and Visa Inc. are among more than a dozen companies putting up $10 million each to fund the association, according to the story. One other participant identified by the report is ride-share pioneer Uber Technologies Inc., which relies heavily on mobile payments funded by passengers’ cards on file.

Contacted by Digital Transactions News, a spokesperson for Mastercard said the network would not comment on “speculation.” PayPal, Stripe, and Visa did not immediately respond to requests for comment. Facebook will not comment in advance of its expected announcement. Details remain sketchy, but at least some of the participating companies could serve as so-called nodes on the new network, according to the Journal report. Nodes verify and record transactions.

McKee: “While it remains to be seen if this will be more than just a high-profile science project, the consortium members give this initiative immediate [credibility] and potential.”
“While it remains to be seen if this will be more than just a high-profile science project, the consortium members give this initiative immediate [credibility] and potential,” says Jordan McKee, research director at 451 Research, via an email message.

Given Facebook’s heft in social media and online commerce, observers see the payments providers’ involvement as at least in part a defensive measure. “First, it’s means of hedging bets,” says McKee. “Considering Facebook has 2.4 [billion] monthly users, card networks and processors don’t want to risk being outsiders on an initiative that could end up becoming an existential threat to their core business. Second, it’s a means of keeping an ear to the ground on Facebook’s crypto plans and having the potential to favorably influence their strategy.”

Others hailed Facebook’s entry as an encouraging sign for digital currencies generally. “Facebook’s move into cryptocurrency is an exciting development for the industry as social and messaging apps like Facebook could make cryptocurrencies available instantly to hundreds of millions of users,” notes Jonathan Levin, co-founder and chief operating officer at Chainalysis Inc., a New York City-based research firm specializing in cryptocurrency.

Unlike the case with most digital currencies, Libra’s value will be pegged to a basket of currencies issued by government entities. This is expected to help the coin avoid the wild swings in value that have plagued Bitcoin and other cryptocurrencies. Such swings encourage buy-and-hold patterns among users and discourage merchant acceptance, since in some cases the value can change radically even as a transaction is being settled. Some digital currencies, called stablecoins, already follow the general pattern of linking value to fiat currencies like the dollar.

The Journal reported Libra has been in development for more than a year and is expected to be used for commerce online, particularly within Facebook’s constellation of properties. That could prove problematic if not managed carefully, Levin cautions.

“The more pervasive use [of] cryptocurrency creates financial inclusion for good and bad actors, and the risk of money laundering needs to be mitigated by all stakeholders, including both these social networks and the partner companies that operate the nodes,” Levin says in an email message. “Transaction monitoring on these blockchains will be needed to meet the expectations of regulators around the world.”

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