May 29, 2019 / 4:12 PM / in a year

Breakingviews - Hadas: Facebook could fall into a new-money trap

Facebook's founder and CEO Mark Zuckerberg speaks at the Viva Tech start-up and technology summit in Paris, France, May 24, 2018.

LONDON (Reuters Breakingviews) - “Data is the new currency” is a popular management consultant mantra. If that’s true, Facebook might be going backwards. The social network which has accumulated vast quantities of information about its users apparently wants to compete in the world of money. The company founded by Mark Zuckerberg is planning to launch a cryptocurrency to be called GlobalCoin by the end of 2019, the BBC reported last week, adding that it has held conversations with the Bank of England and the U.S. Treasury. The Financial Times says it has also talked with leading cryptocurrency exchanges and high-frequency trading firms. Though Facebook is not commenting, it looks like Zuckerberg is aiming high. Probably too high. A more modest approach might work. Smooth-talking consultants could make a plausible case that 2.4 billion average monthly users of the Facebook, Instagram, WhatsApp, and Messenger platforms are the raw material for a potentially valuable business in transferring money. That would be a major new line of business for Facebook, which earned 98.5% of its revenue from advertising last year. Money could even be a bigger market than messages and photos. Total 2017 revenue in the global payments business was $2.9 trillion, according to research by McKinsey, dwarfing Facebook’s $56 billion top line. Better still, the consultancy anticipates an alluring 9% annual growth rate over the next five years, as mobile phones replace cash. Chinese tech giants have shown the way. Tencent and rival Alibaba, through its financial offshoot Ant Financial, have upended electronic payments in the People’s Republic. Facebook’s financial business may never achieve the $150 billion valuation investors gave to Ant last year. Still, the American company’s main rivals in most of the world would be banks, many of which struggle with cumbersome legacy computer systems. On the other hand, there are good reasons to be cautious about Facebook’s prospects in handling cash. A company with a near-monopoly position in its core business and a 45% operating profit margin may have the wrong corporate culture to succeed in a more competitive and less profitable business. Current partner and potential rival PayPal converts little more than a quarter as much of its revenue into operating profit. Also, Facebook would face many of the same costs as competitors in the money business. Transferring cash via WhatsApp does not relieve the operator of regulatory obligations to keep records, monitor for fraud and correct errors. Indeed, a history of problems with protecting data privacy suggest Facebook might struggle with bank-like activities. And users who are only mildly irritated by receiving fake news and targeted political advertising would be less tolerant of theft and lost payments. In any case, the talk of cryptocurrencies suggests Zuckerberg is thinking about much bigger goals. He has undoubtedly received encouragement from crypto experts. That world is full of people who do not understand the political economy of money, which might lead them to think Facebook can create a successful new currency. A “FaceCoin” would start with a big potential user base – something that bitcoin and other existing cryptocurrencies lack. Such talk dodges the big question, though. Why would these billions of potential customers actually want to use an unfamiliar type of money? If FaceCoin’s value is tied to existing local currencies, there is no good answer to that question. Alternatively, Zuckerberg might be dreaming of a currency of his own, something global, simple, and solid. There is speculation its value could be linked to a basket of currencies. This sort of talk shows the dangers of monetary confusion. The role of governments in all functioning money systems is so dominant that there is little chance for currencies without state backing to succeed. Only governments can regulate the supply and cost of money to prevent inflationary excesses or investment-killing shortages. Only governments have the political authority needed to collect taxes or create trustworthy new money to rescue depositors at failed banks. Only governments can enforce the currency monopoly which ensures that dollars or euros can be spent anywhere in a currency zone. No amount of financial technology can surmount these hard facts. Just possibly, Facebook could go in a more conventional direction. The biggest source of profit in finance has nothing to do with technology. It is the interest margin on loans. Facebook might envisage that its reputation and client base, perhaps combined with its own imagined currency, will lure attractive new borrowers. The rhetoric surrounding such a venture might be grand, but it would actually be much like an old-fashioned bank. A successful bank? Maybe, but hyper-ambitious new lenders often get into serious trouble. A government rescue of a Facebook Finance is a lot more likely than FaceCoin becoming a new global currency. Zuckerberg would be wise to stick to data.


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