Facebook is preparing to launch a cryptocurrency, the The New York Times reports. The new cryptocurrency would be integrated with Facebook’s WhatsApp messaging platform, allowing ordinary WhatsApp users to send electronic cash to friends and family across international borders. The Times says it talked to five anonymous sources who have been briefed on the project.
The most popular cryptocurrencies float freely against conventional currencies, leading to high volatility. By contrast, Facebook is planning to peg its currency to a basket of national currencies. This approach could give the new WhatsApp coin greater stability without tying it too tightly to any specific country’s financial system.
The Times notes that Facebook is just one of several messaging companies that are working on cryptocurrencies. Two privacy-focused messaging apps—Telegram and Signal—are each working on cryptocurrencies of their own, too. These are expected to be more traditional cryptocurrencies not pegged to conventional money.
According to the Times, Facebook has gotten far enough in the project to approach cryptocurrency exchanges about potentially listing the currency. One thing that isn’t answered by the Times reporting, however, is how Facebook will resolve the fundamental tradeoff between decentralization and accessibility that has bedeviled existing cryptocurrencies.
The trouble with centralized cryptocurrencies
Blockchain networks like Bitcoin and Ethereum don’t have any central authority, which means that users bear 100 percent of the burden of securing their coins against loss and theft. If the hard drive storing your coins gets damaged and you don’t have backups, your coins will be gone forever. If a hacker gets ahold of your secret keys, they can steal your coins and you will likely have no recourse.
There’s no Bitcoin company with the capacity to reverse fraudulent transactions, restore lost coins, or shut down fraudulent service providers. This means that participation in the Bitcoin ecosystem requires a higher level of sophistication than the average Facebook or WhatsApp user has.
Presumably, Facebook will attempt to address some of these shortcomings by integrating secure payment software into WhatsApp, by supporting the value of its cryptocurrency with Facebook’s own financial resources, and by policing the WhatsApp payment ecosystem for fraudulent activities.
But this will make it difficult for Facebook to disclaim responsibility for uses of the cryptocurrency outside of Facebook’s control. A big selling point of cryptocurrencies is that they’re open platforms that anyone can build on top of—without the red tape that accompanies conventional payment platforms.
But government regulators are likely to demand that Facebook vet users, supply records to law enforcement, reverse fraudulent transactions, and comply with other banking regulations around the world just as conventional payment network providers must do. To comply with many of these regulations, Facebook would need to actively oversee the activities of third-party developers and require them to comply with many of those same regulations.
But that means that whatever its technological underpinnings, a WhatsAppCoin would wind up looking a lot like a conventional payment service. So for now, it’s not clear why Facebook doesn’t just build a conventional, closed payment service like PayPal or Venmo, avoiding the complexity and scaling problems that come with a blockchain.