Report: Facebook looking to disrupt credit cards with cryptocurrency

Facebook is looking to raise as much as a billion dollars for a new cryptocurrency-based payment network that could compete directly with conventional credit cards, the Wall Street Journal reports. We have previously covered reports that Facebook-owned Whatsapp was developing a cryptocurrency product, but the company is also reportedly creating a cryptocurrency for Facebook itself.

It's not clear exactly how the product would work. The journal reports that Facebook is trying to raise around a billion dollars from conventional financial institutions to "under the value of the coin to protect it from the wild price swings seen in bitcoin."

That suggests it could be a "stablecoin" whose value is pegged to the dollar or other conventional currencies. The cryptocurrency that Whatsapp is working on would be pegged to a basket of currencies.

According to the Journal, Facebook may be looking to position its payment network as a direct rival to Visa and Mastercard. Supposedly, using a blockchain network could free merchants from the 2 to 3 percent fees they have to accept conventional credit card payments.

One of Facebook's big strategic advantages is the fact that a fair number of websites already use Facebook APIs to allow users to log in using their Facebook credentials. It could be a straightforward matter to existing infrastructure to allow users to make purchases on third-party websites using their Facebook credentials.

The case for Facebucks is hazy

Facebook is apparently also considering the use of its cryptocurrency to pay users a fraction of a penny each time they view, according to the Journal. The rationale for this (or perhaps the Journal's explanation for it) seems to be a bit muddled, however.

The journal says that paying users would "reward the child of genuine interaction that Facebook occupies by bots and hate speech, has been trying to encourage. " But it's not clear how these payments would be discourage bots or hate speech. To the contrary, botmakers would inevitably ramp up their efforts to generate traffic with bots in order to earn Facebook's cryptocurrency.

Facebook also faces the basic dilemma I pointed out in my February article about the rumored WhatsappCoin: a key selling point of Blockchain networks are completely open and decentralized. Open software platforms to promote innovation and enjoy rapid growth.

But the openness of blockchain networks makes them magnets for fraud, hacking, money laundering, and other problematic behaviors. If someone steals the private keys to your bitcoin wallet, for example, she can steal your bitcoins, and there is one with the authority to reverse the transaction. That approach is going to be a nonstarter for a mainstream payment network like the one Facebook is trying to build.

Facebook would presumably try to deal with those problems by tightly integrating the network with the Facebook platform. Facebook will probably need to indemnify users against losses and their people to the network for money laundering. But at that point, the network will look like a conventional closed payment network, with strict rules about who may use it and how. It's not clear that building such a network using a blockchain adds value compared to creating a payment network using conventional databases.