What would Facecoin look like?

Facebook insiders recently hinted that the company may be issuing a cryptocurrency so that users of WhatsApp—a Facebook-owned messaging app—can make payments to people on their contacts list.

A WhatsApp payments service would hardly be a revolutionary move. Tencent’s WeChat app, the most popular chat app in China, introduced the ability to make payments using WeChat Pay way back in 2014. WeChat Pay has proven to be incredibly popular and facilitates millions of payments each day.

This same integration of chat and payments has been successfully replicated by other Asian chat apps including KakaoTalk in Korea, which introduced Kakao Pay in 2014, and Line in Japan, which rolled out Line Pay that same year. Vietnam’s Zalo debuted its own payments service in 2017.

If there’s anything surprising about the Facebook rumor, it’s the cryptocurrency angle. None of the other chat apps mentioned above rely on a decentralized architecture to drive payments. Like 99.9 percent of the financial infrastructure in existence, these apps rely on a central hub to drive the whole process. Indeed, Facebook is currently running a beta of WhatsApp Pay in India which follows this very setup.

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Given that the conventional model works so well, why go through the hassle of setting up a blockchain to facilitate in-chat payments? Facebook CEO Mark Zuckerberg recently wrote a post staking out a more “privacy-focused” future for Facebook, writing that privacy gives people the “freedom to be themselves and connect more naturally.” Having earned a reputation for breaking its own privacy policies, could Facebook be exploring the idea of committing itself to private payments at the technology level via blockchain?

The “Facecoin” rumors are vague, so let’s run through what sort of blockchain Facebook might consider using. The first possibility is that it creates its own “permissionless” or public blockchain, like bitcoin, Litecoin, or Zcash. These blockchains are permissionless because anonymous actors can jump in and maintain them by becoming transaction validators. On the user side, public blockchains are censorship-resistant: people cannot be prevented from transferring tokens.

It’s hard to imagine Facebook taking this route. As a regulated entity, it would be obligated to freeze the accounts of those suspected of money laundering and terrorist financing. But permissionless coins cannot be stopped.

Another problem is volatility. Since the supply of permissionless tokens like bitcoin is fixed, the price is left to fluctuate, often quite dramatically. The result is that—like bitcoin—only the most ideologically-committed users would have the courage to hold Facecoins to make payments. Don’t forget that blockchains like bitcoin don’t actually hide user data, as Breakermag contributor Tor Bair points out here. To provide privacy, a would-be Facecoin would have to incorporate some sort of shielding, say like Zcash.

A second possibility is that Facebook copies the likes of Tether, Paxos, and Gemini, and issues a stablecoin. Because a stablecoin’s price is fixed while its quantity fluctuates, regular folks should feel comfortable holding it to make payments. A Facebook stablecoin would be secured by dollars held in Facebook’s bank account, with Facebook promising to redeem each Facecoin token with $1 worth of deposits.

Like Tether and the other big stablecoins, Facecoins would be implemented on a permissionless blockchain like Ethereum. But updating Ethereum requires that the multitude of participants who verify transactions arrive at consensus, and this takes time and energy. This arduous process necessarily limits the number of transactions that an Ethereum-based Facecoin could process per second. The demands for in-chat WhatsApp payments are likely to swamp capacity.

There is also the question of anti-money laundering and other sorts of auditing that Facebook will have to do. Why bother issuing tokens on an expensive censorship-resistant network when the issuer will have to build in the ability to censor transactions anyways?

The potential for chain splits and 51 percent attacks will also worry Facebook. It would be risky for the company to build a large-scale payments service on top of an untried utility that is prone to strange new breakdowns like double-spending and transactions rewinding.

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So we can probably scratch the stablecoin option off too. That leaves a third blockchain option, that Facebook implements U.S. dollar tokens on its own private or “permissioned” blockchain, say like how financial giant JP Morgan is implementing a version of the U.S. dollar, JPM Coin, on its proprietary blockchain Quorum. (Breakermag’s David Z. Morris has also explored this possibility here).

Unlike permissionless chains, which allow anyone to verify transactions, a private blockchain like Quorum relies on a small number of validators who have been pre-approved to run the network. This screening process sacrifices the “anarchic” nature of open blockchains like bitcoin. However, since the validators are known to each other, achieving consensus requires much less time and energy. This has the benefit of increasing the amount of transactions that could be driven through WhatsApp. No need to worry about 51 percent attacks or chain splits either.

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A private blockchain might also give Facebook the chance to demonstrate that it cares about privacy. Compared to competitors such as WeChat Pay, Facebook’s payments infrastructure would be relatively transparent, the rules available for all to verify. Facebook could guarantee that it doesn’t snoop by excluding itself from the process of running it, leaving other more trustworthy administrators to serve as transactions verifiers. David Birch has described this as the “glass bank” approach.

This route is an especially risky one since private blockchains are exotic and relatively untested. By choosing to adopt the same non-blockchain architecture as WeChat Pay and its other messaging competitors, Facebook gets a solution that works right away and the market has already embraced.

Privacy-conscious WhatsApp users might prefer a technology that irrevocably builds in a degree of financial privacy. But while people care about privacy, they don’t really care about privacy. Facebook knows this. If it’s in a rush to catch up to the wave of payment-enabling chat apps, avoiding cryptocurrency is probably the easiest bet.

J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a brokerage firm and a financial writer at a large Canadian bank. More recently, he has authored several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments, as well as writing for Breakermag, Sound Money Project, and Bullionstar. He founded the popular blog Moneyness in 2012.