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5 Things to Know About Facebook’s Cryptocurrency Ambitions

Leo Sun, The Motley Fool

Facebook (NASDAQ: FB) is building a cryptocurrency payment platform for its social network, according to The Wall Street Journal. The platform, codenamed Project Libra, will reportedly let users use digital coins to make purchases on Facebook and third-party sites.

This isn't the first time we've heard about Facebook's cryptocurrency ambitions. In late 2018, it tested out an internally developed cryptocurrency for peer-to-peer money transfers on WhatsApp in India. In February, The New York Times claimed that Facebook was "hoping to succeed where bitcoin failed," and that the unification of WhatsApp, Messenger, and Instagram's messaging platforms could enable crypto payments across all three platforms.

Here are five new things investors should know about Facebook's push into the crypto market.

1. It will use "stablecoins"

Facebook's cryptocurrency will reportedly be a "stablecoin." Stablecoins are cryptocurrencies that are pegged to a stable asset like the U.S. dollar or a commodity (like gold) to minimize volatility. That's a smart move, since the prices of many other cryptocurrencies (like bitcoin and ethereum) fluctuate wildly. The price of bitcoin, for example, bounced between nearly $14,000 in late 2017 and about $3,000 at the beginning of this year. That volatile price might make it attractive to traders, but it also makes it impractical for traditional payments.

Stacks of physical cryptocurrency coins.

Image source: Getty Images.

2. It could challenge PayPal, Apple, Google, Amazon, and Square

Facebook finished last quarter with 2.38 billion monthly active users. If it launches a unified currency for all those users, its coin could theoretically become the most widely used currency in the world. If Facebook tethers more third-party websites, apps, and stores to that platform, it could challenge payment platforms like PayPal (NASDAQ: PYPL), Apple (NASDAQ: AAPL) Pay, Alphabet's Google Pay, Amazon (NASDAQ: AMZN) Pay, and Square (NYSE: SQ).

David Marcus, PayPal's former president, currently leads Facebook's blockchain group (which is developing the cryptocurrency), and about 20% of the unit's 50 employees came from PayPal. That reunion suggests that Facebook plans to leverage its massive network of users to disrupt the market for online payments.

3. It would complement the company's other e-commerce ambitions

A "Facebook coin" could tie together the company's fragmented payment and e-commerce efforts, which include peer-to-peer payments on Messenger, in-app checkouts for purchases on Instagram, interactive live videos that let merchants sell their products, and the Craigslist-like Facebook Marketplace.

Facebook only offers these services in select markets, but launching a single currency for all its users worldwide could expand their reach and form the foundations of a stable e-commerce ecosystem. Facebook could also nurture the growth of its payments service by charging transaction fees or adding a slight margin to its coin purchases.

A woman makes a purchase with her smartphone.

Image source: Getty Images.

If that business grew, it would reduce Facebook's dependence on ads by boosting the weight of its oft-overlooked "payments and other fees" business. That segment generated just $165 million in revenue (1% of its top line) last quarter.

4. It could pay its users and offer merchants discounts

Facebook could reportedly reward users with crypto coins for viewing ads, or distribute them as loyalty points for interacting with content or buying products across its platforms.

This strategy would be similar to Amazon's offer of free "Amazon Coins" for users who purchased certain Android apps, games, or in-game items. However, the Amazon Coin isn't a blockchain-powered cryptocurrency -- it's a simple virtual currency with a fixed value of $5 per coin.

Facebook could also reward merchants for accepting more Facebook coin payments. For example, if a user clicks through a Facebook ad and completes a purchase with the coins, the retailer can use those coins to buy additional ads at a discount.

5. Visa and Mastercard might be interested

Facebook's plans could potentially disrupt traditional credit card companies like Visa (NYSE: V) and Mastercard (NYSE: MA). However, Facebook is reportedly in talks with both companies, which might want to become investors -- or even partners -- in the platform.

That's logical, because Facebook would need a physical debit card partner to expand into brick-and-mortar stores. PayPal partnered with Visa to offer a physical debit card, and Square forged a similar partnership with Mastercard. Apple also recently introduced the physical Apple Card to expand Apple Pay into more stores.

A promising plan, but plenty of hurdles

Facebook's plan still faces lots of hurdles. For instance, established platforms like PayPal have a big lead, and Amazon and Google both struggled to catch up. Apple fared better thanks to its loyal base of hardware users, but it still controls a smaller slice of the market than PayPal. Facebook's reputation, which was tarnished by privacy and security debacles over the past year, could also prevent users from adopting its cryptocurrency offering.

Facebook's plan sounds promising, but investors shouldn't count on it to reduce the company's dependence on advertising revenue anytime soon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Apple, Facebook, and Square. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Mastercard, PayPal Holdings, Square, and Visa. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.