Why Facebook is getting into blockchain

• Facebook is expected this week to announce details of its cryptocurrency project, which is seen as a huge vote of confidence in a technology that remains niche and poorly understood.
• Creating its own payment system will help the company—which makes 99% of its revenue from ads—develop different profit streams.
• Purchasing data would also add to Facebook’s ability to target users through ads or via other methods.
• The project is likely to face intense scrutiny from regulators and politicians, many of whom say the company is already too big and too powerful.

Facebook, the social network that’s everywhere you want to be and even many places you don’t, is on the verge of detailing its cryptocurrency project. The world’s biggest social media company plans to release a white paper on Tuesday that will describe the project, known inside the company as Libra. It is also expected to set a timeline for the currency’s release, which media reports have put sometime during next year and which reportedly include such corporate partners as Visa, PayPal, eBay, Thrive Capital and Andreessen Horowitz.

Nearly all the details of the project are still unknown — Facebook did not reply to a request for comment — however, the move gives an enormous vote of confidence in the still-new technology. And it gives a hint of where Facebook’s business strategy is headed.

Here are three advantages that the social network would get from a currency project.

Advantage 1: New revenue streams

Facebook makes nearly all its money from advertising, but the company has for some time been trying to diversify its income streams. One of the options it’s considering is the highly profitable area of financial transactions. Messenger got a payments option five years ago, and Instagram has been gradually adding e-commerce features—for instance, allowing users to buy a product they see directly from the app.

Having a branded currency is likely to make Facebook’s users more “spendy,” particularly if the money comes with a fanciful name like “Libra” or “GlobalCoin.” Research has shown that the farther away a form of payment is from cash in one’s wallet, the more money it makes people spend. Add in the seamlessness of a one-click payment system within the app, and the potential profits are significant.

How blockchain works

Already, Facebook has been accused of making it far too easy to spend money. A group of parents are suing the company, claiming their children were tricked into racking up hundreds or thousands of dollars in charges on their parents’ cards.

Advantage 2: Even more data

The data created by Facebook’s 2.3 billion users is the fuel that powers its seemingly unstoppable profits, and a currency option would only speed up the combustion.

Owning its payment system would allow Facebook a vast trove of data on the spending habits of its users, cryptocurrency author David Gerard told the BBC. Even if only a fraction of Facebook’s users ever try the Crypto Coin, the details of that small group’s activity, such as what they buy, where and how frequently, could make those users very profitable to the company.

The same logic already applies to its advertising. “It’s not necessarily the size of Facebook’s audience that keeps drawing advertisers back to the platform, but rather its ability to precisely target ads to those users,” found a recent eMarketer report. And the enormous size of Facebook’s user base—more than a quarter of the globe’s population — means that even that small fraction could encompass many people.

Advantage 3: An expanded, more active user base

Facebook’s Big Tech competitors all have a payment system—think Apple Pay, Google Wallet, Samsung Pay and the Amazon range of credit cards. Facebook clearly aims to compete by offering its own payment option.

But the project could also pull in people who are today absent from online banking, according to some reports. Existing electronic payment systems require you to link an existing financial account, but Facebook’s will be accessible “regardless of whether users have a bank account,” the BBC reported.

Facebook’s blessing could push virtual money to a level of popularity it hasn’t yet achieved. Last year, transactions in bitcoin, the most widely used cryptocurrency, made up less than one-tenth of one percent of all financial transactions.

“These cryptocurrencies in general have been quite difficult to acquire and use,” said Cathy Barrera, founding economist of Prysm Group, a consulting firm focused on the economics of blockchain. “It’s difficult to get some [virtual currency] for people who aren’t technologically savvy, and when there’s a person you want to pay, it can be difficult to actually execute that payment,” she said.

Facebook’s involvement could change that. Just associating with the Facebook name is enough to make people look more favorably on cryptocurrency, a LendEdu survey suggested. While only 7% of users it queried said they had ever invested in a cryptocurrency, double that number said they would be interested in investing if it were backed by Facebook.

In a stroke of coincidence, Tyler and Cameron Winklevoss—the Olympic rowers and fellow Harvard classmates who claimed Zuckerberg stole the idea of Facebook from them in college—have been making a name for themselves as bitcoin entrepreneurs. The Winklevosses settled with Facebook for $65 million back in 2011, taking the money in Facebook stock and seeing its value balloon as the company made public. They then reinvested it in bitcoin, which has grown exponentially in the last few years, peaking in late 2017 at around $20,000 before crashing to around $3,200 a year later and more recently rising to around $9,000.