Facebook and Square take uncharted paths to cryptocurrency payments

Mark Zuckerberg and Jack Dorsey are lending their considerable influence and expertise to blockchain and cryptocurrency, but even their efforts may not be enough to spark a global network of crypto-accepting merchants.

The problem they face is that, years after bitcoin and other cryptocurrencies came to market, there is still no tried-and-true method to enabling their use. Square's approach is to pin its hopes to the success of bitcoin, a tactic that rivals such as Stripe have already given up on; while Facebook is developing its own digital currency system in-house — a tactic that Facebook itself gave up on years earlier.

That's not to say Square and Facebook aren't having an influence on cryptocurrencies in general. After a few months of mostly bad news about bubbles, government crackdowns and bailing companies, Square and Facebook in short order have changed the narrative around cryptocurrency.

David Paul Morris/Bloomberg

The Square Cash P2P app is reportedly growing at a faster rate than Venmo, partly because of Square Cash's support for bitcoin. That news came this week at about the same time that Dorsey, Square and Twitter's CEO, gave a bullish speech in which he advocated for a native currency for the internet.

Earlier this year, Facebook CEO Zuckerberg expressed interest in the blockchain as a potential source of new innovation for Facebook—a change in philosophy from Facebook's more centralized strategy. That strategy advanced in the past week as Facebook created a division to focus specifically on blockchain, the distributed ledger technology that underpins virtual currency.

Facebook's announcement didn't mention cryptocurrency and was part of a corporate restructuring that followed a period of historically bad press for the social network, though it's been followed by many stories that say the Facebook unit is building its own currency.

Whatever path they take, both companies will face the same pushback from merchants in accepting non-government backed currency for payments in stores.

"There are literally thousands of cryptocurrencies and only a few have a meaningful following," said Richard Crone, a payments consultant, noting Square is not supporting bitcoin for retail payments but for investment via Square Cash. "Facebook and Square could get their own cryptocurrency, but for what use? You need a network for acceptance."

While Facebook has already failed at building its own currency, called Facebook Credits, the effort is now helmed by an executive with direct experience in running a digital payments company. By placing Messenger chief David Marcus — the former head of PayPal — in charge of Facebook's blockchain strategy, Facebook is turning to someone who has a history of building new and innovative transaction rails that also became competitive forcing mechanism for other companies.

Marcus became head of Messenger four years ago, and since that time the app jumped dramatically in users and in its transaction capabilities. Marcus went to work quickly, adding a buy button that gave Facebook a transaction option to go along with analytical marketing when attracting merchants.

Facebook's ability to tie social networking and external content was so enticing it attracted collaboration from PayPal to create a contextual commerce service, even though PayPal's Venmo arguably competes against Facebook Messenger.

Facebook Messenger's entry into the payments business was also influential enough to draw a competitive response from Apple at a time when Apple, Facebook and PayPal were all trying to entice merchants to accept their various electronic payment, marketing and digital marketing products.

Beyond Facebook, Marcus has a long history in payments technology. Marcus was president of PayPal before joining Messenger, and earlier in his career founded Zong, a mobile payments pioneer that drew more than 250 mobile carriers to its mobile-phone-based payment system. Rather than trying to compete, PayPal acquired Zong — and hired Marcus in the process — in 2011.

In Marcus' own announcement that he was changing roles at Facebook to focus on blockchain, he mentioned Messenger's monthly users have grown from 300 users per month to more than 1 billion, and highlighted the app's mix of P2P payments, games, video chat and interactive content.

Given this experience, it's easy to see Marcus using the blockchain to spin a mix of content, merchant services, social tools, a buy button and a virtual currency.

Facebook would not comment on the possibility of Facebook having its own "coin."

"Like many other companies Facebook is exploring ways to leverage the power of blockchain technology. This new small team will be exploring many different applications. We don’t have anything further to share," a Facebook spokesperson said in an email.

But even given Facebook Messenger's success in adding transactional capabilities, embedding a non-fiat currency would have the same result as other attempts to build a crypto payments market—namely a group of merchants that are nervous about the volatility and lack of oversight and risk inherent in cryptocurrency.

"Facebook would rally interest in mining a Facebook cryptocurrency and people would accumulate and buy and sell it," Crone said. "They do have a brand, but payments is a multi-party market. You could send 'Facebook dollars' to pay for rent or split the dinner bill, but converting it to real value is the key here to use it for retail payments."

The bad publicity surrounding Facebook's recent privacy breach might hurt its efforts to brand itself as a platform for payments — but then again, Apple famously announced its own mobile wallet in the days following a massive leak of intimate celebrity photos from its iCloud service.

Square's own site warns about the risk of bitcoin. A Square spokesperson said the company does not currently support cryptocurrency payments.

"What's going on with Square? They are using bitcoin trading to help build prepaid balances. Unlike Zelle, any nonbank P2P app is built on amassing a prepaid balance, then the user monetizes that when they make a purchase," Crone said.