Facebook's Libra is biggest test yet of crypto payments' viability

Facebook's Libra, or GlobalCoin, will be cryptocurrency's largest test — fueled by a collection of huge investors that will determine if mainstream merchants and consumers will actually use a payment system featuring an alternative currency.

The social network's plans have been a loosely guarded secret, with nuggets of information about the structure and partners in Facebook's crypto venture slowly leaking out over the past year.

Facebook has reportedly drawn $10 million each from about a dozen payments or retail companies that will be partners in the initiative, including Visa, Mastercard, Stripe, PayPal and Uber, according to The Wall Street Journal, bringing Libra close to actual launch, which could come as early as this year. Facebook has been reportedly courting investors, hoping to draw about $1 billion.

David Paul Morris/Bloomberg

The investment commitments, which were not publicly confirmed, will fund the creation of Facebook's coin, which is expected to be backed by a group of traditional currencies to avoid cryptocurrency's notorious volatility.

Given Facebook's size and fame — and the importance of Libra's reported investors to the payments industry — Libra is the best chance to build a disruptive payment system that's backed by a virtual currency.

If it works, the rest of the financial services industry will be pressured to respond and offer cryptocurrency payment processing. If it fails, it will be a major blow to the concept of an alternative currency-backed payment network.

How we got here

Facebook has been working on a new cryptocurrency for some time, likely since it transferred David Marcus from his post running Messenger to a new unit at Facebook that's focused on blockchain in 2018.

Marcus has a long history in payments innovation: He was president of PayPal and founder of payments fintech Zong. At Messenger, Marcus helped embed transaction capabilities and added a contextual commerce partnership with PayPal.

Marcus' move to blockchain caused speculation that Facebook was building its own coin, though the social network has long held it's working on variety of use cases for blockchain. Since Marcus' transfer to blockchain, Facebook's cryptocurrency activities have ramped up. Reports surfaced that Facebook is looking for investors, has set up a secretive internal lab to build a cryptocurrency and has registered a fintech in Switzerland called Libra to run the cryptocurrency.

Another Facebook executive, Deborah Lui, has played a major rule in building Facebook marketplace into an online marketplace powerhouse. Facebook also hired staff from Chainspace, a London-based technology company that builds blockchain payment systems.

Facebook is additionally already active in stablecoins, reportedly developing a stablecoin to support WhatsApp transfers.

Facebook likely anticipates regulatory and potential political hurdles to Libra, reportedly hiring Edward Bowles, who has served as a lobbyist for Standard Chartered and will join Facebook in September, according to the Financial Times.

Facebook has not discussed specific cryptocurrency plans, and in an email Friday, Facebook's PR office said: "Like many other companies Facebook is exploring ways to leverage the power of blockchain technology. This new small team is exploring many different applications. We don’t have anything further to share."

Why invest in Facebook crypto?

The large payment companies mentioned in the Journal article will have some role in Libra, giving them skin in the game. It's unclear what that role would be, but one possibility is to manage the nodes that track the payment network and manage records.

All of these reported Libra investors are under pressure to diversify beyond their core payment and merchant acquiring operations, and a cryptocurrency could open a new route to reach consumers and merchants.

The traditional card networks face heightened competition from alternative financing solutions at the point of sale, and have already made investments to diversify into newer payment streams. Visa has taken a stake in Klarna, for example; and Mastercard just agreed to buy Vyze to gain a foothold in point of sale financing.

Mastercard and Visa also have existing cryptocurrency activities, such as support for crypto debit cards in the U.K.

Uber has been expanding beyond is basic ride sharing app, reportedly building a fintech shop in New York to build new use cases up to an including a possible financial account. And PayPal's socially driven Venmo, which is popular with younger consumers, is expanding into general retail, but it's still not profitable and could benefit from an extra channel or venue for advertising.

Facebook's huge commercial platform — 800 million people visit Facebook Marketplace each month — and the social network's existing payment ties to companies like JPMorgan Chase's WePay that use the network for authentication, create a huge user base for any new venture.

Libra could additionally be an advertising bonanza. Writing for PaymentsSource, Eric Grover, a principal at Intrepid Ventures, said Facebook's 2.3 billion monthly active users could reward consumers for watching ads and buying, giving merchants an incentive to accept the digital currency.

Why it may not work

Having a huge "network of networks" doesn't mean people will use an alternative currency for payments.

Consumers and merchants have not used bitcoin and other cryptocurrencies for payments in a substantial way, despite the growth of stablecoins and the overall fame of bitcoin as a marketplace and in popular culture.

Most of the initiatives to drive crypto payments usually involve an intermediary, or some form of conversion that transfers the cryptocurrency to traditional money before the payment is actually made — an acknowledgment that merchants aren't keen on directly accepting cryptocurrency.

And the major payment fintechs that are pursuing cryptocurrency, such as Square, aren't using it for merchant payments but as a venue to buy and sell the actual cryptocurrency.

In earlier coverage, analysts told PaymentSource the scale of a merchant network or an enrolled consumer base does not automatically equal adoption of a cryptocurrency payments project.

Facebook's also already failed at digital currency. Facebook Credits launched in 2009 as a common currency for payments on Facebook, and it did not succeed. Though Facebook began phasing out Credits in 2013, it has built out payment- and merchant-related services since that time, creating a more welcoming environment for a digital currency.

And even among consumers who are enthusiastic about using cryptocurrency there may be an adoption problem.

Writing for PaymentsSource, tentrum CEO Richard Dennis says Facebook's image as a huge repository of user data works against the concept of cryptocurrency, which is seen as a decentralized system in which users have more control over data than a centralized power.