Original author: RICHARD HOLDEN
Original compilation: Block unicorn
Facebook failed, but another tech giant may soon succeed, ready to embrace enterprise digital currencies.
Buying and selling cryptocurrencies is a huge business, with Bitcoin, for example, handling $3 trillion worth of transactions in 2021, more than twice as much as American Express. But most of these trades are for speculation only. The proportion involving the purchase of actual goods and services is so small that it is difficult to measure.
What developments might enable cryptocurrencies to replace the U.S. dollar as the primary medium of exchange in the United States? This may look a lot like the Libra stablecoin (later renamed Diem) proposed by Facebook (now called Meta). Although Diem suffered a major setback in 2021, with U.S. Treasury Secretary Janet Yellen refusing to support it, this does not mean that the related model cannot succeed. Indeed, Yellens refusal to support Diem indicates that she believes private digital currencies could be a potentially serious competitor to the U.S. dollar, and therefore to the U.S. Treasury Department.
Here, I outline the rationale for the push for private digital currencies and explain why one (specifically, a stablecoin similar to Facebook’s proposed Libra stablecoin, later renamed the Diem model) may soon gain prominence in the United States.
companys cash assets
The concept of private digital currencies dates back to at least 1994, when the late Edward de Bono proposed the concept of the “IBM Dollar.” In Bonos vision, large manufacturing companies should create their own currencies that can be used to purchase their products. He sees the plan primarily as a way for the company to smooth out fluctuations in sales and make the business more predictable.
Facebook’s Libra proposal failed, so how can another private digital currency succeed where Libra failed?
It is important to attract a large number of customers quickly. This is sometimes called “launching the flywheel” – that is, becoming large enough for consumers to benefit from network effects. Facebooks user base might have provided such a customer base, but theres some psychological distance between social media and currency.
For other potential proponents of private digital currencies, the gap may be much smaller. Joshua Gans and Hanna Halaburda argued in an important 2015 paper: “Every currency can be considered a platform, and its attractiveness It mainly depends on peoples acceptance of the platform.
Bezos Stablecoin
Consider Amazon, which has over 200 million unique visitors every month. Its annual revenue is approximately $500 billion. A staggering 167 million Americans have an Amazon Prime membership, which offers discounted or free shipping for an annual fee of $139, making Amazon their go-to shopping option. This large and loyal customer base makes it possible for Amazon to launch its own digital currency. Borrowing some ideas from Libra, this digital currency may be as follows:
Amazon’s stablecoin will have four pillars:
The first pillar involves the Amazon platform
Amazon will announce that from now on, users can continue to use credit cards to pay for purchases, and they can also use a digital currency called Amazon Coins (amazons). (I like to call them — “Bezos Dollars” or BBs, but that’s probably not a fair enough term for Jeff Bezos.) Customers can exchange USD for Amazon Coins, and at least in the short term, they can Convert it back to US dollars on demand at a 1:1 exchange rate, possibly with a small fee.
Shopping using Amazon Coins will entitle users to a discount of up to 2% off the normal shopping price. This will provide an incentive for people to use Amazon Coin. In fact, Amazon has launched a virtual currency called Amazon coins that can be used in the Amazon App Store to purchase specific apps and games and make in-app purchases. Therefore, Amazon Coin would be a natural extension of this concept.
As a platform that connects buyers and sellers, Amazon has considerable market power and influence. In principle, Amazon could require sellers to accept Amazon coins instead of U.S. dollars for sales on Amazon’s marketplace. However, in the short term, such an arrangement may not be feasible because Amazon Coin is of no use to retailers, who would need to pay their suppliers in U.S. dollars, at least initially.
However, if Amazon Coin becomes widely used, this will not be a problem. For Amazon, the challenge is driving adoption of its currency without penalizing sellers on its platform. It would be wise to pay the seller a portion of the sale price in Amazon Coins, perhaps 10% initially, and the remainder in USD. Each seller will have a digital wallet into which Amazon Coins are paid, and Amazon Coins can be smoothly converted into U.S. dollars.
This approach would create a subtle but useful default situation for Amazon. Although it is not difficult for sellers to convert Amazon Coins to U.S. dollars, having Amazon Coins in a digital wallet, readily available for use elsewhere on the Amazon platform, will serve as an incentive to use them.
Depositing money and paying interest in a digital wallet would incentivize sellers to keep their funds in Amazons digital wallet, rather than moving it to a bank and earning little to no interest there. Introducing these features would provide Amazon with a natural way to provide additional financial services to small businesses.
second pillar
The second pillar involves Amazon Web Services (AWS), the worlds largest cloud computing company. It started out as a way to run Amazons own platform and has since grown into a company that provides similar services to other companies and even university researchers.
Netflix is AWSs largest customer in terms of monthly spending, followed by Twitch and LinkedIn. Other major cloud services companies operating on AWS include Baidu, BBC, ESPN, Facebook/Meta (for third-party collaboration with existing AWS users), and Turner Broadcasting. Its like telling these big companies that they have to hold a certain amount of Amazon stablecoins up front without providing any additional benefits. Its kind of like asking these companies to pay for AWS services up front instead of billing them in the usual business way. This is like directly transferring working capital (funds for daily operating activities) from AWS to its customers, which is very beneficial to AWS. In this way, adding additional costs to customers is unlikely to be successful. But Amazon/AWS could form a partnership with some or all of these large companies that would increase the likelihood of private digital currencies succeeding.
But remember what happened a few years ago, when Facebooks Libra Association lost key payments companies including Visa. These companies have two main concerns.
The first is whether the Libra Association will fully comply with regulatory requirements. At a House Financial Services Committee hearing in October 2019, Representative Maxine Waters (D-Calif.) asked Facebook project lead David Marcus if the company would wait for Congress to consider appropriate regulations. Marcus responded, Im committed to waiting until we get all the appropriate regulatory approvals and resolve all the issues before moving forward. Waters said, Thats not a commitment. Marcus seemed to suggest that Facebook would comply with existing regulations, and the commissions Lawmakers made clear throughout the hearing that such a major innovation would likely require significant new regulations.
Joshua Gans and Hanna Halaburda argued in an important 2015 paper: “Every currency can be considered a platform, and its attractiveness It mainly depends on peoples acceptance of the platform.
The second concern is Facebooks reputation and past conduct, including its involvement with Cambridge Analytica. Cambridge Analytica is a British company that collected large amounts of Facebook users personal data in the 2010s without their consent and used it for political advertising purposes.
These concerns were most clearly expressed by New York Rep. Alexandria Ocasio-Cortez (D-N.Y.), who told Facebook founder Mark Zuckerberg: “I think you Best understands the importance of using a persons past behavior when making decisions about future behavior. In order for us to make decisions about Libra, I think we need to dig into your past behavior, Facebooks past behavior in terms of our democracy. Zuckerberg Mr. Ge, when did you personally first learn about Cambridge Analytica’s affairs? In which month and year?”
At the time of this exchange, Visa had withdrawn from the Libra Association and issued the following statement: [Visa] will continue to evaluate and our ultimate decision will be determined by multiple factors, including whether the association can adequately meet all necessary regulatory expectations. Visa Continued interest in Libra stems from our belief that well-regulated blockchain-based networks can extend the value of secure digital payments to more people and places, especially in emerging and developing markets.
The exchange highlighted the critical importance of reputation in prompting companies to use private digital currencies. A solid customer base may be enough to attract consumers, but large companies like Visa, Netflix or ESPN need to be convinced that participation will enhance, not diminish, their reputations.
Facebook has too much baggage after the 2016 election, especially when it comes to credible support for digital currencies. True to Zuckerbergs famous motto of move fast and break things, the company has certainly moved quickly when it comes to exploiting personal user data for profit and political advertising.
Still, for companies like Netflix and ESPN, private digital currencies could bring significant advantages. Companies like ATT and Microsoft already allow customers to pay with cryptocurrencies through payment processors such as BitPay. It doesn’t matter why they choose to do this: because it sounds cool, because their customers have a philosophical belief in cryptocurrencies, or because of privacy concerns. What matters is that customers seem to want the option. For large companies, a more stable digital currency would be more attractive. It might even allow them to expand into other product lines: ESPN, for example, might offer sports betting, an area it has already shown interest in, although such a move would involve regulatory complexities.
Even if some of these companies are hesitant to accept the leadership of a rival like Amazon, they will understand that the power to control currency in the United States (and possibly elsewhere) will create an extraordinary pool of business revenue streams. Even if Amazon takes the lions share, these business revenue streams are enough to be distributed among all companies.
third pillar
The third pillar is regulation: Amazon will admit that by issuing the Amazon stablecoin, it is effectively acting as a money market mutual fund. As a result, the company will readily agree to have its money business regulated by the SEC as a money market fund (MMF).
MMFs are regulated by Section 2a-7 of the Investment Company Act of 1940. The regulations set out a number of conditions regarding an MMFs investment portfolio, including the credit quality of the assets in which the MMF can invest, the extent to which the portfolio must be diversified, the liquidity it must have, and the maturity structure of the assets held. Amazon could agree to meet or exceed all of these conditions and commit its digital currency reserve to the cleanest money market fund.
In this case, Amazon’s stablecoin may encounter additional regulatory requirements related to banking, especially if it begins to expand into offering other financial services such as credit products. However, for Amazon, the main goal is to create a dominant private digital currency, rather than trying to make money through banking or circumventing regulations. Therefore, this is an area where Amazon can act in good faith while pursuing the goal of keeping the network externality flywheel spinning and expanding the use of its digital currency.
Regulatory compliance will also allow the Amazon stablecoin to have the stablecoin characteristics of the Libera model, and unlike the Libera reserve, there will be an Amazon stablecoin reserve. Keeping its entire reserve in U.S. government securities would satisfy regulatory requirements and give Amazon stablecoin holders confidence that they can redeem them for U.S. dollars (or other currencies, since Amazon is a global business) at any time.
Block unicorn Note: The stablecoin feature of the Libera model typically involves a digital currency backed by a basket of assets, which may include fiat currencies, government bonds, etc. The purpose is to ensure the stability of digital currency and avoid large fluctuations through diversified asset support. This is designed to make the digital currency more suitable for use as a medium of exchange because it does not experience extreme price fluctuations like some cryptocurrencies.
Amazon will essentially operate a money market fund in each currency for which it offers convertibility, which will be an advantage for international consumers looking to avoid currency risk. Moreover, this may give holders of Amazon stablecoins more confidence because they can be converted into local currencies, thereby reducing the risk of customers hedging currency and thus reducing the risk of a modern bank run on Amazon stablecoins.
The fourth pillar
Pillar 4 is financial inclusion: Through its efforts on Libra, Facebook is charting the plight of those excluded from banks—not just in sub-Saharan Africa, but also in South Los Angeles and the South Side of Chicago. Many people in these communities are unbanked or pay extremely high fees to use ATMs and other basic banking services. They may be forced to pay extremely high fees for short-term loans because of a lack of alternatives.
Part of the promotion of private digital currencies may be to provide cheap, secure financial services to people in these communities. While it may not be profitable for existing banks and financial services companies to do so, companies like Amazon can easily absorb this cost as a traffic-draining tool.
Some elements of this idea relate to an initially undervalued benefit of blockchain technology—the financial innovation known as an initial coin offering (ICO). ICOs are a new financial use of raising funds for blockchain investments, through so-called tokens or coins issued on a blockchain distributed network. Tokenization allows the creation of a range of financial instruments, some new and some superior, with huge potential in financial markets.
To understand how this works, lets take the example of Filecoin, a project that raised $257 million in its 2017 ICO. The basic goal of the project is to establish a data storage market. Both buyers and sellers must use FIL tokens to conduct transactions, and Filecoin has committed to issuing up to 200 million FIL tokens. Therefore, in principle, the total value of all FIL tokens will be equal to the revenue generated by that part of the disk storage market, and the value of an individual token is that revenue divided by the number of tokens.
Owners of FIL tokens are essentially buying (and betting on) a security tied to the data storage market revenue, and those holding this security can resell it to people who want to buy storage space on the network people. In the ICO, 10% of the tokens were sold to investors, resulting in a total valuation of Filecoins future revenue of $2.57 billion.
Amazon isnt the only company with the potential to create a private digital currency that could largely replace the U.S. dollar. Google also has a large base of consumer and business users, and Apple is another obvious example.
This is not to say that a private digital currency created by one of these tech giants will create social value. In fact, this will bring about complex issues involving tax evasion, monetary policy, illegal activities, etc.
The challenge for the U.S. government is that maintaining the status quo appears to be difficult and may require precautionary measures to launch a central bank digital currency to prevent the establishment of a private digital currency that competes with the U.S. dollar. But regardless, it’s likely that you’ll see such a currency emerge soon.
