Yes, even I’m surprised that I’m defending that company. And no, I haven’t changed my mind about their disintermediation or the rotation from platforms into coins. Nor do I have confidence that Facebook’s foray into stablecoins will be a success. This is a defense of their idea of developing a blockchain-based payment network.
That defense, as it applies to Facebook or anyone else that applies DLT to dollars, starts with a number: $2 trillion. Those are the revenues of the payments industry today, expected to grow substantially in the next few years. And why not? As the world grows increasingly global, digital and platform based, more and more money needs to zoom around for goods and services, or borrowing and investing. Someone needs to own the pipes through which that money flows, and those owners need to be compensated.
Or do they?
Let’s answer that question by asking another: what exactly is a payment? Is it a product? service? In my not-at-all humble opinion, it’s neither. A payment is a transfer of data. Money is just information, and always has been. If I pay you with a physical dollar bill, all that happens is the universe now considers me a dollar poorer and you a dollar richer. The point of money is to keep score, and the preferred mechanism is always whatever happens to work best.
The first mechanism was physical and intrinsic: the coins in your possession were your score. Then banking showed up and introduced scorekeeping via ledger. Ledgers used to be written on paper, and updated by sending around more paper, like a check. Then things were sped up with telegraphs and telephones. When databases showed up they got adopted, as was the internet. Today, the scorekeeping happens via an interconnected networks of ledgers inside banks, clearinghouses and FinTechs.
But the payment is still just data, traveling as debits and credits across different databases. Venmo doesn’t have a bag of cash with your name on it sitting in a vault, it has an entry in a ledger, and Venmo’s bank doesn’t have a bag of cash either, nor does that bank’s central bank. It’s all ledgers updated continuously and electronically. But therein lies the problem, because electronic is not digital.
Consider this: today, I can send almost anyone on the planet a text or an image instantly and at no marginal cost. Texts and images are just data, and data roams the world fast and free. Even voice calls are free, because a voice chat is also just an exchange of data. But if I want to send that same person a payment, then I have a problem.
Payments are a special kind of data, because they require guaranteed delivery, perfect reliability and total security. For a text message to not arrive or a voice call to have static is not a big deal, but a failed or error-riddled payment is. Thus the need for electronic payments to travel across special pipes like cards networks or correspondent banking. The core protocols of the Internet — great as they are for moving texts and images — are not good at moving value. So we’ve needed separate applications (like Venmo) on top of them to handle payments.
But now, there’s a blockchain for that.
What the base layer of the internet can’t do, protocols like Bitcoin, Ethereum and whatever else is yet to come do well. Yes, they were built for crypto, and no, the world isn’t about to abandon fiat money. Blockchain is just a tool for digital value transfers, and it can be used for anything, from Dogecoins to dollars to digital cats. It is natively digital, which makes it distinct from our electronic payment systems, most of which were architected before the internet showed up. These legacy systems have adopted certain digital features, but their DNA dates back to a bygone era. They are what Blue-Ray disk was to VHS. They are not Netflix.
The availability of this new tool has now inspired a crop of new entrants into the payments universe, including Circle, the companies behind the Utility Settlement Coin and Facebook. Unlike the legacy players who treat payments as a service to charge for, these guys are treating it like the data it always was, and understand that data wants to be free. In a world where everyone has access to unlimited data, it doesn’t make sense to have users pay extra for just one kind of data. That’s how Skype eliminated the long-distance calling industry. It’s also what stablecoins will do to the payments industry.
Disruptive new tech is seldom developed by the legacy giants of the old guard, for obvious reasons. Skype wasn’t invented by AT&T and stablecions aren’t being pioneered by those collecting big chunks of that $2 trillion. They are being built by new entrants to that world who see the ability to offer affectively free solutions as a good foundation for other business models. That’s Circle, Fnality and Facebook for you. Today’s legacy payment rails have been put on notice. I can already use USDC on Ethereum to pay an Ebay merchant a grand for just pennies in fees. How much longer will PayPal get to charge $30 for the same thing?
The only unknown is who will win this new arms race. It could be the existing stablecoin providers, Facebook or someone else. There are also thorny questions of how AML, KYC and sanctions laws will be applied. But people will find solutions, as tech always leads regulations, not the other way around.
The acceleration of payments towards free — a trend began by other tech solutions — will be great for society. Revenues on payments are a tax on data, which means we are headed for a $2T tax cut. Imagine the resulting value creation, not to mention the social benefits of payments that no longer discriminate against the poor, migrants or the unbanked.
As I have said before, the dollar will be the first killer application for blockchain.
PS: If there’s one critique I have of Facebook’s efforts, it’s this whole “global coin” business. Nobody other than academics at an NGO wants a basket currency. It looks and sounds like something from Mr. Robot. People are fine with euros and dollars so long as the trust the source.
And while we are at it, could the entire industry please drop this whole “coin” business? Bitcoin is a coin. A tokenized dollar is not. When people log into their Venmo account, it doesn’t say “Venmo Coins,” it just says dollars, which is accurate, because after all, it’s just a way of keeping score.
The opinions expressed here are strictly my own and not that of any client, employer or associate.