Is Coinbase the perfect buy for Facebook?
Rumours that Facebook could swoop for Coinbase refuse to die.
Take two billion users on the largest social network in the world, add an estimated 20 million customers in 32 countries on one of the most profitable crypto wallet and cryptocurrency exchanges. A match made in heaven, right? Maybe. Maybe, not – but what’s not really up for debate is that Facebook has been steadily ramping up the amount of resources it’s putting into blockchain research.
The former head of Facebook Messenger, David Marcus, joined the board of Coinbase in December 2017, announcing the move in this Medium post and a tweet
Thrilled to join the @Coinbase Board! Looking fwd to doing my best to help @brian_armstrong and the amazing team he’s assembled, continue to democratize access to cryptocurrencies, and deliver on the mission to create an open financial system for the world https://t.co/CDGPu4RhYO
— David Marcus (@davidmarcus) December 12, 2017
By May 8, Marcus told the world via his personal Facebook account that he would be the network’s new lead for blockchain:
“After nearly four unbelievably rewarding years leading Messenger, I have decided it was time for me to take on a new challenge. I’m setting up a small group to explore how to best leverage Blockchain across Facebook, starting from scratch.”
Facebook’s PR Problems
Facebook could certainly do with some positive column inches right now.
In the wake of a whistleblower-led scandal involving political data wranglers Cambridge Analytica, who also worked on Brexit and the Trump presidential campaign, CEO Mark Zuckerberg first refused, then was forced, to appear in front of legislators in both the US Congress and UK Parliament. When he finally appeared, he was compelled to attempt an explanation for his company’s part in the leak of nearly 100 million personal accounts to advertisers.
His attempts obviously did not impress the markets. Facebook’s share price tumbled from a March 16th high of $187.09 to April 6th low of $157.20, setting the price back by eight months.
In a 747-page dossier, released to the US Congress on June 29th, Facebook admitted a further ‘omission’: that, in 2015, it had continued sharing personally-identifiable information with over 60 app developers six months after it previously said it had shuttered access. The data included users’ full names, dates of birth, hometown, public photographs and status, company or page likes.
As of July 2nd, 2018 that share price had stabilised to $194.10, so investors are happy with the company response to the compound scandals – but Facebook’s reputation in the eyes of the general public may never fully recover.
Coinbase too has had its own struggles, mainly to keep its alarmingly wobbly back-end operation stable while allowing for rapid growth. Since launching in 2012, the San Francisco broker has hoovered up millions of users all searching for a professional, stable, unhackable exchange. However, a Freedom of Information request to the SEC by Mashable in June uncovered 134 pages of redacted complaints alleging outright fraud.
They came from customers furious that the exchange had allegedly held on to their money, refused to allow them to withdraw their own funds, failed to offer even a proper customer service phone number, and displayed, in the words of the journalist who uncovered the complaints, an “aggressive nonchalance on the part of Coinbase in response to the loss.”
General Manager David Farmer wrote in a blog post on June 12th that Coinbase Pro would take over from GDAX, and the company announced new offices in Portland and Japan, promising better customer support, financial compliance, IT and HR operations. Adding the support and business structure of an entity the size of Facebook could take Coinbase to the moon by lending the cryptocurrency space some much-needed legitimacy, beleagured as it is with repeat stories of hack, scams, and regulatory crackdowns. So, is Coinbase the perfect buy for Facebook?
Since 2005 Zuckerberg and co. have acquired Instagram ($1bn), WhatsApp ($19bn), Oculus VR ($2bn) and an incredible 63 other companies. Sometimes it has left the brands as separate entities, sometimes it has integrated the tech directly into the Facebook platform. According to Recode, Coinbase – which has seen $150bn-worth of trade on its exchange since 2012 – put an $8bn valuation on itself when trying to take payments app Earn into its stable.
That kind of price tag sounds steep but, as Arthur Falls – former tree surgeon and lobster fisherman, but now Director of Communications for decentralised supercomputer DFinity – told us:
“Coinbase is a bargain at any price. If Facebook went ahead with the acquisition they could become the world’s biggest finance company, as well as benefiting from a once-in-a-generation event: the emergence of a new capital market. Coinbase is one of a handful of companies poised to capture uncountable billions of dollars.”
Igor Shoifot, serial entrepreneur and now Founding Partner at TMT Blockchain Fund, shares the same view – but with caveats.
“On one hand, it would be a dangerous move because Facebook are an obvious target for lawsuits. On the other hand, it would be a very smart move if they were to add their wallet to their huge network with Coinbase as an option for e-commerce payments.”
Cryptocurrency regulation varies wildly from country to country and tends to move slowly at first, on a case-by-case basis, then one regulator will make a large pronouncement and companies and investors suddenly have a huge turnaround to contend with.
“It’s one of the main cryptocurrency platforms for transactions and Facebook is looking to establish itself in a whole bunch of sectors,” Shoifot continued. “Facebook have a ton of users, and if they could make it more convenient to use, they could do it with much more power and panache than Apple [Pay].”
The other question to answer is: if it does happen, can Coinbase survive as a separate brand, or will it be seamlessly integrated into Facebook’s back-end as a payments technology so users don’t necessarily even know they’re using Coinbase?
This is where opinions start to diverge. Shoifot thinks not.
“So far the history of Facebook acquisitions teaches us that major products tend to stay separated. For example, Instagram is still a separate product, it runs to different rules, it has its own distinctive brand and name. Looking into my crystal ball I would say they would probably keep it separate because, well, who knows what all those regulators have up their sleeves, they might say, ‘You have to submit every data point you keep, you can’t do anonymous transactions at all.’
“I would be extremely surprised if they would integrate it behind the scenes, instead I would say Facebook will keep it very, very separate and let it do certain things that Facebook would never do. Over the years they would watch what is happening and slowly integrate Coinbase into their systems.”
With a crypto customer base approaching 20 million, the acquisition would grant Facebook an even larger reach than Bitcoin and take the use of cryptocurrency to the next level.
Gianluca Giancola, co-founder and head UX designer for loyalty and rewards blockchain project Qiibee, thinks the payments aspect would be the most interesting facet of a Facebook-Coinbase buyout.
“Like every other major company in the world, Facebook wants to get an early foothold in the blockchain and crypto space. It has been lagging behind tech giants like Apple and Google in terms of e-payment solutions, so with Coinbase’s talent and industry know how, such an integration could take Facebook a step closer to creating its own online payment platform, much like Alipay.”
China’s Alipay has a higher level of integration than its rivals and allows users to not only order takeaways and call taxis but also to pay bills through its app. Giancola is cautious of the regulatory headaches such a move would throw up, though.
“Facebook’s already severely damaged reputation cannot be fixed by a simple takeover,” he thinks. “Coinbase and Facebook’s modus operandi are worlds apart and with an already uncertain and fluctuating regulatory environment, this could cause more problems for Facebook than it solves. The clash of principles between data security and privacy, coupled with crypto-related anonymity, would fuel concerns about Facebook’s ethical stance.”
Company execs certainly will not want to expose themselves to another highly public backlash. There are other issues, too. Could Facebook really launch its own cryptocurrency – a ‘FaceCoin’, if you will – as has been mooted elsewhere?
Giancola again: “Scalability is one of the most pressing concerns in the blockchain issues, and Facebook will suffer the same issues as any other company using existing cryptocurrencies. It is unlikely to launch its own blockchain or token in the medium term, and is likely to focus on incorporating blockchain to improve data security and privacy. It is possible the social network will work with Ethereum to improve the process of transaction handling.”
Arguing the other corner is Matej Tomazin, COO of Ethereum-based digital asset management firm ICONOMI. Speaking from his base in Ljubljana, Slovenia, he said:
“Platforms are the name of the game. It’s a platform world at the moment. My guess is that Facebook would copy the best solutions available and implement them into their own network. Such a move, they would argue, would be with the intention of maintaining some centralised overview.”
To create trust in a Facebook token, you would need regulators to sit somewhere in the middle of the chain, to be able for them to go in an analyse transactions. You would end up with at least a partly-centralised system with a middle-man that blockchain is designed to avoid.
The social network last experimented with its own little-remembered, centralised, digital currency all the way back in 2009. Called Facebook Credits, they allowed you to spend your own cash on in-app purchases in freemium games like Farmville, but Facebook was too far ahead of the market, and it shut down the scheme in 2011. While the idea of a Facebook Coin may get more traction these days, could Facebook really sign off on a decentralised solution?
“This is a question that is coming up more and more often,” says Tomazin. “In the end, the big players will eat the small players and we will have even more centralisation, no doubt. Just imagine what will happen to the insurance industry when Google or Facebook or Amazon comes to the market with insurance products. They will have much more information about the user, and they will completely disrupt the industry.
Facebook’s FinTech Evolution
Industry analysts suggest that Facebook Messenger will begin to handle finance between contracts, along with cross-border payments, with crypto technology underpinning the lot. Of course, there are already vast marketplaces on Facebook, and with Facebook Payments you can move money around with credit cards, debit cards, mobile banking, even Paypal. There are transaction fees to cover with all of those options, though. If Facebook had its own cryptocurrency, it avoids those transaction fees and boosts its own bottom line.
The average Facebook user may never even encounter cryptocurrency on the user-facing parts of the network. Instead, it may simply create a kind of Facebook Cash, a product that has more in common with Apple Pay than any cryptocurrency. The payments industry is certainly ripe for innovation, says Matej Tomazin.
“In traditional traditional industries, you still need to go separately to the bank, separately to the broker, separately to the custody wallet, but today, people are doing all this through platforms like Coinbase with one easy click.
“With white-labelling it is so simple to just add-add-add services onto your platform, and you just take care of the user expectations and the user experience.”
So, will there be a Facebook cryptocurrency or will it be integrated?
“We will see a lot of blockchain services and products be hidden behind the glossy user-facing parts of sites,” Tomazin believes. “Most people will not notice they are using such innovations.”
However, at the Upfront Ventures conference in February David Marcus said it was unlikely Facebook would integrate payments using crypto.
“Payments using crypto right now is just very expensive, super slow,” he said, before adding that “the communities running the different blockchains need to fix all the issues…[then] maybe we’ll do something.”
While a Facebook-Coinbase takeover would seem to satisfy each organisation’s route to success, the answer really is that nobody other than the people in each boardroom knows what’s going to happen. Finding out could change the financial world as we know it.