Facebook (FB) clearly has an excellent grasp of the power of network effects -- the way in which a platform's total value grows as more participants are added -- in the world of social media and messaging apps. And from the looks of things, the company also understands the critical role network effects play in getting a new payments platform off the ground.
Six weeks after reporting that Facebook is seeking $1 billion in total investments for its much-reported cryptocurrency project, The Wall Street Journal reports that Facebook has convinced more than a dozen firms, including Visa (V) , Mastercard (MA) , PayPal (PYPL) and Uber Technologies (UBER) , to invest around $10 million apiece to help fund its cryptocurrency. The paper also says that online travel giant Booking.com (BKNG) , Latin American e-commerce leader MercadoLibre (MELI) and privately-owned Stripe, whose platform is used by many big-name tech and e-commerce firms to process payments, have "signed on to the project."
Markets like what they see: Facebook's stock is up 2.2% near the close on Friday, in spite of 0.4% drop for the Nasdaq.
In line with prior reports, the WSJ says Facebook's coin will be "pegged to a basket of government-issued currencies to avoid the wild swings that have dogged other cryptocurrencies." It also says neither Facebook nor any other member of the consortium being formed to govern the coin -- it will be known as the Libra Association -- have direct control over the currency.
Last month, the BBC reported that Facebook wants to launch its coin in 12 countries by Q1 2020, and has talked with U.S. and British regulators about the effort. The Financial Times, meanwhile, reported that Facebook has talked with major financial trading firms and cryptocurrency exchanges about supporting its coin.
Much is still unknown about how the coin will function -- more should be learned next week, when Facebook is expected to share a white paper about the coin. But a lot has already been reported about the types of use cases that Facebook envisions.
In addition to handling the types of digital payments that are often handled today via credit cards or PayPal accounts -- possibly while charging little or nothing in terms of transaction fees -- Facebook reportedly wants to enable cheap international money transfers. The company has also been reported to be interested in supporting digital content microtransactions that are too small to cost-effectively support via credit cards, and to be mulling the idea of "paying users fractions of a coin when they view ads, interact with other content or shop on its platform."
By getting firms such as Uber, Booking, MercadoLibre and Stripe to support the coin off the bat, and also supporting it on its own massive platforms, Facebook might be able to avoid the kind of chicken-and-egg dilemma that has derailed so many other payments initiatives over the years. Throw in support for microtransactions and cheap cross-border payments, and the coin could quickly have some appeal for a subset of Facebook users.
And even if the company doesn't collect any transaction fees from the coin's usage, Facebook could benefit from it to the extent that it boosts time spent on its core apps, drives more advertising activity on those apps and/or provides it with transaction data that its ad business can leverage.
There are still some big question marks, however. Chief among them: How interested will consumers who are getting cash back and/or other perks via their credit card loyalty programs be in using the coin for standard digital transactions? For such consumers, a 2% or 3% discount given on account of a lack of payment-processing fees might not be enough of an incentive to use it.
It's also worth wondering, given the obvious risk that Facebook's coin could pose to their existing businesses, to what degree companies such as Visa, Mastercard and PayPal will support it. For such firms, being involved in Facebook's project at such an early stage might simply be a case of keeping your friends close and your enemies closer, with the goal of not being caught flat-footed in the event that Facebook's coin takes off. Certainly, the $10 million or so that they're reportedly putting into the project amounts to pocket change for them.
Nonetheless, given the backers that Facebook has reportedly lined up for its coin as well as what has been reported about its potential use cases, it makes sense that investors are getting a little more enthusiastic about the project's business potential.