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Decentralization vs Convenience, Facebook & Crypto

If you think about it, the benefits of decentralization sometimes tend to get overhyped. For instance, when you are ordering an Uber, all you really want is a cab with in a reasonable time, that can get you to where you want to go. The thing that disrupts Uber will likely have many things, including potentially some element of decentralization. But one of the key ‘must-have’ features, if not the key feature, is likely to be a radically better user experience, possibly AR related as well. A potential slice of an Uber TopCo through a token or some sort of loyalty reward token are all nice-to-haves, not must-haves.

Additionally, centralization brings scale benefits; which is why we think AWS will continue to grow stronger, and it will take a few iterations for the Filecoins and the Siacoins to pose any relevant threat, at the very least. Decentralization therefore has to be seen in the context of where it is applied, irrespective of what the crypto anarchists would have you believe. As the experienced consultant might sagely comment on most such situations – it depends!

So, what do we make of Facebook’s foray into blockchain and cryptocurrencies.  They have been quietly building up a team, and building up a head of steam. Unlike most ‘skunk-work’ projects, they are a large, super-successful enterprise, which, on the plus side, will help them get the regulatory stuff sorted out in a much more structured front-and-centre fashion with all the legal and policy muscle that only FB and a select few can bring to bear. The centralization will also help them build and iterate on a fantastic product development timeline with a laser focus on usability.

Facebook (FB) has the strategic leverage to go down multiple paths with its crypto/blockchain strategy; Given its massive amounts of user data, it could make a play for being an identity provider. It could open an exchange like Coinbase does, or more likely, Robinhood; or it could play in the payments space and then branch into financials services, leveraging the massive amounts of data generated. It could also airdrop coins to all users, which could then be used to incentivize commerce on the platform across its massive network of businesses and end-users; or it could just accelerate current ‘legacy’ usage, which by many measures is peaking, (although the prospect of a good chunk of humanity liking, posting and actively sharing daily activities on Facebook/Instagram/Whatsapp with renewed vigor, with the added carrot of a potential ‘FBCoin’ dangling in front of them might be too dystopian to behold).

Out of all the above, it seems like FB has decided to go with the payments play, in a manner that also implicitly leverages its ability to verify identity. Payments and remittances are a huge TAM, especially in the initial target market of India, which leads global remittances with ~ 70b annually. And India is arguably the most important market for Whatsapp; there are entire businesses built around WhatsApp, and companies are raising huge sums to address opportunities in WhatsApp-enabled social commerce.

Between the Facebook platform, WhatsApp and Instagram, FB probably has close to half of humanity on its platform. It has access to their habits, their preferences, their spending patterns, as well as a truckload of data that can be sliced and diced with AI/ML and all that jazz. One of the big challenges of building any market place is to build up network of suppliers and consumers and reach scale.  FB already has this installed base, and also has data on them for any KYC/AML requirements necessitated by any regulator. Admittedly, it will take some time for India regulation to play out, as India has been extremely ambivalent in its approach to cryptocurrencies, but FB could very design and position this as a pure payments solution with all the ‘blockchain/crypto’ voodoo stuff black-boxed and under the hood.

If they pull this off in India, FB could very well build a strong competitor to the likes of PayTM etc in India, and even more importantly, existing payment giants such as Mastercard and Visa. FB Payments could be a really big deal. And the template for payments and commerce  allied to a chat application has already been pioneered in Asia by the likes of WeChat, Line and Kakao.

Let us now remove those rose tints, and look at what might go wrong. Quite a few things actually; a couple of years ago, FB tried to pioneer a program called ‘Internet Basics’ in India, something that was purportedly aimed at providing internet access to the masses at the bottom of the pyramid. Basically, the program was aimed at enabling internet access for folks that were not already online in India, a very large demographic of close to 250 million people. Corporate self-interest as always took precedence, and what effectively came out as a product was a program that enabled these folks free internet access, as long as they limited their surfing to Facebook and affiliate partner properties. The program was widely ridiculed, and became part of the ‘net-neutrality’ debate as well. Execution is always fraught with complexities.

Apart from this there is the issue with data privacy and security. Funnily enough, we do not think these are such big issues, especially in light of what we mentioned above around ease of use. Most of the current tech valuations are built around monetizing data acquired from users, as we all know, and quite a number of the emerging leaders as well; Robinhood sells user trading data to HFT traders, for instance. The decentralization revolution might yet change this someday, but for now, it is very much status quo in favor of the entrenched oligarchy. A well-designed user experience, in conjunction with the appropriate ‘growth-hack’, will be more than enough to get past the defences of 99% of folks, and access their critical data.

(In a dystopian future, in a sheer, brazen act of economic rent-seeking, some oligarch in India, or another developing nation, will offer something like free genetic testing to the masses, who will have no problem, thanks to hyperbolic discounting as well as any number of other inevitable human cognitive biases, giving away their genetic data for eternity to aforementioned corporate, who will of course then proceed to slice and dice the data and sell them onto any number of third-parties ranging from insurers, healthcare provides, employers, government agencies and so on and so forth for some black-mirror style scenarios. This process, by the way, is already underway in the Middle Kingdom, apparently)

There are of course the technical challenges of designing an appropriate stability mechanism, getting wider acceptance for this ( although airdrops and other growth hacks will help), and solving the regulatory hurdles in a country like India where there are multiple regulators competing with each other on the best way to regulate a rapidly evolving technology such as blockchain. Of course, a host of competitors and other stakeholders, such as PayTM (backed by Softbank) Tencent, WeChat, Mastercard and Visa, the Indian banks, and most importantly the Indian Government itself which has a payment system of its own, will be watching.

Moving money (legally) is still a massive fundamental problem that can be made faster and cheaper. This is a situation where a great team meets a great market. There are some near term regulatory clouds to clear, and the obvious challenges on execution. Facebook however is one of the few companies that could actually pull this off. As regulations mature, payments will end up becoming a data play, and price will continue to go lower. It is not inconceivable to think of a future scenario where companies are willing to transfer money for free, in exchange for access to user data, which continues to be the real gold mine. Few are better than one of the Valley tech giants to actually execute this playbook.

Wishing you all a Merry Christmas, wherever you are!

Meanwhile in Crypto Wonderland….

“FB Developing Crypto Payment Solution” According to Bloomberg, social media giant Facebook is developing a way to use cryptocurrency to transfer money on WhatsApp messenger in India. Facebook intends to use a stablecoins as the medium of transaction instead of bitcoin, possibly due to the ease of use and lower volatility. Earlier, Facebook’s hiring of former PayPal President David Marcus had sparked rumors that the company would eventually dive into financial services.

“Iran Crypto Makes US Double Down on Sanctions” Last week, the US Congress introduced a bill called the “Blocking Iran Illicit Finance Act” that threatens Iran with more sanctions in response to activity that could see Iran develop its own national cryptocurrency. A corresponding bill calls for additional sanctions against anybody who could be aiding Iran to develop such a digital currency, including sanctions against any foreign person that might facilitate transactions for the “sale, supply, or transfer” of such a currency.

“Crypto Winter Hits Nvidia” The drastic decrease in crypto mining profitability has hit graphics processing unit (GPU) producer Nvidia hard as the firm experienced a massive sell-off of its shares in Q4 2018, cutting the stock price by 54 percent and making it the worst performer in the S&P 500. Earlier, from 2016 to September 2018, Nvidia’s market value had grown from $14 billion to $175 billion on the back of increased demand for GPUs in artificial intelligence (AI) and cryptocurrency mining.

“Vctrade Announces Crypto Deposits”Vctrade, a crypto exchange recently launched by Japanese financial giant SBI Holdings, has announced the implementation of Bitcoin, Ethereum and Ripple deposits. The announcement further notes that the exchange is also considering Bitcoin Cash deposits after further evaluation. SBI explained that cryptocurrency withdrawals will not be available until late January 2019, and will be limited to a hardware wallet that the company refers to as “designated wallet”.

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