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Facebook and the case to buy Coinbase

July 3, 2018
Giancarlo Roma


Facebook and the case to buy Coinbase

Over the past week, rumors of Facebook’s plans to acquire leading US-based cryptocurrency exchange Coinbase have heated up, in large part due to Facebook’s sudden U-turn on their ban on cryptocurrency ads, which was initially announced in January. On the surface, this reversal could amount to merely unlocking the ad revenue lost during the initial ban. But given Facebook’s reputation as a forward-thinking company, it would seem that there is a larger plan in motion, especially in light of its recent embracing of blockchain at a corporate level.

In May, the company announced a massive internal reorganization that included the reassignment of David Marcus, former head of Messenger, to leader of a new experimental blockchain group. In a Facebook post, Marcus explained he is “setting up a small group to explore how to best leverage Blockchain across Facebook, starting from scratch.”

Due to the vague nature of the announcement, it is hard to predict exactly how blockchain will be integrated into Facebook. Given the recent privacy concerns resulting from the Cambridge Analytica scandal, it would logical to reason that Facebook might explore ways to employ blockchain to address data misuse and weed out bad actors. However, given Marcus’ background in the payment space–he founded a micropayments company that was acquired by PayPal, where he served as an executive before joining Facebook to revamp Messenger, to which he introduced P2P payments–it appears safe to assume Facebook is not only interested in blockchain technology, but cryptocurrency as well.

And here’s where the acquisition theory really gets its legs: Marcus sits on the board of Coinbase. With all this smoke, there just might be some fire.

Acquiring Coinbase, simply as a standalone business, may seem like a no-brainer for any large tech company looking to secure a piece of the cryptocurrency pie. Coinbase is the largest cryptocurrency exchange in the United States, facilitating over $160 million worth of trades per day, and recently announced a self-valuation of $8 billion and deemed itself a “self-sustaining” company. In recent months, it has also greatly expanded its offerings, including a suite of institutional services and an index fund.

However, where the potential acquisition gets interesting is with the introduction of a cryptocurrency into Facebook’s ecosystem. As the platform stands now, there are numerous potential social use cases that arise if even one existing cryptocurrency (like Bitcoin) were supported: users could tip other users who post meaningful content, donate directly to worthy causes, fund new ideas, or transfer funds–all securely, with faster processing speeds and lower fees, and perhaps most importantly, across international borders.

These P2P features would not only enhance user experience, but generate revenue for Facebook–in order to use cryptocurrency on the platform, users would first have to purchase it, likely through Coinbase. Currently, exchanges are the number one on-ramp for new adopters of cryptocurrency; put simply, most people come to own their first Bitcoin or Ether from buying it on an exchange, as opposed to receiving it as payment, for example. And Coinbase, with its sleek design and user-friendly interface–and the fact that it has a mobile app–is well-positioned to continue to be the leader in terms of onboarding new US-based users.

But there is another, more ambitious direction Facebook could choose to go in–it could release its own, native cryptocurrency. This coin could fulfill all the aforementioned social use cases, as well as create whole new ways for platform participants to engage with each other: users could pay Facebook to opt out of ads; top creators could be compensated fairly and nearly instantly for their content (creating an incentive to remain posting on Facebook); brands could increase engagement by rewarding users with coins. In short, it would allow for value to be created in ways that don’t currently exist.

And the creation of new value is necessary for Facebook’s continued success. Although the company has succeeded wildly in monetizing its platform, it is facing a looming revenue problem–the majority of its revenue comes from selling ads, but it is literally running out of places to put them. In order to keep pace with its own precedent for rapid growth, Facebook will need to look for new ways to generate revenue, and creating more interactions where value–represented by a native coin–is exchanged between users, creators, brands, and the platform itself is an immediately available way to do just that. Especially, that is, if Coinbase were the only exchange on which this native coin could be purchased.

Combining Coinbase’s ability to onboard people into cryptocurrency with Facebook’s enormous, connected network could potentially create a complete, end-to-end cryptocurrency user experience. People could buy, store, send, receive, and pay with cryptocurrency, all without leaving Facebook. This sort of vertical integration is the final frontier for enterprise-level companies like Facebook, as controlling users’ journey from start to finish allows for the full value of their actions and transactions to be captured.

Facebook has over two billion monthly active users as of Q1 of 2018. If it were its own country, it would be the most populous in the world by well over a 50% margin. In theory, it is long overdue for its own native currency. And acquiring Coinbase may be the most effective way to make that a reality.

Time will tell if an offer does materialize. But until it does, the two companies will continue to operate separately, just a shade of blue apart.