2018 was the year the cryptocurrency boom turned bust. After skyrocketing in value in 2017, digital currencies like Bitcoin came undone -- although prices are still much higher than they were a couple of years ago.
The implosion has wreaked havoc on some companies that got a boost from increased interest in digital currencies, but that isn't preventing others from investing in crypto-assets and the underlying blockchain technology. Enter Facebook (NASDAQ: FB), which is reportedly working on blockchain technology -- a stablecoin, to be precise -- which will be integrated into its WhatsApp messaging service to facilitate money transfers in India.
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What's a stablecoin?
A stablecoin is a type of cryptocurrency that's pegged to the value of a country's currency; in the case of Facebook's project, that would be the U.S. dollar. Pegging the currency to the dollar helps minimize price volatility, especially the kind that's plagued Bitcoin as illustrated in the chart above. That could make stablecoins useful instruments in e-commerce and cash transfers.
Stablecoins could be tricky in the real world, though. They likely would be labeled as an asset versus a currency -- which opens up additional regulatory compliance -- and a balance of reserve dollars would need to be held to back them up. Nevertheless, Facebook isn't the only company that has expressed interest in stablecoins.
Japan's second-largest bank, Mizuho Financial Group (NYSE: MFG), is planning on launching a stablecoin pegged to the yen for digital-transactions use in 2019. The bank plans on monetizing the currency by charging a fee to retail shops for its use -- although that fee would be lower than typical credit card fees and payment settlements would be much faster.
Facebook's supposed interest in bringing a stablecoin to India could follow a similar template as Mizuho's, and the focus on the country makes sense. India has over 460 million internet users, making it second in the world behind China. Despite the government's "de-monetization" push as it attempts to foster a cashless economy, most commerce in India is still conducted on a cash basis. Facebook could help hasten the move to cashless online transactions and transfers with its stablecoin project -- a big opportunity given India's population of over 1.3 billion.
Other tech and e-commerce companies are piling into India, too. Walmart's stake in India's biggest e-commerce site Flipkart and Berkshire Hathaway's investment in FlipKart competitor Paytm are two examples. Facebook's move could be a unique way for the company to bet on the country's developing consumer and digital economy without delving into the retail world itself.
What's it to Facebook?
As Facebook's growth in number of users slows and regulatory scrutiny increases, the company has labeled 2018 and 2019 "investment" years. Expenses are expected to increase faster than revenue as the company builds out new tools and services to connect the global community. For long-term investors, that isn't a bad thing.
Facebook has a huge user base. The company says over 2 billion people use at least one of its apps (Facebook, WhatsApp, Instagram, and Messenger). The social-networking king has monetized its platform through advertising, but the nascent digital-payments industry could be a way to diversify revenue and provide a future source of growth.
To be clear, Facebook's stablecoin project is still in the works, and no release date or specifics on how it would actually work have been released. It's nonetheless an exciting development for cryptocurrency believers and Facebook shareholders alike. With a massive global user base on tap, stablecoin could make the social network an attractive way to bet on blockchain technology.
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Nicholas Rossolillo and his clients own shares of Berkshire Hathaway (B shares) and Facebook. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Facebook. The Motley Fool has a disclosure policy.