Top 4 reasons why Amazon is issuing stablecoins

BY RICHARD HOLDEN

Compilation: Block unicorn

Facebook failed, but another tech giant may soon succeed and be ready for a corporate digital currency.

Buying and selling cryptocurrencies is a huge business, for example, BTC processed $3 trillion worth of transactions in 2021, more than double that of American Express. But most of these trades are only for speculation. The proportion involved in the purchase of actual goods and services is so small that it is difficult to measure. **

What kind of developments might allow cryptocurrencies to replace the U.S. dollar as the primary medium of exchange? This could look a lot like the Libra stablecoin (later renamed Diem) proposed by Facebook (now known as Meta). Although Diem suffered a major setback in 2021 and US Treasury Secretary Janet Yellen refused to support it, that doesn’t mean the model can’t be successful. In fact, Yellen’s refusal to support Diem suggests that she believes private digital currencies could be a potential serious competitor to the US dollar and, therefore, to the US Treasury.

Here, I outline the rationale for the push for private digital currencies and explain why a currency (specifically a stablecoin similar to Facebook’s proposed Libra stablecoin, later renamed the Diem model) could soon make its mark in the United States.

The company’s cash assets

The concept of private digital currencies dates back to at least 1994, when the late Edward de Bono coined the concept of the “IBM dollar.” In Bono’s vision, “large manufacturing companies” should create their own currencies to use to buy their products. He sees this approach primarily as a way for the company to smooth out sales fluctuations and make the business more predictable.

Facebook’s Libra proposal ended in failure, so how did another private digital currency succeed where Libra failed?

It’s important to attract a large number of customers quickly. This is sometimes referred to as a “start-up flywheel” – that is, on a large enough scale for consumers to benefit from network effects. Facebook’s user base may have provided such a customer base, but there is some psychological distance between social media and money.

For others who potentially support private digital currencies, the gap is likely to be much smaller. Joshua Gans and Hanna Halaburda noted in a major 2015 paper that "every currency can be considered a platform, and its attractiveness depends largely on how well people accept it. 」**

Bezos stablecoin

Consider Amazon, which has over 200 million unique visitors per month. Its annual revenue is about $500 billion. A staggering 167 million Americans have an Amazon Prime membership, a service that offers discounts or free shipping at an annual fee of $139, making Amazon their go-to option for shopping. This large and loyal customer base makes it possible for Amazon to launch its own digital currency. Borrowing some of Libra’s ideas, this digital currency might look like this:

The Amazon stablecoin will have four pillars:

Pillar 1 involves the Amazon platform

Amazon will announce that from now on, users can continue to pay for purchases with credit cards, while also using a digital currency called Amazons. Customers can convert USD to Amazon Dollars, at least in the short term, at a 1:1 exchange rate on demand, perhaps for a small fee.

Shopping with Amazon Dollars will entitle the user to a discount on the normal purchase price, which may be 2%. This will provide people with an incentive to use Amazoncoin. In fact, Amazon has launched a virtual currency called “Amazon coins” that can be used to purchase specific apps and games in the Amazon Appstore and make in-app purchases. Therefore, Amazoncoin would be a natural extension of this concept.

As a platform that connects buyers and sellers, Amazon has considerable market power and influence. In principle, Amazon can require sellers to accept Amazon Dollars instead of USD for sales on the Amazon marketplace. However, in the short term, such an arrangement may not be feasible, as Amazon Coin is not useful to retailers, who need to pay suppliers in US dollars, at least initially.

However, this won’t be a problem if Amazon Coins are widely used. For Amazon, the challenge is to drive the adoption of its currency without penalizing sellers on its platform. It’s wise to pay the seller a portion of the sale price, possibly 10% initially, and the rest in USD. Each seller will have a digital wallet into which Amazon Dollars will be paid and Amazon Dollars can be smoothly converted into US dollars.

This approach will create a subtle but useful default case for Amazon. Although it is not difficult for sellers to convert Amazon Coins to USD, having Amazon Coins in a digital wallet that can be used elsewhere on the Amazon platform at any time will be an incentive to use them.

Depositing money in a digital wallet and paying interest will incentivize sellers to keep their funds in Amazon’s digital wallet, rather than transferring to a bank and generating little to no interest there. The introduction of these features will provide Amazon with a natural way to provide additional financial services to small businesses.

Second Pillar

The second pillar involves Amazon Web Cloud Services (AWS), the world’s largest cloud computing company. It started out to run Amazon’s own platform and has since grown into a company that offers similar services to other companies and even university researchers.

Netflix is AWS’s largest customer, followed by Twitch and LinkedIn in terms of monthly spend. Other major cloud services companies operating on AWS include Baidu, BBC, ESPN, Facebook/Meta (for third-party partnerships with existing AWS users), and Turner Broadcasting. It’s like telling these big companies that they have to hold a certain amount of Amazon stablecoins in advance without providing any additional benefits, it’s a bit like asking these companies to pay AWS service fees upfront, rather than being billed in the usual commercial way. It’s like moving working capital (funding for day-to-day operations) directly from AWS to its customers, which is very beneficial to AWS. In this way, adding additional costs to the customer is unlikely to be successful. But Amazon/AWS can form a partnership with some or all of these large companies, which will increase the likelihood that private digital currencies will succeed.

But remember what happened a few years ago, when Facebook’s Libra Association lost key payment companies, including Visa. These companies have two main concerns.

The first is whether the Association will fully comply with regulatory requirements. At a hearing before the House Financial Services Committee in October 2019, Representative Maxine Waters (D-Calif.) asked Facebook program leader David Marcus if the company would wait for Congress to consider appropriate regulation. Marcus replied, "I promise to wait until we have all the appropriate regulatory approvals and all issues are addressed before moving forward. Waters says, "It’s not a commitment. Marcus appeared to be suggesting that Facebook would comply with existing regulations, and the committee’s lawmakers made it clear throughout the hearing that such a major innovation would require significant new regulations.

In a major 2015 paper, Joshua Gans and Hanna Halaburda noted, "Every currency can be considered a platform, and its attractiveness depends largely on how well people accept it. 」

The second concern is Facebook’s reputation and past behavior, including its involvement with Cambridge Analytica. Cambridge Analytica, a British company, collected the personal data of a large number of Facebook users without their consent in the 2010s and used it for political advertising purposes.

These concerns were most articulated by New York State Rep. Alessandria Ocasio-Cortez (D-N.Y.), who told Facebook founder Mark Zuckerberg, “I think you best understand the importance of using a person’s past behavior when making decisions about future behavior. In order for us to make decisions about Libra, I think we need to dig into your past behavior, Facebook’s past behavior in terms of our democracy. Mr. Zuckerberg, when did you personally first learn about Cambridge Analytica’s affairs?”

At the time of this exchange, Visa had withdrawn from the Libra Association and issued the following statement: "[Visa] Evaluations will continue and our final decision will be determined by a number of factors, including whether the Association is able to adequately meet all necessary regulatory expectations. Visa’s continued interest in Libra stems from our belief that a well-regulated blockchain-based network can extend the value of secure digital payments to more people and places, especially in emerging and developing markets. 」

The exchange highlighted the critical importance of reputation in motivating companies to use private digital currencies. A solid customer base may be enough to attract consumers, but big companies like Visa, Netflix, or ESPN need to be confident that engagement will strengthen, not weaken, their reputation.

Facebook had too much baggage after the 2016 election, especially when it came to trusted support for digital currencies. Staying true to Zuckerberg’s famous adage of “move fast, break the mold,” the company has moved quickly when it comes to profit-making and political advertising with individual user data. **

Still, for companies like Netflix and ESPN, private digital currencies can offer significant advantages. Companies like AT&T and Microsoft already allow customers to pay with cryptocurrencies through payment processors such as BitPay. It doesn’t matter why they choose to do it: because it sounds cool, because their customers have a philosophical belief in cryptocurrency, or because of privacy concerns. The important thing is that the customer seems to want this option. A more stable digital currency will be more attractive for larger companies. It may even allow them to expand to other product lines: ESPN, for example, may offer sports betting, an area in which it has already shown interest, although such a move would involve regulatory complexities.

Even if some of these companies are hesitant to accept the leadership of a rival Amazon, they will understand that the power of controlling money in the United States (and perhaps even elsewhere) will create an extraordinary pool of business revenue streams. Even if Amazon has the lion’s share, these business revenue streams are enough to be distributed to all companies. **

Third Pillar

The third pillar is regulation: Amazon will admit that by issuing Amazon stablecoins, it is effectively acting as a money market mutual fund. As a result, the company will readily agree to bring its money business regulated by the SEC as a money market fund (MMF).

MMF is regulated by Section 2a-7 of the Investment Company Act of 1940. The regulation sets out a number of conditions regarding an MMF portfolio, including the credit quality of the assets in which the MMF can invest, the extent to which the portfolio must be diversified, the liquidity it must have, and the maturity structure of the assets held. Amazon can agree to meet or exceed all of these conditions and commit to making its digital currency reserves the cleanest money market fund available.

In this case, the Amazon stablecoin may encounter other regulatory requirements related to banking, especially if it begins to expand into the provision of other financial services such as credit products. However, for Amazon, the main goal is to create a dominant private digital currency, rather than trying to make money through banking or circumvent regulation. Therefore, in this space, Amazon can act in good faith while pursuing to let the flywheel of network externalities spin and expand the use of its digital currency.

Regulatory compliance will also give Amazon stablecoins the stablecoin characteristics of the Libera model, which will have Amazon stablecoin reserves, unlike Libera reserves. Keeping its entire reserves in U.S. government securities would meet regulatory requirements and give Amazon stablecoin holders confidence that they can exchange it for U.S. dollars (or other currencies) at any time, since Amazon is a global business.

Block unicorn Note: The stablecoin features of the Libira model typically involve a digital currency backed by a basket of assets, which may include fiat currencies, government bonds, etc. The aim is to ensure the stability of digital currencies and avoid large fluctuations through diversified asset support. This design is designed to make digital currencies more suitable for use as a medium of exchange, as it does not experience extreme price fluctuations like some cryptocurrencies.

Amazon will essentially operate a money market fund in every currency in which it offers convertibility, which will be an advantage for international consumers looking to avoid exchange rate risk. And, this may give holders of the Amazon stablecoin more confidence that it can be exchanged for the local currency, reducing the risk of customers hedging their exchange rates, thereby reducing the risk of a modern bank run on the Amazon stablecoin.

Fourth Pillar

Pillar 4 is Financial Inclusion: Through its efforts on Libra, Facebook paints a picture of the plight of those left out of the bank – not just in sub-Saharan Africa, but also in South Los Angeles and the South Side of Chicago. Many in these communities are unbanked or pay extremely high fees for using ATM and other basic banking services. Because of the lack of other options, they may be forced to pay extremely high short-term loan fees.

Part of the promotion of private digital currencies may be to provide cheap, secure financial services to people in these communities. While this may not be profitable for incumbent banks and financial services companies, companies like Amazon can easily absorb this cost as a diversion tool. **

Some elements of this idea have to do with one benefit of blockchain technology that was initially underestimated – a financial innovation known as an initial coin offering (ICO). ICO is a new type of financial use of blockchain investment to raise funds, which is achieved through so-called tokens or coins issued on a blockchain distributed network. Tokenization allows the creation of a range of financial instruments, some of which are new and some of which are more superior, with great potential in the financial markets.

To understand how this works, let’s take the example of FIL, which raised $257 million in its 2017 ICO. The basic goal of the project is to build a data storage market. Both buyers and sellers must trade with FIL tokens, FIL commit to issuing up to 200 million FIL tokens. Therefore, in principle, the total value of all FIL tokens will be equal to the revenue generated in that part of the disk storage market, and the value of individual tokens is that revenue divided by the number of tokens.

Owners who hold FIL tokens are essentially buying (and betting on them) securities associated with revenue from the data storage market, and those who hold this security can resell it to people who want to buy storage space on the network. In the ICO, 10% of the tokens are sold to investors, so the total valuation of FIL future revenue is $2.57 billion.

Amazon isn’t the only company that has the potential to create a private digital currency that largely replaces the U.S. dollar, Google also has a large consumer and business user base, with Apple being another clear example.

This is not to say that a private digital currency created by one of these tech giants will create social value. In fact, this will bring complex issues involving tax evasion, monetary policy, illegal activities, etc.

**The challenge for the U.S. government is that maintaining the status quo seems difficult and may require precautionary measures to introduce a central bank digital currency to prevent the creation of a private digital currency to compete with the U.S. dollar. But in any case, it is likely that you will soon see the emergence of such a currency. **