Why did Amazon launch the Bezos stablecoin?

Article Author: RICHARD HOLDEN
Article Compiler: Block unicorn

Facebook failed, but another tech giant may soon succeed, ready to embrace corporate digital currency.

Trading cryptocurrencies is a massive business; for instance, Bitcoin processed $3 trillion in transactions in 2021, more than double that of American Express. However, most of these transactions are purely speculative. The proportion of transactions involving the purchase of actual goods and services is so small that it is difficult to measure.

What kind of developments could allow cryptocurrencies to replace the dollar as the primary medium of exchange in the U.S.? It might look quite similar to the Libra stablecoin proposed by Facebook (now known as Meta), which was later renamed Diem. Although Diem faced significant setbacks in 2021, with U.S. Treasury Secretary Janet Yellen refusing to support it, this does not mean that the underlying model cannot succeed. In fact, Yellen's refusal to support Diem indicates that she views private digital currencies as potential serious competitors to the dollar, and thus a challenge to the U.S. Treasury.

Here, I outline the reasons driving private digital currencies and explain why a currency (specifically, a stablecoin similar to the Libra stablecoin proposed by Facebook, later renamed Diem) could soon emerge in the U.S.

Corporate Cash Assets

The concept of private digital currency dates back to at least 1994, when the late Edward de Bono proposed the idea of an "IBM dollar." In de Bono's vision, "large manufacturing companies" should create their own currencies for purchasing their products. He primarily viewed this scheme as a way for companies to smooth out sales fluctuations and make their businesses more predictable.

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

Quickly attracting a large customer base is crucial. This is sometimes referred to as the "launch flywheel"—that is, achieving sufficient scale to allow consumers to benefit from network effects. Facebook's user base could have provided such a customer base, but there is some psychological distance between social media and currency.

For other potential supporters of private digital currency, this gap may be much smaller. Joshua Gans and Hanna Halaburda pointed out in a significant paper in 2015: "Every currency can be viewed as a platform, and its appeal largely depends on how well people accept that platform."

Bezos Stablecoin

Consider Amazon, which has over 200 million unique visitors each month. Its annual revenue is about $500 billion. Remarkably, 167 million Americans have Amazon Prime memberships, which offer discounts or free shipping for an annual fee of $139, making Amazon their preferred shopping option. This vast and loyal customer base makes it possible for Amazon to launch its own digital currency. Drawing on some ideas from Libra, this digital currency might look like this:

The Amazon Stablecoin Will Have Four Pillars:

The first pillar involves the Amazon platform: Amazon will announce that, starting now, users can continue to shop using credit cards while also using a digital currency called "Amazon Coins." (I like to call it—"Bezos Bucks" or BBs, but that might not be a reasonable name for Jeff Bezos.) Customers can exchange dollars for Amazon Coins, and at least in the short term, they can also redeem them back to dollars at a 1:1 exchange rate, perhaps with a small fee.

Shopping with Amazon Coins will allow users to enjoy discounts on normal shopping prices, possibly around 2%. This will provide an incentive for people to use Amazon Coins. In fact, Amazon has already launched a virtual currency called "Amazon Coins," which can be used to purchase specific apps and games in the Amazon Appstore and for in-app purchases. Therefore, Amazon Coins will be a natural extension of this concept.

As a platform connecting buyers and sellers, Amazon has considerable market power and influence. In principle, Amazon could require sellers to accept Amazon Coins instead of dollars for sales on the Amazon marketplace. However, in the short term, such an arrangement may not be very feasible, as Amazon Coins would be of no use to retailers who need to pay suppliers in dollars, at least initially.

However, if Amazon Coins become widely used, this will not be an issue. The challenge for Amazon is to promote the adoption of its currency while not penalizing sellers on its platform. A wise approach would be to pay sellers a portion of the sales price in Amazon Coins, initially perhaps 10%, with the remainder paid in dollars. Each seller would have a digital wallet where Amazon Coins would be deposited, and Amazon Coins could be smoothly converted into dollars.

This approach would create a subtle but useful default situation for Amazon. While converting Amazon Coins to dollars may not be difficult for sellers, having Amazon Coins stored in a digital wallet, ready to be used elsewhere on the Amazon platform, would serve as an incentive to use them.

Depositing funds in a digital wallet and earning interest would incentivize sellers to keep their funds in Amazon's digital wallet rather than transferring them to a bank where they earn almost no interest. Introducing these features would provide Amazon with a natural way to offer additional financial services to small businesses.

The Second Pillar

The second pillar involves Amazon Web Services (AWS), the world's largest cloud computing company. It was initially designed to run Amazon's own platform and later evolved into a company providing similar services to other companies and even university researchers.

Netflix is AWS's largest customer in terms of monthly spending, followed closely by Twitch and LinkedIn. Other major cloud service companies operating on AWS include Baidu, BBC, ESPN, Facebook/Meta (for third-party collaborations with existing AWS users), and Turner Broadcasting. It would be like telling these big companies that they must hold a certain amount of Amazon stablecoins in advance, without offering any additional benefits, akin to requiring these companies to prepay for AWS services instead of billing in the usual business manner. This would effectively transfer working capital (the funds for daily operational activities) from AWS to its customers, which would be very beneficial for AWS. Adopting this approach, however, is unlikely to succeed if it adds extra costs for customers. But Amazon/AWS could form a partnership with some or all of these big companies, which would increase the likelihood of success for private digital currency.

But remember what happened a few years ago when the Libra Association lost key payment companies, including Visa. These companies had two main concerns.

The first was whether the Libra Association would fully comply with regulatory requirements. During a House Financial Services Committee hearing in October 2019, Representative Maxine Waters (D-Calif.) asked Facebook project head David Marcus whether the company would wait for Congress to consider appropriate regulations. Marcus replied, "I commit to waiting until we have all the appropriate regulatory approvals and have addressed all issues before moving forward." Waters said, "That doesn't count as a commitment." Marcus seemed to imply that Facebook would comply with existing regulations, while the committee's legislators made it clear throughout the hearing that such a significant innovation might require substantial new regulations.

Joshua Gans and Hanna Halaburda pointed out in a significant paper in 2015: "Every currency can be viewed as a platform, and its appeal largely depends on how well people accept that platform."

The second concern was Facebook's reputation and past behavior, including its involvement with Cambridge Analytica. Cambridge Analytica was a British company that collected vast amounts of personal data from Facebook users without their consent in the 2010s and used it for political advertising purposes.

These concerns were most clearly articulated by New York Congresswoman Alexandria Ocasio-Cortez (D-N.Y.), who told Facebook founder Mark Zuckerberg, "I think you understand best the importance of using a person's past behavior when making decisions about future behavior. In order for us to make a decision about Libra, I think we need to look closely at your past behavior, Facebook's past behavior in our democratic system. Mr. Zuckerberg, when did you first learn about the Cambridge Analytica matter, what year and month?"

At the time of this exchange, Visa had already exited the Libra Association and issued the following statement: "[Visa] will continue to evaluate, and our ultimate decision will be determined by multiple factors, including whether the association can adequately meet all necessary regulatory expectations. Visa's ongoing 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."

This exchange highlighted the critical importance of reputation in encouraging companies to use private digital currency. A solid customer base may be enough to attract consumers, but large companies like Visa, Netflix, or ESPN need to be assured that participation will enhance rather than undermine their reputation.

Facebook has too much baggage after the 2016 election, particularly regarding credible support for digital currency. True to Zuckerberg's famous motto—"Move fast and break things," the company did indeed move quickly in profiting from personal user data and political advertising.

Nevertheless, for companies like Netflix and ESPN, private digital currency could offer significant advantages. Companies like AT&T and Microsoft have already allowed customers to pay with cryptocurrencies through payment processors like BitPay. The reasons they choose to do so are not important: whether it sounds cool, their customers have a philosophical belief in cryptocurrencies, or for privacy reasons. What matters is that customers seem to want this option. For large companies, a more stable digital currency would be more attractive. It could even allow them to expand into other product lines: for example, ESPN might offer sports betting, an area it has already shown interest in, although such a move would involve regulatory complexities.

Even if some of these companies are hesitant to accept Amazon as a competitor, they will understand that in the U.S. (and possibly elsewhere), the power to control currency will create an extraordinary pool of business revenue streams. Even if Amazon captures the largest share, these business revenue streams are sufficient to be distributed among all companies.

The Third Pillar

The third pillar is regulation: Amazon will acknowledge that by issuing Amazon stablecoins, it is effectively acting as a money market mutual fund. Therefore, the company will gladly agree to have its currency business regulated by the U.S. Securities and Exchange Commission as a money market fund (MMF).

MMFs are governed by Section 2a-7 of the Investment Company Act of 1940. This provision sets forth multiple conditions regarding MMF portfolios, including the credit quality of the assets that MMFs can invest in, the degree to which the portfolio must be diversified, the liquidity it must have, and the maturity structure of the assets held. Amazon could agree to meet or exceed all these conditions and commit to making its digital currency reserves the cleanest money market fund.

In this case, Amazon stablecoins may encounter other regulatory requirements related to banking, especially if it begins to expand into offering credit products and other financial services. However, for Amazon, the primary goal is to create a dominant private digital currency, not to try to profit from banking or evade regulation. Therefore, in this area, Amazon can fully act in good faith while pursuing the goal of spinning the network externality flywheel and expanding the use of its digital currency.

Regulatory compliance will also give Amazon stablecoins the stablecoin characteristics of the Libra model, with reserves of Amazon stablecoins instead of Libra reserves. Keeping its entire reserve in U.S. government securities will meet regulatory requirements and assure Amazon stablecoin holders that they can redeem them for dollars (or other currencies, as Amazon is a global company) at any time.

Block unicorn note: The stablecoin characteristics of the Libra 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 the digital currency through diversified asset backing, avoiding significant volatility. This design is intended to make the digital currency more suitable as a medium of exchange, as it does not experience extreme price fluctuations like some cryptocurrencies.

Amazon will essentially operate a money market fund for every currency it offers convertibility in, which will be an advantage for international consumers looking to avoid exchange rate risks. Moreover, this may instill greater confidence in holders of Amazon stablecoins, as they can be converted into local currencies, thereby reducing the risk for customers of engaging in currency hedging and minimizing the risk of a modern bank run on Amazon stablecoins.

The Fourth Pillar

The fourth pillar is financial inclusion: Through its efforts on Libra, Facebook depicted the plight of those excluded from banking—not just in sub-Saharan Africa but also in South Los Angeles and Chicago's South Side. Many people in these communities lack bank accounts or pay exorbitant fees to use ATMs and other basic banking services. Lacking other options, they may be forced to pay extremely high fees for short-term loans.

The promotion of private digital currency may partly aim to provide affordable, secure financial services to these communities. While this may not be profitable for existing banks and financial service companies, companies like Amazon can easily absorb this cost and view it as a customer acquisition tool.

Some elements of this idea relate to a benefit of blockchain technology that was initially underestimated—known as Initial Coin Offerings (ICOs). ICOs represent a new financial use of blockchain for raising funds, achieved through the issuance of so-called tokens or coins on a distributed blockchain network. Tokenization allows for the creation of a range of financial instruments, some of which are new and some superior, with enormous potential in financial markets.

To understand how this works, let’s take Filecoin as an example, which raised $257 million in its 2017 ICO. The project's fundamental goal is to establish a data storage market. Buyers and sellers must use FIL tokens for transactions, and Filecoin promises to issue a maximum of 200 million FIL tokens. Thus, in principle, the total value of all FIL tokens will equal the revenue generated from that portion of the disk storage market, with the value of a single token being that revenue divided by the number of tokens.

Holders of FIL tokens are essentially purchasing securities related to the revenue of the data storage market (and betting on it), and those holding such securities can resell them to those wanting to purchase storage space on the network. In the ICO, 10% of the tokens were sold to investors, thus valuing Filecoin's future revenue at $2.57 billion.

Amazon is not the only company that could create a private digital currency that could largely replace the dollar; Google also has a vast consumer and business user base, and Apple is another obvious example.

This is not to say that a private digital currency created by one of these tech giants would create social value. In fact, it would raise complex issues involving tax evasion, monetary policy, illegal activities, and more.

The challenge facing the U.S. government is that maintaining the status quo seems fraught with difficulties, and it may need to take preemptive measures by launching a central bank digital currency to prevent the establishment of a private digital currency that competes with the dollar. But in any case, you are likely to see the emergence of such a currency soon.