While exploring the Gift Shop shortly after Facebook's announcement, we discovered that this medium may in fact present opportunities for currency arbitrage. Facebook has since changed the process for Gift Shop transactions. Users now must choose their currency option under Account Settings - Payments, rather than make that choice at the time of purchase. In addition, it would seem that the option to purchase additional Credits (i.e. more than what is necessary to effect the current transaction) has temporarily gone away. Nevertheless, our conclusions still hold.
Facebook's local currency quotations are not in real time. In fact, they appear to be based on the previous day's closing value, and they apparently remain fixed for the following day. This means that Credit buyers have the ability to exploit this time distortion, and the pricing differential which may result. Depending on volatility, buyers could realize a substantial discount. Here's how it works:
1. Identify currencies experiencing a meaningful (i.e. 2% or more) intraday drop against the USD from the previous day's close.
2. Purchase credits in that currency (quoted at the previous day's close).
3. The purchase is converted into USD by your credit card company (for which you will be charged a conversion fee ranging from 1 to 3% of the transaction).
4. Enjoy your discounted Credits, or perhaps resell your Credits for dollars using Facebook's proposed transfer system when it becomes available.
Now, there are numerous caveats and assumptions here, not the least of which being that when using any of the myriad currency converters available to derive current exchange rates we are quoted the bank or wholesale rate - that is, the rate which applies to transactions sized in the millions of dollars. Whether credit card companies use this rate when converting your transaction is a bit of a mystery, thus transaction costs could substantially erode if not wipe out any discount. Also, this is of course not true arbitrage in the sense that (as of yet) Credits cannot be readily converted back into hard currency via Facebook. But to the extent that Credits can be used as currency in the Gift Shop and within a growing list of popular Facebook applications, it's as close as you can get. Should Facebook roll out its Credit transfer system (currently under private beta), however, things could get interesting. Theoretically, one could buy Credits in a currency experiencing a significant intraday drop against the dollar, then use the Credit transfer system to offer Credits in USD at less than the going Facebook rate. Using any number of payment providers to effect the transaction, the arbitrage is complete.
As with any arb trade designed to exploit tiny price differentials, in order to realize any meaningful return substantial sums would have to be involved. Transaction costs (the credit card conversion fee and the payment provider's fee) would have to be minimal, and the rate at which credit card companies convert purchases into your home currency would be a factor as well. Nevertheless, we find this to be an intriguing possibility, and as Facebook inches closer to full deployment of its virtual currency, we will continue to monitor. We hope that Facebook will be hedging their exposure.
As with any arb trade designed to exploit tiny price differentials, in order to realize any meaningful return substantial sums would have to be involved. Transaction costs (the credit card conversion fee and the payment provider's fee) would have to be minimal, and the rate at which credit card companies convert purchases into your home currency would be a factor as well. Nevertheless, we find this to be an intriguing possibility, and as Facebook inches closer to full deployment of its virtual currency, we will continue to monitor. We hope that Facebook will be hedging their exposure.
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