Facebook set to deliver cryptocurrency-tied digital wallet
17:48, 18 August 2021
Facebook says it is ready to market a digital wallet, tied to the company’s own Diem cryptocurrency, that would allow consumers to make online payments without transaction fees.
David Marcus, the head of the social media giant’s financial services unit, revealed the news Wednesday 18 August in a memo published on Medium.com. Marcus contended that Facebook’s digital wallet, Novi, could repair the “broken” payments infrastructure that now exists in the US.
“Novi is ready to come to market,” he wrote. “It’s regulated, and we’re confident in our operational ability to exceed the high standards of compliance that will be demanded of us.”
Company processed $100bn in digital payments in past year
According to Marcus, Facebook completed $100bn in online payments over the past year through conventional means, but the company is looking to expand its digital-payment services. While the digital wallet would be free to consumers, the company would later monetise – and profit from – it through merchant services.
“We trust that people will prefer a service that is cost-free and more convenient to ones that are significantly more expensive and not consumer-centric,” wrote Marcus.
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Plan still requires regulatory approval
While Novi has licences or approvals in most US states, Facebook’s plan to tie it to the company’s Diem stablecoin would still require regulatory acceptance. The memo pushed regulators to accept Facebook’s plan to use Novi in conjunction with Diem and regular or “fiat” currencies, such as dollars and Euros. Marcus argued that Facebook’s system could offer greater consumer protection, better reduce money-laundering and terrorist financing risks, and move money around the world faster than banks currently do.
He said Facebook could profit by only offering domestic and cross-border online payments using fiat money – and the company might do that. But Facebook does not want to miss its shot at creating an “open, interoperable protocol for money on the Internet and truly change the game for people and businesses around the world.”
Stablecoins draw concerns
Stablecoins have run into regulatory roadblocks due to concerns they lack sufficient cash reserves. Facebook opted to use Diem as its stablecoin after a more ambitious plan to use its larger-scale Libra stablecoin drew resistance from the US Congress. Diem is operated by a non-profit group of the same name, which Marcus serves as a director. The association is seeking the necessary regulatory approvals.
But stablecoins alone, he said, can’t solve online payment problems. A cryptocurrency needs to be combined with an underlying payment network that’s cheaper, faster, safer, interoperable and programmable.
“A well designed stablecoin — one that always holds (one-to-one) reserves in cash at US banks and very short-term (US Treasure bills), with the issuer holding capital as a buffer – arguably offers better consumer protections than a fiat balance held in any wallet available in the US right now,” he wrote.
Rollout will be a “long journey”
While Novi faces perception problems, Facebook is also attempting to bolster its own image, which has been tarnished by privacy violations that resulted in the company being fined $5bn in 2019 by the US Federal Trade Commission. Marcus said he has heard repeatedly that, “this proposal would be so great if only Facebook wasn’t involved.” But, he noted, people and businesses in 160 countries have used its platform to make payments with 55 currencies, so the company deserves “a fair shot.”
“While Facebook still has more work to do to rebuild trust, it has also consistently delivered massive value for consumers involving similar important services,” wrote Marcus, noting the company has provided communications offerings, “once only reserved for wealthy people.”
Contrary to perceptions, he said, Novi’s rollout will be “a long journey.
“Change is long overdue,” wrote Marcus. “It’ll happen one way or another.”
Appreciation for the plan
Rutger van Faassen, Head of Innovation, New Markets and Industry Ecosystems at New York-based data intelligence firm Curinos, said in an interview with capital.com that he appreciates what Marcus is trying to do.
“In the digital world that we live in today, it’s still very hard to move money – especially across borders,” said van Faassen, whose firm provides consultancy on cryptocurrency for financial institutions.
Some observers criticised Marcus on Wednesday for seeking to tie Novi to a stablecoin instead of Bitcoin. But van Faassen said stablecoins are susceptible to less volatility than Bitcoin because they are pegged to countries’ currencies.
Bitcoin, which is not tied to national currencies, has been prone to value fluctuations. Stablecoin values would rise and fall in conjunction with fiat-currency exchange rates.
Van Faassen suggested that Facebook’s plan has come under criticism because of its large size and influence. But the scrutiny and Facebook’s large size could prevent them innovating sufficiently and achieving its goal.
“Maybe they won’t be the one to get to the finish line, because there are so many eyes on them,” he said.
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