Facebook pushes ahead with crypto wallet plan in bid to 'fix broken payment system'

Facebook (FB) is plowing ahead with plans to shake up the cryptocurrency-based payment system, even as the company contends with new accusations by the federal government that it is abusing its market power.

On Wednesday, David Marcus, the Facebook guru spearheading its crypto efforts, unveiled new details about Novi, the digital wallet side of the initiative he called a “challenger in the payment industry.”

In a lengthy post on Medium, Marcus revealed that Novi has secured licenses or approvals in nearly every state. It will offer free peer-to-peer payments “domestically and internationally” and earn profits from “merchant services” similar to other crypto wallets.

Marcus' post came a day before the Federal Trade Commission refiled a claim that accused Facebook of running an illegal "buy or bury" scheme. Amid widespread concerns surrounding the company's business practices, it's unclear whether the FTC's action could impact Facebook's ambitions in the blockchain sector.

Formerly known as Libra, Diem is the cryptocurrency and blockchain-based payment system Facebook first announced in June 2019. After facing major backlash from global regulators and industry players, the tech giant dramatically scaled back its plans and rebranded the project as "Diem."

Yet unlike Bitcoin (BTC-USD)and other cryptocurrencies like Ethereum (ETH-USD) and Dogecoin (DOGE-USD), Diem will run on a permissioned-blockchain. Instead of using governance models such as Bitcoin’s proof-of-work or Ethereum’s Proof-of-Stake mechanism, which rely on mining cryptocurrency, Diem proposes to use the Switzerland-based Diem Association to process transactions.

The cadre of private companies encountered trouble after losing many of the association’s starting members such as PayPal (PYPL), Mastercard (MA), Ebay (EBAY) and Visa (V), just months after the project’s initial 2019 announcement. Regulatory concern over consumer privacy and potential antitrust risks have further slowed the project's launch.

In May, Diem announced a partnership with Silvergate Capital Corporation (SI), a bank holding company whose subsidiary, Silvergate Bank, provides banking for companies in the crypto space. The partnership stated Silvergate would become the exclusive issuer of the Diem stablecoin, which will have its value pegged to the U.S. dollar. However, some analysts think Facebook's creation will face more regulatory roadblocks.

David Marcus, CEO of Facebook’s Calibra, is pictured with a microphone in front of a Facebook background.
David Marcus, CEO of Facebook’s Calibra, testifies to the House Financial Services Committee hearing on "Examining Facebook's Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System" on Capitol Hill in Washington, D.C., July 17, 2019. REUTERS/Joshua Roberts

A good stablecoin is hard to find

According to Marcus, the current payment infrastructure in the U.S. has remained "broken," and in need of fixing. To service the 62 million Americans and 1.7 billion people worldwide who are still without a bank account, America needs to step up, he declared.

And the executive stated that stablecoins like Diem should at least be given a “fair shot” in providing the answer.

Basically cryptocurrencies backed by governments, other fiat currencies or even exchange-traded commodities, stablecoins have little to no price volatility when compared to unpegged cryptocurrencies like Bitcoin and Ethereum.

And thanks to lower volatility, stablecoins arguably provide a better medium of exchange than other cryptocurrencies. China’s digital yuan, a government-backed cryptocurrency developed by the country’s central bank, has already been deployed in real-world trials since early 2021.

“Contrary to many points of view, stablecoins with strong control at the network and wallet levels unlock enormous opportunities to innovate in this area,” wrote Marcus. Along with 1 to 1 reserves, a “well-designed stablecoin offers better consumer protections than a fiat balance held in any wallet available in the US right now.”

The topic of stablecoins has gotten hotter in finance, and with good reason. With a market capitalization of $64 billion, Tether (USDT-USD), the largest stablecoin, has been criticized for not providing audits of its reserves.

Marcus also argued that “well-designed stablecoins and their ecosystem of wallets” have the potential to improve traditional controls for “anti-money laundering, counter-terrorist financing sanctions and tax compliance.” In short, they can make the financial system more transparent, increase consumer protection and curb dark money floating around the system.

The argument for Diem has gotten a slight boost from El Salvador, which in June announced plans to make Bitcoin legal tender in the country. While Bitcoin is not a stablecoin, its proposed use in El Salvador overlaps with some of the possible benefits and risks associated with stablecoins such as financial inclusion, transparency and legality.

One main goal with the Salvadoran law is to lower the cost of cross-border remittances, which make up 20 percent of the country’s gross domestic product (GDP). Currently, it proposes to do this by using Bitcoin’s lightning network, a payment protocol on top of Bitcoin that makes transactions faster, cheaper and more private.

Gabor Gurbacs, Director of Digital Assets Strategy at the global investment manager, VanEck, thinks that given the right approach, the Facebook initiative will work.

“Facebook has roughly 2.9 billion users. Their efforts and trajectory in digitization may become one of the most important social media developments for the western hemisphere. I hope regulators allow technology companies to innovate,” Gurbacs said.

One model for how this could work might be found in the digital company, Square, which owns the mobile payment service Cash App.

David Hollerith is a Blockchain and cryptocurrency reporter for Yahoo Finance.

For more information about cryptocurrency, check out:

Dogecoin, what is it? How to buy it

Ethereum: What is it and how do you invest in it?

The top 21 crypto leaders to watch in the back half of 2021

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