Last year’s ad against Facebook Inc.’s proposed digital currency Libra. would be the Chief Executive’s worst nightmare. Governments and regulators linked arms to repel a perceived threat to financial sovereignty, financial stability and data privacy. The more Mark Zuckerberg tried to reassure politicians by discussing financial inclusion and innovation, the more he came across as the head of tobacco addictively denying cigarettes. He even acknowledged the problem: “I find I am not the ideal messenger for this.”
That has not stopped him. Given Zuckerberg’s tendency to issue half-hearted apologies before going back to breaking things, it’s no surprise that he’s preparing for a second attempt to launch Libra next year.
There have been a few changes: Libra is now known as Diem – as in Carpe – and Stuart Levey leads his membership council, whose spells at US Treasury and HSBC Holdings Plc make him a combination of Beltway and banking. There is no more mention of rewards for members in the form of “investment tokens.”
The biggest concession for regulators is that Facebook will no longer create a single global currency. Instead of a synthetic Libra craft out of a basket of euros, dollars and yen – like the IMF’s Special Drawing Rights – Diem will feature multiple single currency pans, pegged to each. Converting a dollar or euro into a digital Diem would be a one-to-one transaction, with little chance of wild volatility at the Bitcoin level or overnight disruption on fiat currency. Facebook even proposes that central banks one day use the Diem blockchain to issue digital currencies, similar to China’s tests of digital yuan.
This plea for legality suggests that Facebook is leaning more towards the kind of electronic money offered by PayPal Holdings Inc. or Alibaba Group Holding Ltd., than Bitcoiners revolutionary crypto dreams. Theoretically, digital dollars that can be transferred anywhere and at any time could be a consumer attraction (even if regulation, rather than technology, is the cause of transactional slowdown). Teunis Brosens, senior economist at ING, thinks Diem could end up as a plain vanilla “e-money” wallet. Blockchain expert David Gerard has called it “Paypal-but-it-Facebook.”
This is the “it’s-Facebook” part that should keep governments on their guard. E-money companies are often start-ups with Visa cards. Facebook, along with its WhatsApp and Instagram platforms, has three billion monthly users. If each generates $ 6 in sales, Diem would represent an $ 18 billion revenue stream overnight. After U.S. regulators accused Facebook this month of unfairly abusing its market power to monopolize social media, will it compete fairly in this new arena or squash the competition? Imagine if Facebook ad contracts were one day attached to Diem, or if he was abusing his access to customer financial data. Trustbusters will be glad Libra didn’t get up earlier.
It is likely that more regulation is needed. As German Finance Minister Olaf Scholz said, referring to the change of Libra’s name, “a wolf in sheep’s clothing is still a wolf.”
The nose is already tightening around such stablecoins with Europe imposing more bank-like capital requirements, said Simon Polrot, head of crypto development’s non-profit ADAN. If it soars, regulators may also want an insider’s insight into how Diem manages its cash reserves. In terms of money laundering risks, Zuckerberg will probably sign up to your customer identification rules, but how effective will Facebook be in tackling bad actors? And will it enforce U.S. extraterrestrial sanctions?
Lawmakers might wonder if Facebook needs a banking license, something it doesn’t really want. Zuckerberg will undoubtedly argue that Diem is a society, independent of its empire. But it’s similar to the village of Potemkin populated by payments companies, not-for-profit funds and venture capital. There are no banks, and none of the other FAANGs. Those who left Libra, like PayPal, have not returned.
No one should underestimate Zuckerberg’s decision to launch this product. Faced with widespread criticism, not only is he coming back for more, but his chief financial services chief David Marcus is asking for the “benefit of the doubt” from regulators. That line wouldn’t work in a car repair shop, let alone a bank. Still, Facebook deserves a fair hearing, given that Zuckerberg changed Libra’s message. If it falls on deaf ears, the problem may be the messenger.