Facebook announced last week that their digital payments platform, Novi, is nearly ready to launch across multiple states, having passed regulatory checks.
Novi will use a stable cryptocurrency called Diem to launch payments across borders for the 2.7 billion users of the social network.
Just a couple of years ago, Facebook tried to launch a cryptocurrency called Libra, and regulators shot it down for fears of money laundering and lack of government oversite. So how have things changed now, that a company that the FTC is resuing for alleged monopolistic practices can launch a crypto payments system and branch off into finance?
“Significantly” Howard Krieger, CEO and co-founder of unFederalReserve, a decentralized peer-to-peer lending protocol. Regulators have switched over to a new administration that is more skeptical but more willing to talk, and in the past year, acceptance toward cryptocurrencies has grown, he said.
‘Apples and oranges’
“To compare the challenges of Libra to Diem is little apples and oranges,” Krieger said. “You have a bigger acceptance of this notion of a digital currency, and digital payment platform, and a countervailing force in the form of heightened regulatory scrutiny, and also a much more competitive landscape like Diem vying for the same territory.”
Like Coinbase partner Circle, multiple large firms are working toward their system replacing the US dollar, he said. As the internet develops, Facebook and its tech contemporaries try to be the platform of choice when everything moves online.
“And it’s really going to be a short of anyone’s guess as to how it’s going to work out. It comes down to Ocums Razor. The easiest solution is likely the right one,” Krieger said. “You would think that whatever solution, whatever solution is accepted in the US, the government feels like they’re going to have the last say.”
Kreiger said the question becomes does the technology outpace the implementation of regulatory practice.
How did we get here? Rewinding back to 2019, Facebook was shot down when it announced it would develop its own digital currency. Right after the bitcoin blowup of 2018, when the price hit near the $20k mark, before roller coasting down to $4k, it was not an attractive time to think blockchain was more than a bubble.
That’s when Krieger’s firm started building their lending service, originally trying to let people make loans using bitcoin. And since discovering the possibilities of decentralized finance, they switched to a platform that lends in crypto without securitization, using US Dollar Coin (USDC).
“Our company was founded in March 2018, with the thesis at the time, the idea at the time was, let’s make loans against Bitcoin and Ethereum,” Kreiger said. “Then, once we learned about defi, we shifted our focus.”
Since then, Kreiger and team built a system that launched in May with $300 million in supplied cryptocurrency value, he said. Just like Krieger, firms took notice of Bitcoin’s bull run and blockchain promises. Facebook promoted David Marcus, former Paypal president, to the new role of developing Libre.
That didn’t pan out, but the dream of a decentralized financial network stuck around, as bitcoin, Etherium, and dogecoin captured retail and institutional investor attention. As a result, Facebook changed gears and replaced their original plan of backing their coin with multiple currencies to instead having a decentralized coin backed by the US dollar in the Diem Project system.
So what is Diem? It is a payment system based on “stable” coins backed with a fiat currency like US dollars. Unlike bitcoin or Ethereum, Diem is centralized by the founding organizations, including Uber, Shopify, and blockchain companies like Coinbase. These members have a financial stake and voting rights and approve transactions on the network, like a central bank.
Like Facebook, Kreiger’s company is now creating a more centralized product within their lending platform. He said their next goal is to create a vehicle that would let users direct their crypto profits toward more centralized alternative assets, in platforms like YieldStreet and PeerStreet, both platforms that invest in housing or art through crowdfunding.
Associated with big names
Libra was also an association of some big names, like Paypal, eBay, Mastercard, Stripe, and Visa, that jumped ship because of regulatory pressure or to build their own competing system.
Three years later, and Marcus announced on Medium that Nivo has built out a platform that has gained approval by the regulators in a majority of US states. And while it may be billed as a way to send money between friends through Facebook messenger, Krieger said the real cash cow for Facebook is the ability to “horizontally” integrate products within its own network.
“By Facebook having a payment system and payment rails, you’re not going to be necessarily paying your buddies on Facebook,” Kreiger said. “If they can move value around on their own rails, between the different companies that actually build and generate, sell the stuff that you and I want. In essence, they created a micro-ecosystem that completely cuts out the US government altogether.”
That is what makes cryptocurrency such a focus for so many, the ability to move value without the necessity of government oversight.
Lack of trust
The founder of Ethereum, Vitalik Buterin, told Fortune that Facebook suffers from a lack of trust, and bringing in tech experts might not be enough. It is an attempt to capture where the world is going without being left behind as “one of this previous generation, old-world companies,” he told Fortune. Of course, Buterin said he hopes the new internet is built on Ethereum.
As for Krieger, the unFederalReserve is soon to announce banking and trading partnerships in the coming months and years. He said he is excited to see if a corporate currency overtakes the US dollar. In addition, he looks forward to how web 3.0 will turn out, especially because he builds instructors that he hopes will one day run decentralized lending and investing.
“Facebook at the end of the day is a business, and they’re going to make decisions that maximize the return for their shareholders,” Kreiger said. “At the end of the day, they’re there to make money just like any other company.”