Facebook is on the cusp of launching an ambitious new cryptocurrency-based payment system that it says will boost financial inclusion and slash transaction fees. But experts have questioned whether the technology will really achieve those goals.
At the center of the company's plan is a digital wallet called Novi designed to let people trade Diem—a "stablecoin" whose value is pegged to the US dollar. The project is essentially a re-branding of the Libra cryptocurrency and Calibra wallet, which the company unveiled in June 2019 but quickly put on the backburner following significant pushback from lawmakers and regulators.
The plan has undergone a major revamp, and the company now plans to launch by the end of the year, offering free person-to-person transfers both domestically and across borders. In a recent blog post, head of Facebook Financial (F2) David Marcus said the project is aimed at tackling systemic problems with today's "broken payments infrastructure," which leads to high transaction fees, slow cross-border payments, and millions of people around the world remaining unbanked.
"They're pointing to a legitimate problem," says Lee Reiners, executive director of the Global Financial Markets Center at Duke University. But it's far from clear why they need a new cryptocurrency to solve them, he adds.
“Facebook takes great pains to point out that Diem is run by the Diem Association. … It deflects a lot of the criticism around concentration and data privacy concerns.”
—Lee Reiners, Duke University
The coin at the heart of the proposal is controlled by a consortium of companies called the Diem (formerly Libra) Association, of which Facebook is a member. The project has morphed significantly since 2019, with the association moving its main operations from Switzerland to the US and abandoning plans to peg the coin's value to a basket of currencies, instead opting for what is essentially a digital dollar.
In a revamped whitepaper published last April, the association also dropped a commitment to eventually shift from a "permissioned" blockchain—where the association decides who can validate transactions—to the kind of "permissionless" system used by most cryptocurrencies, where anyone who plays by the rules built into the network can edit records. The move was explained as a response to regulators' concerns about the challenge of ensuring all users were complying with financial regulations, which the Diem Association has committed to honoring.
Another consideration may have been that a permissioned network is able to handle far more transactions per second than the diffuse networks of permissionless systems, says Shin'ichiro Matsuo, research professor of computer science at Georgetown University. But the trade-off is that they sacrifice the main rationale for using a blockchain in the first place—namely its decentralized structure, which prevents any single point of failure in the payment system.
“They’re not going to do this out of the goodness of their hearts. I think they lost that benefit of the doubt a long time ago.”
Blockchains, whether permissioned or not, can have other advantages over conventional payment technology, says Matsuo. Most significant is programmability, which makes it possible to create "smart contracts" and automate the provision of financial products and services. But Facebook's suggestion that the technology will help significantly reduce the cost of transactions seems unlikely, he adds.
The reason it takes a lot of time and money to process payments is not down to the underlying payment technology, but the onerous security checks providers have to conduct to comply with laws aimed at prevent money laundering and other illicit activities. If Facebook is lowering transaction fees, that's a business decision, not a feature of the technology, says Matsuo. "There's no magic," he adds.
For the same reason, the approach is unlikely to significantly boost financial inclusion, says economist and financial commentator Frances Coppola, because the company will have to implement the same identity checks that prevent the bulk of the world's unbanked from opening conventional accounts.
The proposal seems focused on solving problems specific to the USA's slow, expensive and surprisingly backwards payments system, says Coppola. In much of the rest of the world fast, cheap digital payments are the norm—and solutions like the UK's Faster Payments Service or India's Unified Payments Interface have solved many of the problems Diem targets without recourse to a blockchain. "You can do this without cryptocurrency," Coppola says. "I don't see any advantage to having a blockchain other than marketing."
Reiners thinks the decision to rely on a blockchain is driven more by policy considerations than technical merit. By adopting a system that shares responsibility for the coin among the members of the Diem Association, Facebook is able to avoid the level of scrutiny it would receive if it set up its own currency. "Facebook takes great pains to point out that Diem is run by the Diem Association, it's not their thing," he says. "I think it deflects a lot of the criticism around concentration and data privacy concerns."
But those concerns should remain, says Reiners. Facebook is clearly the driving force behind the project and will be the first to release a Diem-enabled wallet, he says. The company has already made clear its intention to integrate Novi with Facebook Messenger and WhatsApp, which could quickly give it access to millions if not billions of users.
And their promise not to leverage transaction fees begs the question what benefit the company sees in the project, says Reiners. "They're not going to do this out of the goodness of their hearts," he says. "I think they lost that benefit of the doubt a long time ago."
His best guess is that the project is aimed at augmenting the company's existing business model of collecting data on its users and selling it to advertisers. "You can imagine how rich a source of data payments information is," says Reiners. "If they can combine what we're buying with all the other data they have on us, then they kind of know us better than we know ourselves."
Facebook and the Diem Association both declined interview requests.
Edd Gent is a freelance science and technology writer based in Bangalore, India. His writing focuses on emerging technologies across computing, engineering, energy and bioscience. He's on Twitter at @EddytheGent and email at edd dot gent at outlook dot com. His PGP fingerprint is ABB8 6BB3 3E69 C4A7 EC91 611B 5C12 193D 5DFC C01B. His public key is here. DM for Signal info.