Good stablecoins, a protocol for money, and digital wallets: the formula to fix our broken payment system
Note: I’m a board member of the Diem Association, and Novi is a member alongside 25 other organizations. I’m writing this with a focus on Novi and Facebook’s potential in the industry.
Why the Way Money Moves Must Change
There has been a lot of conversation and debate in the US lately about stablecoins, crypto, and other digital assets. I’m encouraged to see the discussion gaining momentum, especially right now. Because it has never been more urgent to transform our broken payments infrastructure.
The systems we have today are costly, slow, and not interconnected. There are still about 1.7 billion people who are unbanked around the world, and even more who are underserved. Among them are 62 million Americans who are unbanked or underbanked — people left behind by the current system and stuck in the cash economy. Globally the state of play for cross-border payments is dramatically bad with an average cost to consumers, who can afford it the least, of 6.5% (more than double the Sustainable Development Goal of 3%) and end-to-end settlement times of three days on average.
The COVID-19 pandemic supercharged the expansion of the digital economy around the world. It sparked changes in how people buy, where they buy, and how they discover and interact with businesses. It prompted greater reliance by many families on money sent from overseas as a critical economic lifeline. And this trend is set to continue — the percentage of global digital transactions is expected to rise from 57% before COVID-19 to 67% by 2025. This all makes it more critical than ever for businesses and policy makers to move faster to help ensure people aren’t left behind.
And yet, there are still so many roadblocks being put in front of responsible innovations that solve these challenges. America should be leading change at this crucial moment — but right now we are in the back seat, allowing countries like China to take the lead.
I have come up against these roadblocks in my role leading the team at Facebook that has been heads down for the past two-plus years building the Novi wallet — an interoperable digital wallet that will enable people, and eventually small businesses, to move money around domestically and internationally in a quick and affordable way.
During this time, I’ve had many conversations about our choices, and why we cared so much about building Novi with stablecoins, rather than with fiat money, or in other words, the government-issued currency we are all familiar with and use today. I want to take the time to explain why it matters to us.
How Stablecoins Help Solve the Problem
Let me be clear, if we only offered fiat money in Novi, it would bring people a lot of value. We could offer domestic and cross-border payments, and it would benefit Facebook as we would be creating a significant number of wallet accounts. These in turn would enable us to build a solid merchant services business by charging competitive rates to merchants to accept payments from Novi customers. So why not just do that and call it a day? Well, we might. But before we do, I strongly believe if there was ever a chance to create an open, interoperable protocol for money on the internet and truly change the game for people and businesses around the world, it is now. The fact that we’re participating, as members of the Diem Association, and in other ways, can help bring more companies around a standard, and I don’t want us to waste our shot.
While there’s been a lot of talk recently about stablecoins and their role in payments, stablecoins in and of themselves don’t solve any problems. To unlock their potential, they need to be combined with an underlying payments network that’s cheaper, faster, safer, interoperable and programmable. One that’s more open than the current antiquated system, which leaves too many people behind and has proven to be resistant to innovation. The current payment rails, in fact, have seen only minimal innovation since the creation of the first credit card network more than six decades ago.
It’s important to understand that all stablecoins are not equal. What defines a well designed stablecoin is how its reserves are designed and managed, how transparent these are to consumers and regulators, and what consumer protections and compliance features the issuer offers. A well designed stablecoin — one that always holds 1:1 reserves in cash at US banks and very short term Treasuries, 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. And if it wasn’t for FDIC insurance, of any bank deposit as well. The former can hold less liquid assets as permissible investments, and the latter is composed of fractional reserves, with banks allowed to maintain short-term liabilities that exceed their short-term assets. As a matter of fact, if all customers of a bank wanted to withdraw all of their balances in a short period of time, even at solvent banks, there would be a delay in withdrawals for the bank to convert its long-term assets into cash. With a well designed stablecoin, this risk doesn’t exist.
When it comes to anti-money laundering, counter-terrorist financing, sanctions and tax compliance — well-designed stablecoins and their ecosystem of wallets have the potential to improve upon the traditional implementation of those controls. It’s a misconception that digital assets are by definition anonymous. Built and configured the right way, stablecoins and wallets put customer due diligence at the center of their approach to compliance. And when a stablecoin’s controls are designed to work in tandem with the controls of individual wallets supporting them, the potential for more effective detection and reporting of illicit activities will prove to be superior to the existing system that often post-processes transactions, screening them in batch long after they’ve been completed. This approach unlocks ground-breaking potential for efforts to stop financial crime more effectively. Contrary to many points of view, stablecoins with strong controls at the network and wallet levels unlock enormous opportunities to innovate in this area.
When It’s Time to Let the Best Ideas Lead
Here at home in America, however, our payments infrastructure is arguably the worst of any developed country in the world, and increasingly falling behind, while China is moving with determination and haste to build an infrastructure that will make the digital yuan a challenger to the dollar as the world’s reserve currency. According to the 2019 Federal Reserve Payments Study, in 2018, Automated Clearing House (ACH) payments accounted for 66.1% of the value of non-cash payments in the US. ACH was conceived in the early 70s, and payments still take up to three days to clear. Meanwhile, merchants pay ten times more to accept payments from consumers in the US than in Europe.
Throughout our journey building Novi, we have talked to many people who are excluded or underserved by the current system. I was shocked to hear that many were eligible to have bank accounts — in fact, many of them had accounts before. They decided they couldn’t afford unexpected fees, and would rather pay a predictable 10% to cash a check, rather than be blindsided by fees they couldn’t cover. How is this acceptable to anyone? If we want to lift people up, and give them a chance to thrive, the very system that helps them secure and move money should be accessible, and serve them at a much lower cost in a non-discriminatory way.
This is why we come to work every day at Novi. We believe that we can help change things for many people who deserve so much better. And to have the maximum impact, building a closed system using fiat only wasn’t going to cut it. We needed to seize the opportunity to help build an open, low cost, accessible, near real-time, ecosystem and network. This is the vision we laid out for Libra in the summer of 2019.
After we announced Libra, we publicly committed that we would not launch Novi on Libra (now Diem) without the necessary regulatory approvals, and that we would engage with regulators, policy makers, and experts as we developed our product. We have stayed true to these commitments and engaged in constructive consultations with regulators and policy makers around the world. In the US, we have secured licenses or approvals for Novi in nearly every state, and we will not launch anywhere we have not yet received such clearances. The Diem Association has become an independent entity, conducting its own dialogue with US and global regulators. It has addressed every legitimate concern that was raised on its journey to design and build a high quality stablecoin with extensive consumer protections, and a highly compliant payments network to support it — all within the US regulatory perimeter.
Nonetheless, along this journey, I’ve repeatedly heard variations of the argument that the payments and financial services industry shouldn’t let Facebook be part of these innovations. I’ve heard multiple conversations about how this proposal would be so great if only Facebook wasn’t involved.
First, Facebook is already an actor in the payments industry, and has been for some time. We started Facebook Payments in 2009 and in the last four quarters we enabled more than $100 billion in payment volume. We have thriving person-to-person payments products at scale in the US and abroad, and we’re properly regulated to do a lot more. People and businesses in over 160 countries use our platform to make payments in 55 currencies. People can shop, make in-game purchases, donate, and purchase events across our family of apps.
Second, I’ve found this line of thinking profoundly un-American. I came to this country and became a proud citizen for its value system, the opportunity to build products that improve the lives of many, and to build a good life for my family. One of the core tenets of our value system is the promise of a level playing field. This idea that any person or company bringing a solid solution to a problem will have 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. Take communications. WhatsApp and Messenger help billions of people communicate at a fraction of the cost that these consumers were paying before those apps existed. When you think about it, we’ve played a critical role in empowering people to communicate in free and unlimited ways. A privilege that was once only reserved for wealthy people when international calls cost $1 per minute, and text messages went for 25¢ a pop.
So I do believe we deserve a fair shot. We can and should play a key role in improving the unacceptable state of affairs that persists for too many people, and the American way to do it is to enable more competition and innovation to break the stalemate of decades of stagnation. Additionally, at a time when the relevance of the dollar and our global influence are challenged like never before, we should leverage the distribution and capabilities of some of our most successful companies to win the war that’s being silently waged against our national interests.
Let me also address the question of scale. I understand and accept the need for extra scrutiny due to our scale. Given Facebook’s reach, some people think that Novi will immediately be used by hundreds of millions of people globally. As we know from our experience launching and scaling other payments experiences, this is not how it will play out. People will have to make an affirmative choice to open a Novi account, no matter how long they’ve been using Facebook. As part of creating a new account, Novi requires full customer due diligence, including identification through the uploading of a government issued ID, so onboarding new customers will take time. Novi also cannot operate in specific jurisdictions until it receives appropriate licensing and complies with local regulations and standards, so we will start in a small number of countries. The scaling of our wallet will be a long journey, one we intend to take responsibly as we know and accept that we will be held to the highest standards globally.
I’ve also heard concerns about our ultimate intentions. The argument being: “Clearly you must have an ominous plan to make money out of this, you can’t be doing this out of the goodness of your hearts!” I can’t blame people for thinking this. But that claim comes from a place of misunderstanding the tech industry, and an ethos that most very successful tech companies have espoused. We first focus on addressing big problems for people at scale. Eventually, a path to sustain the work through monetization is found. In this case, our business model is very clear. We’re a challenger in the payments industry, and we will offer free person-to-person payments domestically and internationally for people using the Novi wallet. 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. Once we have a meaningful customer base, we can offer cheaper merchant payments to businesses around the world and still make a profit margin on merchant services. We can then branch out and offer a variety of other financial services in partnership with respected and well regulated partners, and expand from there.
Where the Future of Money is Going
Lastly, as of late, I’ve been reflecting a lot on Mark’s vision for the Metaverse. Thinking about money in the Metaverse is actually very helpful in how we approach designing our products and the underlying infrastructure to support them. After all, if money and payments systems were invented today for a digital-only world, what would they look like? They certainly wouldn’t look like our current infrastructure. A global, open, interoperable, near real-time, cheap, compliant global protocol for money would be required to enable people, creators, and businesses to move money around seamlessly and to innovate via programmable money. Wallets would need to support NFTs. Real contracts and titles would be replaced by smart contracts. While this may sound detached from the reality experienced by the very people we want to serve — those left behind by the current system — it’s actually not. Designing products and infrastructure with this future in mind will result in real cost savings and innovation that will benefit the greatest number of people today and tomorrow well before the Metaverse becomes mainstream.
Change is long overdue. It’ll happen one way or another. Novi is ready to come to market. It’s regulated, and we’re confident in our operational ability to exceed the high standards of compliance that will be demanded of us. We feel that it’s unreasonable to delay delivering the benefits of cheaper, interoperable, more accessible digital payments. We will continue to persevere and demonstrate we can be a trusted player in this industry — and one that’s bringing positive change by being in it.