Number of the Week: $50 million (explanation below)
FIN Goes Live!
I am thrilled to announce the first-ever FIN podcast—and it will air live and on camera! On Thursday, December 17, at 12:30 PM EST (GMT -5), I will interview Jim McKelvey, cofounder of Square, arguably the most innovative and successful fintech company of all time. FIN readers are invited to register to attend for free.
The podcast is produced by Arizent, the publisher of American Banker, The Bond Buyer, and other financial publications. If you’d like to submit questions for McKelvey in advance, please leave them as comments below.
Facebook’s Currency Dream Shrivels On
Pretend, for a moment or two, that you are Facebook. You are under constant bombardment for peddling fake news, harassment, and hatred. Pressured by advertisers, you have agreed to a “brand safety audit” to assure advertisers that their money isn’t going into a cesspool, although you continue to fight to keep the auditors’ noses out of your news feed. The US Justice Department is suing you, alleging that you discriminate against American workers by favoring H1-B visa holders and other temporary workers. The incoming president has labeled your founder “a real problem” and suggested immediate revocation of Section 230 of the Communications Decency Act—an action that would make it impossible for your business to operate at anything like its current scale.
And your response is “Let’s definitely push forward with the plan for a global digital currency! Sort of!”
In June 2019, when Facebook originally announced its intention to launch a global, blockchain-based digital currency called Libra, legislators, regulators and central banks across the planet panned the idea. US Treasury Secretary Steven Mnuchin went so far as to label Libra “a national security issue.” Many of the partners—including payment giants VISA and PayPal—in the Switzerland-based consortium designed to oversee the currency (it was called the Libra Association, which sounds like a ‘70s supergroup) pulled out. A year ago, it seemed likely that Libra would just quietly crawl away to die.
Yet in April, Facebook announced a stripped-down version of Libra, in a clear attempt to mollify regulators. The key change was to move away from a single currency backed by a basket of multiple currencies, and instead issue digital versions of several currencies. Then in late November, the Financial Times reported that Libra would be issued only as a one-to-one coin backed by the US dollar, and could become available as soon as next month; according to Bloomberg, the new currency will be called the Diem Dollar.
This leaves Libra/Diem as a dollar-pegged “stablecoin,” a word that was never used in the original Libra white paper. Facebook’s retreat is tactical—Diem can be…kind of whatever the regulators want it to be! (Although see the next item.) At the same time, it further limits Diem’s value proposition against competitors. In a 2019 paper analyzing the original Libra proposal, Morgan Stanley wrote: “What legitimate corporate or consumer global payments need exists that a FB-led crypto consortium can uniquely fill? In our view, none.”
Part of the problem is that Facebook has never given plausible or transparent reasons for why it wants to create an independent global currency. (Neither Facebook nor Diem gave substantive replies to FIN’s requests for comment.) Facebook has constantly emphasized that, through the Calibra (now called Novi) wallet and through the Association, it would not have excess influence on the currency. Charging fees on day-to-day Diem transactions would not likely yield much revenue, given how many free options many customers already have. Some have suggested that, since Diem would make Facebook ads easier and quicker to pay for, Facebook could raise its ad rates, but good luck getting the company to admit that.
Instead, Facebook has presented its currency efforts as a grand gesture to save the world’s most vulnerable; the original Libra white paper repeatedly insisted that the currency “empowers billions of people.” Last month, Facebook Chief Operating Officer Sheryl Sandberg said in a Harvard speech:
I've worked in the most rural parts of the world, and that means you are a woman who's working, maybe earning a little bit of money, hiding it under your mattress, because you have no access to any banking. And, you know, your husband or partner is probably taking it from you at night. That is the fact of life for a lot of people. And so, access to digital currency to remittances for people who are working is super important and something we really believe in.
It’s hard to know even where to begin here. Certainly poor people need more stable control over their money, but it’s far from clear that digital currency is the only or most accessible solution to this problem; even if so, it’s still less clear that Facebook’s not-yet-available currency is the best option.
Indeed, in many parts of the world to which Sandberg alludes, Facebook is arguably part of the problem. In a place like The Philippines, Facebook penetration is so high (around 90%) that it essentially functions as the Internet for a majority of the population. And Facebook in turn has become an arm of the state, with often frightening results.
Imagine, then, a global company with local monopoly power that already has access to a frightening amount of personal data about its users—then layer on top of that access to how millions of users spend their money. Are Facebook users going to accept this unprecedented data takeover? Will they even understand the stakes before the Diem system is already in place?
Still, Sandberg’s use of the term “remittances” may provide a clue to Facebook’s motivation. Facebook knows there’s little point in competing with Apple Pay or Venmo in transactions that take place in the same currency. But remittances—transfers between countries and currencies—are a vast market; global remittances in 2018 were $689 billion, according to the World Bank. And perhaps just as important: the remittance market is dominated by many old-school players: Western Union, MoneyGram, Bank of America. If there’s a place where a digital currency easily adapted by Facebook’s billions of global users could make a quick and large impact, it’s remittances. Of course, shrinking the Libra vision down to the Diem Dollar complicates that effort, but presumably Facebook and the Diem Association have to start somewhere.
The Wrong Way to Regulate
It seems not entirely coincidental that just a few days after Facebook’s stablecoin plans trickled out, US Representative Rashida Tlaib (D-MI) proposed a law to regulate stablecoins. The bill’s main effect would be to make it illegal for anyone (including Facebook) to issue a stablecoin “other than an insured depository institution that is a member of the Federal Reserve System,” i.e., a bank. Explaining the rationale for the bill, Tlaib’s press release (I think it omitted a verb, but you get the gist): “Getting ahead of the curve on preventing cryptocurrency providers from repeating the crimes against low- and moderate-income residents of color that traditional big banks have is—and has been—critically important.”
A lot of cryptoTwitter was upset, as were a few Members of Congress, including some of Tlaib’s colleagues on the Financial Services Committee. The discussion quickly became one of those fruitless exercises in which both sides claim that their approach would better serve underbanked Americans.
It’s frustrating to see all this exertion, for several reasons. First, there is no way that the 116th Congress is going to make this bill into law. Congress hardly holds unanimous views on the subject, and one would hope that there are a few priorities right now more urgent than stablecoin regulation.
Second, while Tlaib’s intentions may be good, the bill is thin, and its approach—to regulate stablecoins through the banking system—is hard to support from an intellectual and policy standpoint. A lot of people who were yelling this week seem to have forgotten that, during the initial 2019 backlash against Libra, US Representative Sylvia Garcia (D-TX) introduced a stablecoin regulation bill with a more justifiable approach. Garcia’s bill (which is also thin, and predictably went nowhere) proposed treating stablecoins as a security, and thus regulating them through the Securities and Exchange Commission (SEC).
There is room for debate on the question of whether stablecoins should be treated as a security, but consider: In November 2019, the International Organization of Securities Commissions issued a statement that said: “Our analysis has shown that so-called ‘stablecoins’ can include features that are typical of regulated securities.” In addition, specific to the United States, the SEC applies a four-pronged test, growing out of the 1946 case SEC v. W. J. Howey Co. et al, to determine whether or not a financial instrument qualifies as a security; both common sense and precedent make it pretty clear that stablecoins meet those criteria.
The final source of frustration: This is no way to create intelligent, effective regulation. Introducing a bill a few days before the end of the Congress, with little chance for even hearings—to say nothing of informed debate—isn’t going to yield anything. Let’s hope the Biden Administration can work with Congress to craft more thoughtful and substantive ways to address these pressing issues.
Stripe’s Big Week
There has been a lot of excitement—and more than a little hype—in recent years about Banking as a Service (BaaS). The vision here is to create the financial services equivalent of an Amazon Web Services (AWS). BaaS would allow a digital company to create a variety of banking and financial services—from payments to offering loans or interest-bearing accounts—within its own platform, typically by way of an API.
There are a few European companies that offer BaaS-like services, notably Solarisbank, which is a fundraising powerhouse and has recently become the first German bank to move all its operations onto…AWS. But the partnerships that Stripe announced this week with some of the world’s largest banks—including Goldman Sachs and Citigroup—should quickly pole-vault it into a BaaS leadership position. As important as this development is for Stripe, it may well open the door here for more traditional banks to offer these services on their own, once the technological and customer-retention wrinkles have been ironed out. I will be writing about this in future issues of FIN.
🦈Number of the Week: The digital bank for teenagers Step raised $50 million in a Series B round. Among the investors are Justin Timberlake, Will Smith, The Chainsmokers, and TikTok sensation Charli D’Amelio. Here is a suggested marketing slogan: “Using celebrities to give credit cards to teenagers…What could possibly go wrong?”
🦈I wrote three weeks ago about the similar mindsets of gold investors and Bitcoin investors. This week Bloomberg reports that “the debate is now heating up on whether the world’s largest digital currency can one day rival bullion as an inflation hedge and portfolio diversifier.” This data point caught my eye: “Bitcoin’s market capitalization is currently only 3.1% the size of gold, according to James Butterfill, investment strategist at CoinShares, which sells investments in digital currencies. If that increased to 5%, it would imply a price of $31,300 compared to around $18,700 currently, he estimated.”