The stablecoin market has grown exponentially over the last few months due to the numerous advantages blockchain-based versions of fiat currencies have. But, when Facebook launched its cryptocurrency wallet Novi using Paxos’ stablecoin, some United States senators were quick to oppose it. Are they concerned about user data or monetary sovereignty?
The social media giant which, according to its Q2 2021 report, has 2.9 billion monthly active users across all of its platforms, tapped Coinbase and Paxos for its Novi digital wallet project that kicked off its testing phase in the U.S. and Guatemala on Oct. 19.
The pilot program allows users in both countries to download the Novi digital wallet app for iOS or Android devices and fund their accounts with a debit card. The wallet allows them to send and receive Pax dollars (USDP), which are dollar-pegged stablecoins issued by Paxos.
Novi customer funds will be custodied with Coinbase, which manages over $180 billion in assets. A Facebook spokesperson told Cointelegraph that the pilot phase allows the company to evaluate the wallet’s core functions and showcase operational capabilities.
Additionally, the spokesperson said that the company hasn’t dropped support for the permissionless payment system it’s developing called the Diem network and is, instead, waiting for a green light from Washington. After receiving regulatory approval, Facebook plans to launch Novi with Diem.
Bringing stablecoins to the masses
Facebook’s digital wallet Novi and its use of a stablecoin custodied by a central entity may go against the cryptocurrency space’s ethos of decentralization and self-sovereignty but could help move blockchain technology to the back-end, potentially allowing billions of people to use it every day without noticing.
Speaking to Cointelegraph, Justin Hartzman, CEO of Toronto-based cryptocurrency exchange CoinSmart, said he believes the launch of Novi is “definitely a major step towards mainstream adoption” of cryptocurrencies, given Facebook’s massive user base.
Hartzman said that on the negative side of Novi’s launch, users won’t be holding their own coins directly, but will instead “keep track of your USDP balances while they are held in custody by Coinbase.”
Sergey Zhdanov, chief operating officer of United Kingdom-based cryptocurrency exchange EXMO, echoed Hartzman’s sentiment on the potential advantages of the Novi project, pointing out that stablecoins today are the “main bridge between traditional finance and the cryptocurrency market.” Zhdanov told Cointelegraph:
“Not to mention the fact that stablecoins are often the only possible option for receiving and sending money in countries with an undeveloped banking system.”
Zhdanov said that stablecoins can become the foundation for “faster and cheaper payments, making it easier for people to pay for goods or store their money.” This will only happen, however, if stablecoins are not “stifled by overly strong regulation.”
Regulators have notably cracked down on Facebook’s original cryptocurrency ambitions, which involved launching a coin backed by a basket of fiat currencies. The project ended up changing course over a year after it was originally announced, complete with a rebrand from Libra to Diem.
Regulatory woes
Soon after Facebook launched its Novi wallet pilot, five senators called for the immediate closure of the cryptocurrency wallet. In a letter sent to Mark Zuckerberg, Facebook’s founder and CEO, the five senators wrote that given the “scope of the scandals surrounding” the company, they were voicing their “strongest opposition to Facebook’s revived effort to launch a cryptocurrency and digital wallet.”
The letter came from the office of Senator Brian Schatz and was co-signed by senators Tina Smith, Richard Blumenthal, Sherrod Brown — who also chairs the Banking Committee — and Elizabeth Warren.
In response, Diem told regulators it’s an independent organization, stating, “Diem is not Facebook. We are an independent organization, and Facebook’s Novi is just one of more than two dozen members of the Diem Association. Novi’s pilot with Paxos is unrelated to Diem.”
To Zhdanov, Facebook may not have any other choice but to “accept the request and disconnect the wallet.” He said that global regulators cracked down on Libra because they saw it as a threat to their monetary sovereignty, adding:
“It would be strange to imagine that the United States would easily agree to redirect huge cash flows to a private company with a huge audience.”
The CEO concluded that he hopes large industry players will be “able to influence what is happening and will not let the largest part of the cryptocurrency market die,” referring to stablecoins.
To CoinSmart’s Hartzman, regulators have been pressuring Facebook because of the company’s past, and not because of its involvement with the cryptocurrency sector or stablecoins. To him, even if Facebook caves to the pressure and shelves Novi, it may not have a major effect on the wider crypto market.
Shift to the metaverse
Speaking to Cointelegraph, CEO of trading platform Spectre.ai Kay Khemani pointed to something bigger than Facebook’s plans initially revealed: the company’s rebrand to focus not on social media, but the metaverse.
The metaverse is loosely defined, but it’s often seen as a digital reality combining aspects of social media, augmented reality and online gaming and cryptocurrencies together. Sources at Facebook have been claiming the company is getting ready to announce a rebrand meant to reflect its shift in priorities to the metaverse.
As The Verge reported, the move is meant to signal the company’s focus on being known for something other than social media. Mark Zuckerberg has said the metaverse will be a “big focus” for Facebook as he believes it “is just going to be a big part of the next chapter for the way that the internet evolves after the mobile internet.”
Khemani said that Facebook is an innovator that “changes paradigms” and that it could corner the market by owning both premier virtual reality hardware producer Oculus and having the largest social media user base out there.
These two things combined could make Facebook a major player in the metaverse, one that U.S. regulators may be more lenient on to “prevent the social media conglomerate from potentially relocating its operations outside the USA.” That move, Khemani said, would trigger an exodus from tech giants that would “undoubtedly harm the U.S. economy.”
As it stands, Facebook appears to be moving forward with both its cryptocurrency wallet Novi and its stablecoin project Diem. If the company manages to make the use of blockchain technology imperceptible, it could launch a cryptocurrency application that would be adopted by billions.
As Facebook is already working with Coinbase and Paxos, it wouldn’t be a stretch to believe Novi could, in the future, offer its users seamless access to other cryptocurrencies including Bitcoin (BTC). Veteran crypto users may nevertheless choose to stay away, as controlling their private keys is paramount.
