Digital Euro Association Blog

Novi is the new Facebook Pay

Nov 19, 2021 11:32:07 AM / by Enrique Titos

I started writing about the disruption that blockchain and crypto assets would bring when Facebook first announced the intention to launch Libra in 2019 with a consortium of 28 companies to develop its distribution ecosystem. A lot has happened since then and at no point has Facebook given up on its ambitions in redefining the payments landscape.

Now, Facebook has surprised again with the announcement of the first pilot in Novi, the renamed Calibra digital wallet that it announced in 2019. Since then, Libra changed its name to Diem, and much more importantly, it will no longer be a stablecoin linked to a basket of fiat currencies, but a stablecoin currently linked only to the US dollar and issued - according to the latest news -  by the US bank Silvergate Bank, also moving its operations from Switzerland to the United States. But Diem is still in the starting square.

With Novi, which in principle is a digital wallet like Google Pay or Apple Pay that does not need any special authorization to be launched, and which runs on mobile operating systems such as IOS or Android that dominate mobile phones internationally, Facebook would be able to collect payments data without having yet launched its own stablecoin. Being considered systemic from the very beginning, a Facebook stablecoin should be authorized ex ante by regulators in several countries and be subject to the principles of market infrastructures according to the recent clarification in the joint document CPMI and IOSCO ratified by the recent G7 communiqué.

It should be remembered that current stablecoins such as Tether, USDC and the rest, although not specifically regulated, are under money transmitter licenses and that even at the time the Office of the Comptroller of the Currency (OCC) in the US has considered them as a valid payment instrument along with the usual banking channels.

Facebook has chosen the Paxos crypto as the first stablecoin that will integrate its digital wallet Novi, and it will be custodied on the Coinbase exchange apparently with cold custody, not online, reinforcing the security of the keys. Facebook´s aim is still to issue its own Diem stablecoin when authorized. Presumably Novi will house other cryptocurrencies inside and will be interoperable with other digital wallets. Therefore, Facebook has already entered into the competition with Apple and Google, and if digital assets based on blockchain and cryptography become mainstream, this could be a new race between Big Techs given the slowness of banks to get involved in crypto assets, not only in offering to the retail public but also to accredited customers. A whole new market is being created and banks, traditional custodians and providers of financial solutions are not moving fast enough.

Paxos is as of today the 7th biggest stablecoin in the world, the 103rd in the total ranking of cryptocurrencies, with only $ 945 million issued on the day of Novi's announcement. Paxos is a fiat collateralized stablecoin and invests 100% of its reserves in “cash or cash equivalents in US banks”. A sign of success of the movement would be that the capitalization of Paxos multiplies exponentially, when Novi is fully operational and expands not only in the US and Guatemala, the first two countries where the launch is scheduled. Paxos is a token of the ERC-20 standard of the Ethereum blockchain network, therefore, it runs on a public blockchain, unlike the permissioned blockchain of the original Libra proposal.

Novi will be launched in the United States, a significant testing ground, which has demonstrated a remarkable export capacity internationally, since what is approved by its experienced regulators is likely to end up being so in other countries.

And it will also be launched in parallel in Guatemala, a test that will make it possible to use the capacity of Novi and the stablecoin Paxos to send remittances as an alternative to normal dollars. The contrast between Guatemala and El Salvador is remarkable, which has preferred Bitcoin but has also gone further, making it legal tender along with the US dollar. It should be clarified that contrary to El Salvador, Guatemala does have its own currency (the Quetzal), which is the only legal means of payment in the country. But Guatemalan residents could receive Paxos on their mobiles through Novi and convert them into physical dollars or quetzales at ATMs.

Facebook has not announced plans to extend Novi to the EU, but it could not take long to do so through stablecoins in euros. In the EU, there is no special regulation of digital wallet apps, although in the future MiCA regulation they will be regulated (art 123) and virtual service providers would have 18 months to adapt to the regulation from approval date, even with a fast track procedure if it is a service already operational. The point is that there are no relevant euro stablecoins yet. The largest is Stasis Euro, ranked 445th according to Coinmarketcap. Europe as a remittance sender is smaller than the US, but has a sufficient market in Eastern Europe, North Africa and Francophone countries of Sub-Saharan Africa.

Why aren't there stablecoins in euros of a certain relevance as is the case in the US?

Europe is caught in the middle wagon of cryptocurrency innovation and the influence of its banking market, the relatively low financial literacy (relative to Anglo-Saxon countries) and its fragmented and internationally small capital markets, along with a more dispersed attitude of national regulators is creating significant heterogeneities. In addition, much of the focus of central banks is on the possible future launch of CBDCs, on MiCA and on national or European regulations for digital transformation and resilience, such as the DORA or Pilot Regime regulations for the transformation of market infrastructures.

Some questions arise from the movement of Facebook with Novi, and I will list some of them:

  1. Can a stablecoin be considered systemic not only because of the size of the issuer it but because of the network or payment gateway through which it transits?
  2. An app like Novi is not a financial service per se, but within Facebook, it can greatly increase the volumes of the stablecoin market cap, hence increasing the volumes in custody and reinforcing the emphasis on the necessary security of the infrastructures.
  3. What would be the reaction of Big Techs such as Google or Apple if a big competitor like Facebook plans to launch Novi in their Android and IOS mobile platforms?
  4. A stablecoin linked to fiat currency is nothing more than a “convenience substitute” (with the possible additional advantages of programmability and integration in DeFi networks for example) compared to the reference fiat currency, therefore a competitor of the CBDC futures and issuing central banks. Will there be any limits if the market grows exponentially?
  5. Stablecoins become huge holders of backing assets, and in fact Fitch Ratings has issued some warnings in certain markets due to the size of investments in short-term instruments by stablecoins vehicles. Could it be conceivable in the future that stablecoins would issue only with money from central banks and have access to direct accounts such as commercial banks?
  6. What should be the banks strategy before the arrival of new instruments such as stablecoins that can replicate bank deposits to transfer money and give entry to new competitors such as BigTechs with their digital wallets?

*  This article originally appeared in FIDE Fundación

Tags: Diem, Digital Money, CBDC, Stablecoin, Novi, Facebook Pay

Enrique Titos

Written by Enrique Titos