Failure to launch: Meta's Novi pilot emphasizes massive 'trust' problem

The lack of public accessibility is the biggest barrier to the mainstream adoption of cryptocurrency. While many companies, such as Unbanked, VISA, and Square, have embraced and integrated various internationally accessible platforms and programs, tech giants like Meta have not been involved until now.

But on 19th October, Facebook (as it was still then) announced the launch of its own digital Novi wallet. The launch was part of the Novi wallet pilot program in the US and Guatemala. In partnership with Coinbase, a leading cryptocurrency exchange platform, the pilot program will allow users to securely and instantly send and receive money using Paxos stablecoin.

Like any other digital wallets, it will not charge any transaction fees. According to David Marcus, the head of Facebook Financial, the launch was meant to "test core feature functions, and operational capabilities in customer care and compliance" along with trying to demonstrate how stablecoins could be used as a viable form of payment.

The Novi wallet was launched without Diem, Meta’s own cryptocurrency, and instead uses the Paxos stablecoin. Coinbase will manage the custody of the cryptocurrencies and the users will be able to send/receive USDP as they please. This plan, unfortunately, was quickly put to rest as US senators ordered Mark Zuckerburg to immediately stop the pilot program and end its diem stablecoin project.

The senate issued an open letter just hours after the social giant announced the launch of its Novi wallet pilot program. The reason cited is that Meta cannot be trusted with protecting user data and managing a payments network.

Diem Stablecoin Project

The current launch of the Novi wallet was an extension of the Diem Stablecoin Project started by Facebook. In 2019, the company announced its own cryptocurrency project Libra which would allow users to send and receive money in its own wallet called Calibra.

Facebook was even the founding member of the Libra (now Diem) Association which was a consortium of companies, tech giants, nonprofits and fintechs that would launch and control the digital currency diem. The name was later changed to the Diem Project and Novi wallet in order to distance Meta as an "independent organization" in the Diem Association, which will manage the new cryptocurrency "Diem". 

Originally Meta had big plans for Diem -- it would be a brand new currency based on different world currencies and securities. However, in just a couple of months after announcing the Libra (Diem) project, the organization lost several key players like PayPal, MasterCard, and Visa. It also received severe backlash from the US Senate as they feared that diem could undermine the sovereign currencies, enable money laundering, and raise privacy concerns.

Central Banks feared that diem would become a quasi-sovereign currency in several countries. Several US Congressmen pressed Marcus and Zuckerberg in a series of hearings and asked them to stop their work on diem. Zuckerberg assured Congress that they would not launch the project until they have approval from US Senators.

Over the last two years, the Diem Project kept changing its goals and time frame for launching its digital currency. While originally they planned that their digital currency would be tied to several global currencies, they recently switched their focus to launching a US dollar-backed stablecoin called Diem USD.

This would be different from Bitcoin which uses a public ledger and is not backed by any central authority. Diem technology will be accessible to the members of the Diem Association such as Meta and become a corporate currency, not controlled by Central Banks, but by Meta itself. Meta products are usually very accessible but they present glaring risks of data security and privacy. Senators were concerned that introducing a payments system on Facebook would mean that it had to invest in improving KYC (Know Your Customer, anti-money laundering regulations) -- something that was not expected of Meta . It was also unclear how Meta would address the regulators’ concerns about money laundering and financing terrorist activities.

Senators’ Response

In an open letter US regulators noted that both Zuckerberg and Marcus committed not delaying Diem’s launch until it satisfied regulatory requirements. They pointed out that securing a state-issued money transmitter license does not mean obtaining the "blessings of all US regulators". They also emphasized that the company has misled US legislators in the past and, therefore, cannot be trusted with its Novi wallet pilot program.

According to the legislators, Diem poses a threat to the financial safety and security of the country. Meta, in the meantime, has not offered any explanation of how it will address the money laundering and criminal activities concerns the politicians have raised. The President’s Working Group on Financial Markets, which is currently examining the global stablecoin industry, will soon come with a set of recommendations concerning stablecoins.

These concerns by legislators are quite legitimate as the number of frauds and scandals concerning cryptocurrencies are increasing exponentially. Last year, the global value of crypto scams and scandals reached around $10 billion. Americans alone have lost $80 million to such scams since October 2019, which is a 1000 percent increase in the number of frauds since fall 2019.

Scammers have invented new ways to con people. These frauds and scandals, especially during the pandemic, have heightened the fear of trust in cryptocurrencies.

The Bottom Line

Cryptocurrencies have been the center of people’s attention especially after the surge of Bitcoin prices earlier this year. Several major companies like Tesla and retailers like Starbucks and Whole Foods are showing increasing interest in cryptocurrencies, thus, making it more and more mainstream. However, skeptics have emphasized that investing in crypto should be done with caution. Meta’s launch of Novi wallet shows its commitment to new technology and innovation, however, the legitimization of cryptocurrency will not be possible until the crypto market creates a safe and transparent environment for its investors.

The world of cryptocurrencies is ever expanding and lucrative -- especially for the young generation -- who is looking at a decentralized vehicle of investment. But the only move forward for mass use and appeal will be safety, transparency and accountability; something that the crypto market and platforms continue to focus on.

Image Credit: Lane V Erickson / Shutterstock

Ian Kane is Co-Founder of Unbanked