Facebook's digital wallet raises privacy concerns

Facebook's Novi wallet is taking its first steps amid a lot of drama, including threats from politicians targeting the app and the affiliated Diem stablecoin.

If the seemingly endless parade of bad publicity — including an outage that shut off Facebook payments and a whistleblower testifying before Congress — makes it harder for Novi to expand beyond its first steps, Facebook's financial services business could fail to gain the consumer trust it needs.

"It will be interesting to watch adoption rates for Novi given that Facebook continues to underestimate the importance of trust," said Tim Sloane, vice president of payments innovation at Mercator.

Facebook this week commenced a test of Novi in Guatemala and the U.S., allowing users to send funds to contacts internationally and without fees. A few hours after Facebook financial services chief David Marcus announced Novi's pilot, a group of Senators issued an open letter demanding the Novi pilot be stopped and that Facebook not bring Diem to market. The senators — Brian Schatz of Hawaii, Sherrod Brown of Ohio, Richard Blumenthal of Connecticut, Elizabeth Warren of Massachusetts and Minnesota's Tina Smith — are all Democrats, though conservative politicians such as former President Donald Trump have also been critical of Diem. Conservatives and liberals have also both criticized Facebook for broader controversies, such as data protection and privacy.

Facebook CEO Mark Zuckerberg "has earned the ire of conservative Republicans. Having both sides of the political aisle hate you, albeit for different reasons, is an unenviable place for Facebook to be," said Eric Grover, a principal at Intrepid Ventures.

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Amid this pushback, Facebook is reportedly also considering a change to its name to better reflect the range of services it offers. If that happens, the rebrand could also distance Facebook's financial services business from the baggage its name carries in security and privacy circles.

"I do think Facebook’s reputation on privacy and data is a huge hindrance in their ability to launch a stablecoin," said Talie Baker, a strategic advisor with Aite-Novarica's retail banking and payments practice. There's also a big issue among regulators and elected officials regarding Facebook and all big technology companies controlling and influencing money through stablecoins, Baker said.

For the Novi pilot, the Pax Dollar stablecoin will support the transactions and the cryptocurrency exchange Coinbase will be the custody partner.

Stablecoins are used to offset the volatility of cryptocurrency while tapping into benefits of digital currency, such as faster international payments and the use of smart contracts to automatically trigger transactions, adding additional speed.

Lawmakers are concerned about anti-money-laundering and know-your-customer issues surrounding money movement as well, and question Facebook's ability and maybe even appetite to manage it in a way that banks and other money transmitters do today, Baker said, adding these concerns are also behind the push by central banks to build digital currencies.

"Central banks want to retain control over the creation and flow of money. They don't want it to fall into the hands of big tech," Baker said.

Facebook is a member of the group of companies that plan to launch Diem, a stablecoin project originally announced as Libra in 2019. That debut was followed by more than two years of political and regulatory pushback.

The project has changed several times amid the regulatory pressure, becoming less of a Facebook-controlled digital currency and more of a digital payments app. Diem instead became a dollar-backed stablecoin, and the Diem organization moved its headquarters to the U.S. from Switzerland and partnered with Silvergate Bank, a regulated U.S.-based financial institution, to issue the currency.

While Facebook is not using Diem for the Novi test, David Marcus, Facebook's financial services chief, said in a blog post that Facebook's support for Diem has not changed and the company intends to migrate Novi to the Diem payment network once it receives regulatory approval.

Diem and Facebook did not return requests for comment by deadline. In a response to the Democratic senators' letter, Diem said it is "not Facebook, 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."

Diem also contends it has engaged extensively with an interagency regulatory team about the design of the project and has made adjustments to reflect feedback it received. Diem did not identify the interagency team, though the Biden administration has convened a working group to assess stablecoins.

"It makes sense for digital wallets like Novi to support multiple stablecoins, central bank digital currencies and cryptocurrencies, and to be interoperable," Grover said. "A world with many competing, regulated, private-sector stablecoins would be good for money and payments innovation, and therefore for consumers and merchants."

In an earlier interview, Facebook's Marcus said Novi and Diem can use blockchain and smart contracts to improve payment processing over traditional payment rails, which he called costly and slow. Novi and Diem could then be used to offer a wider range of payments and financial services, taking advantage of Facebook's large user base to create scale.

This kind of embedded payments strategy that has become popular with other large technology firms, such as Apple and PayPal.

The Novi pilot and political rebuke come against the backdrop of other news drawing attention to Facebook failings, such as a recent outage that temporarily blocked access to several apps, including payment services.

These events, while seemingly distinct from Diem and Novi, create an atmosphere that could discourage adoption and eventually draw more political attention.

"Employees become whistleblowers or leave," Sloane said. "Users reduce their exposure to Facebook products or delete their accounts entirely. Regulators have similar concerns and are obligated to take those concerns into account when dealing with Facebook."