Mark Zuckerberg has another answer to Bitcoin

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Last year’s backlash against Facebook Inc.’s planned digital currency Libra would have been most CEOs’ worst nightmare. Governments and regulators linked arms to repel a perceived threat to monetary sovereignty, financial stability and data privacy. The more Mark Zuckerberg tried to reassure politicians by talking up financial inclusion and innovation, the more he came across like a tobacco boss denying cigarettes are addictive. He even acknowledged the problem: “I get that I’m not the ideal messenger for this.”

That hasn’t deterred him. Given Zuckerberg’s tendency to issue half-hearted apologies before going back to breaking things, it’s not surprising that he’s gearing up for a second attempt to launch Libra next year.

There have been a few changes: Libra is now called Diem – as in Carpe — and its membership council is headed by Stuart Levey, whose stints at the U.S. Treasury and HSBC Holdings Plc make him a blend of Beltway and banking. There’s no more talk of rewards for members in the form of “investment tokens.”

The biggest concession to regulators is that Facebook will no longer create a single global currency. Rather than craft a synthetic Libra out of a basket of euros, dollars and yen — like the IMF’s Special Drawing Rights — Diem will be made up of multiple single-currency stablecoins, pegged to each one. Converting a dollar or euro into a digital Diem would be a one-to-one transaction, with little chance of wild Bitcoin-level volatility or an overnight disruption of fiat currencies. Facebook is even proposing that central banks one day use the Diem blockchain to issue digital currencies, similar to China’s testing of a digital yuan.

This plea for legitimacy suggests Facebook is leaning more toward the kind of electronic cash offered by PayPal Holdings Inc. or Alibaba Group Holding Ltd., than the revolutionary crypto dreams of Bitcoiners. A digital dollar that’s transferable anywhere and at any time could in theory be a draw for consumers (even if in practice it’s regulation, rather than technology, that’s the cause of transaction slowness). Teunis Brosens, a senior economist at ING, reckons Diem may end up like a plain-vanilla “e-money” wallet. Blockchain expert David Gerard has called it “Paypal-but-it’s-Facebook.”

It’s the “it’s-Facebook” part that should keep governments on their guard. E-money firms are often start-ups with Visa cards. Facebook, together with its WhatsApp and Instagram platforms, boasts three billion monthly users. If they each generate $6 in sales, Diem would represent an $18 billion revenue stream overnight. After U.S. regulators this month accused Facebook of unfairly abusing its market power to monopolize social media, will it compete fairly in this new arena or squash the competition? Imagine if Facebook’s ad contracts were one day tied to Diem, or if it abused its access to customers’ financial data. Trustbusters will be glad Libra didn’t lift off earlier.

It’s likely more regulation is needed. As German Finance Minister Olaf Scholz put it, referring to Libra’s name change, “a wolf in sheep’s clothing is still a wolf.” 

The noose is already tightening around such stablecoins with Europe imposing more bank-like capital requirements, says Simon Polrot, head of crypto-development non-profit ADAN. If it takes off, regulators might also want an inside peek into how Diem manages its cash reserves. As for money-laundering risks, Zuckerberg will no doubt sign up to know-your-customer rules, but how effective will Facebook be in tackling bad actors? And will it enforce the U.S.’s extraterritorial sanctions?

Lawmakers may very well wonder if Facebook needs a banking license, something it really doesn’t want. Zuckerberg will no doubt argue Diem is an association, independent of his empire. But it resembles a Potemkin village populated by payments firms, non-profits and venture capital funds. There are no banks, and none of the other FAANGs. Those who left Libra, such as PayPal, haven’t returned.

No one should underestimate Zuckerberg’s determination to launch this product. In the face of widespread criticism, not only is he coming back for more, but his top financial-services executive David Marcus is asking for “the benefit of the doubt” from regulators. That line wouldn’t work in a car-repair shop, let alone a bank. Still, Facebook deserves a fair hearing, given Zuckerberg has changed Libra’s message. If it falls on deaf ears, maybe the problem is the messenger.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.


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