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CAPITAL MARKETS

Meta finds a bad moment to get out of stablecoins

Facebook never recovered from the regulatory hostility that first greeted Libra. It is now selling what is left of Diem while building the very metaverses that might make its stablecoin useful.

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Meta chief executive Mark Zuckerberg. Photo: Reuters

With your share price sinking 26% in a single day and market capitalization falling by $234 billion – a record one-day loss of value for any public company in US stock market history – it is probably not the moment to appease investors with mention of a strategic disposal bringing in $182 million of proceeds.

Chief executive Mark Zuckerberg and chief operating officer Sheryl Sandberg were too busy on Meta Platforms’ fourth-quarter earnings call on February 2, discussing increasing competition for younger adults’ attention from TikTok and the setback for advertising revenue from Apple’s iOS changes to protect users’ privacy, which make it so much harder to monetize users’ data.

While outlining investments to counteract these setbacks, they didn’t find time to mention the sale to Silvergate Capital of intellectual property and other technology assets related to running a blockchain-based payment network through the Diem Group. The consideration was $50 million in cash and $132 million-worth of shares in Silvergate, owner of Silvergate Bank, a California chartered and Federal Reserve member bank that serves the cryptocurrency industry.

It … became clear from our dialogue with federal regulators that the project could not move ahead
Stuart Levey, Diem Networks
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Maybe that was because Meta, the company formerly known as Facebook, is just one member of the Diem Group that shared this windfall. Or perhaps Zuckerberg and Sandberg realised that fourth-quarter earnings was a bad day to bury bad news. Their failure to realise the vision for the stablecoin that Facebook originally called Libra could rank as a huge opportunity missed, if the metaverse, on which Facebook is now pinning its future, does take off and boosts demand for digital payments and currencies.

Libra was announced with great fanfare in 2019. The end, at least of Facebook’s involvement, came with a whimper. David Marcus, head of what became the Diem Association as Facebook tried to downplay its involvement, left at the end of last year after Meta was forced to issue its digital wallet, Novi, without Diem, instead using a stablecoin provided by Paxos. The departure of Marcus signalled the project’s imminent demise.

At least Stuart Levey, chief executive of Diem Networks, had something to say on its fate. In a statement on the disposal to Silvergate, he suggested that the project could yet deliver under its new owner.

“One of our highest priorities in designing the Diem Payment Network was building in controls to protect it against misuse by illicit actors,” he states. “We addressed that concern in ways that are novel in the industry, implementing numerous controls that were recognized as innovative by regulators. Among these controls was a prohibition on anonymous transactions, which pose both a sanctions and money laundering risk.”

According to Levey, one senior US regulator even told Diem that it was the best-designed stablecoin project the US government had seen. He also argues that the subsequent report on stablecoins issued by the President’s Working Group on Financial Markets validated many of Diem’s core design features.

But despite this positive feedback, “it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead”, Levey states.

Why not?

Partly because of the sheer scale of Meta Platforms. Its various apps, including Facebook itself as well as WhatsApp and Instagram, still have 2.8 billion daily active users even as the company loses trust and falls behind the latest short-form video technology favoured by young adults. A cryptocurrency used by that many people – one third of the world’s population – would directly compete with leading world fiat currencies.

“No governments could willingly accept the creation of a digital currency that could undermine their authority,” Chris Dinga, payments analyst at GlobalData, points out. “The last nail in the coffin for Diem was losing Silvergate Bank, which was meant to be its banking partner and issue the stablecoin. However, the US Federal Reserve informed Silvergate that it would not provide support if it went ahead. This left Diem with no way of issuing its coin.”

Silvergate is committed to continuing to foster the open-source community that supports the technology
Alan Lane, Silvergate Bank
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Instead, Silvergate may do so on its own. Alan Lane, chief executive officer of both Silvergate Capital and Silvergate Bank, states: “Through conversations with our customers, we identified a need for a US dollar-backed stablecoin that is regulated and highly scalable to further enable them to move money without barriers.” On the acquisition of the Diem assets, he adds: “Silvergate is committed to continuing to foster the open-source community that supports the technology.”

There is a hefty irony in all this. Meta is busily investing in technology that could create new augmented reality platforms teeming with commercial activity and associated payments. Clothing and footwear brands are already acquiring real estate in metaverses to sell digital versions of their products for users to dress up their avatars.

Zuckerberg gets all this. He sees the potential. He talks about making avatars as “expressive and high-fidelity as they need to be, to fully represent us and make us feel present with one another”.

On February 2, he told analysts, even as the stock tanked, that the company intends to release a high-end virtual reality headset later this year and is introducing digital clothing for Meta avatars, starting with a partnership with the National Football League (NFL).

Eric Sheridan, technology analyst at Goldman Sachs, believes that metaverses being built on a more decentralized so-called Web 3.0 could be a $12.5 trillion opportunity. Many will be built on blockchains and use blockchain-based payments.

In January, the Federal Reserve released a study on stablecoins’ growth potential and impact on banking, suggesting that, issued within the regulated banking industry, they could increase payments efficiency without impacting credit intermediation.

“Stablecoins hold the potential to support next-generation innovations,” the authors state, one example being Web 3.0, with a possible move away from centralized web platforms and data centres towards decentralized networks. “Under this paradigm, internet services and social-media platforms would shift their revenue from advertisements to microtransactions, facilitated by the advent of efficient, integrated online payment systems. One could imagine, for example, a search engine or video-streaming platform supported by near-instant micropayments of stablecoins, instead of advertising revenue and the sale of user data. If this shift in web services were to take hold, it would likely drive further growth in stablecoins.”

The Fed and Zuckerberg share a similar vision for the future of Web 3.0 and the potential of metaverses where stablecoins may be the key to payments traffic.

The only question is whether Meta itself has any role in this new metaverse order. That is what the company’s big investment programme is for and that is why investors have taken fright.

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