Facebook's financial chief David Marcus: Why must the way money flows change?

Author: David Marcus, Head of Facebook Financial and Co-Creator of Diem

Compiled by: Chain Catcher

Why must the way money flows change?
Recently, there has been a lot of conversation and debate in the U.S. about stablecoins, cryptocurrencies, and other digital assets. I am pleased to see the discussion gaining momentum, especially now. Because transforming our broken payment infrastructure has never been more urgent.
The system we have today is costly, slow, and not interconnected. Approximately 1.7 billion people worldwide still lack bank accounts, and even more are underserved. Among them are 62 million Americans who are either unbanked or underbanked, left behind by the current system. Globally, the state of cross-border payments is abysmal, with an average cost of 6.5% (more than double the sustainable development goal of 3%), and an average end-to-end settlement time of three days.
The COVID-19 pandemic has accelerated the expansion of the global digital economy. It has triggered changes in how people buy, where they buy, and how they discover and interact with businesses. It has led many households to rely more on remittances as a vital economic lifeline. And this trend is expected to continue— the percentage of global digital transactions is projected to rise from 57% before COVID-19 to 67% by 2025. All of this makes it more important than ever for businesses and policymakers to help ensure that people are not left behind.
However, there are still many barriers to responsible innovation in addressing these challenges. At this critical moment, the U.S. should lead the change—but we are currently in a secondary position, allowing countries like China to take the lead.
In leading the Facebook team, I have encountered these barriers, as the team has been developing the Novi wallet for over two years—a interoperable digital wallet that will enable people—ultimately small businesses—to transfer funds quickly and affordably for domestic and international sales.
During this time, I have had many conversations about our choices and why we care so much about building Novi with stablecoins rather than fiat currency, or in other words, the government-issued currency we are all familiar with and use today. I want to take the time to explain why this is important to us.
How stablecoins help solve problems
Let me be clear, if we only offered fiat currency on Novi, it would provide a lot of value to people. We could offer domestic and cross-border payments, which would benefit Facebook as we would create a large number of wallet accounts. In turn, this would allow us to build a solid merchant services business by charging competitive rates to merchants for accepting payments from Novi customers.
So why not just do that and call it a day? Well, we might. But before we do, I firmly believe that if there is an opportunity to create an open, interoperable currency protocol on the internet that can truly change the game for people and businesses around the world, it is now. In fact, our participation as members of the Diem Association or otherwise can help more companies reach a standard, and I don’t want us to waste our opportunity.
While there has been much discussion recently about stablecoins and their role in payments, stablecoins themselves do not solve any problems. To unlock their potential, they need to be combined with a cheaper, faster, safer, interoperable, and programmable underlying payment network. A system that is more open than the current outdated systems, which have left too many people behind and have proven resistant to innovation. In fact, since the creation of the first credit card network over 60 years ago, the current payment rails have seen very little innovation.
It is important to understand that not all stablecoins are created equal. The definition of a well-designed stablecoin lies in how its reserves are designed and managed, the transparency of those reserves to consumers and regulators, and the consumer protection and compliance features provided by the issuer. A well-designed stablecoin—one that always holds 1:1 cash reserves in U.S. bank accounts and very short-term government bonds, with the issuer holding capital as a buffer—can arguably provide better consumer protection than the fiat balances held in any U.S. wallet.
The same goes for any bank deposit without FDIC insurance. The former can hold less liquid assets as permitted investments, while the latter consists of fractional reserves that allow banks to maintain short-term liabilities exceeding their short-term assets. In fact, if all customers of a bank wanted to withdraw all their balances in a short time, even in a solvent bank, there would be delays in converting the bank's long-term assets into cash for withdrawals. With a well-designed stablecoin, this risk does not exist.
In terms of anti-money laundering, counter-terrorism financing, sanctions, and tax compliance—well-designed stablecoins and their wallet ecosystems have the potential to improve the traditional implementation of these controls. By definition, digital assets are anonymous, which is a misconception. Building and configuring stablecoins and wallets in the right way places customer due diligence at the center of their compliance approach. When the controls of stablecoins are designed to work in conjunction with the controls of the individual wallets that support them, the potential to detect and report illegal activities more effectively will prove superior to the existing systems that typically process and screen transactions after the fact.
This approach unlocks groundbreaking potential for more effective efforts to combat financial crime. Contrary to many views, stablecoins with strong controls at the network and wallet levels provide tremendous opportunities for innovation in this space.
When to let the best ideas lead the way
However, in the U.S., our payment infrastructure can be said to be the worst among any developed country in the world, and it is increasingly lagging behind, while China is building its infrastructure firmly and hastily, making the digital yuan a challenger to the dollar as the world’s reserve currency. According to the 2019 Federal Reserve Payment Study, in 2018, Automated Clearing House (ACH) payments accounted for 66.1% of the value of non-cash payments in the U.S. ACH was conceived in the early 1970s, and payments still take up to three days to complete. Meanwhile, merchants in the U.S. pay ten times more to accept consumer payments than in Europe.
Throughout our journey in building Novi, we have spoken with many people who have been excluded or underserved by the current system. I was shocked to hear that many people are eligible for bank accounts— in fact, many of them have had accounts before. They cannot afford unexpected fees and would rather pay a predictable 10% to cash a check than be blindsided by unaffordable charges. How can this be acceptable to anyone? If we want to lift people up and give them a chance to thrive, then the systems that help them protect and transfer their funds should be accessible and serve them at a much lower cost in a non-discriminatory manner.
That’s why we come to work at Novi every day. We believe we can help many deserving people change things for the better. To have the greatest impact, building a closed system using only fiat currency won’t cut it. We need to seize the opportunity to help build an open, low-cost, accessible, near-real-time ecosystem and network. This is the vision we laid out for Libra in the summer of 2019.
After we announced Libra, we publicly committed that we would not launch Novi on Libra (now Diem) without obtaining the necessary regulatory approvals, and that we would engage with regulators, policymakers, and experts as we developed the product. We have kept those commitments and have engaged in constructive consultations with regulators and policymakers around the world.
In the U.S., we have obtained Novi licenses or approvals in almost every state, and we will not launch in any place where such approvals have not been obtained. The Diem Association has become an independent entity, engaging in its own dialogue with U.S. and global regulators. It addresses all reasonable questions raised in the process of designing and building high-quality stablecoins with broad consumer protections.
Nevertheless, throughout this journey, I have repeatedly heard various arguments that the payments and financial services industry should not allow Facebook to be part of these innovations. I have heard discussions multiple times that this proposal would be so great without Facebook's involvement.
First, Facebook is already a participant in the payments industry and has been for some time. We launched Facebook Payments in 2009, and in the past four quarters, we have processed over $100 billion in payments. We have a thriving peer-to-peer payments product both in the U.S. and abroad, and we are properly regulated to do more. People and businesses in over 160 countries use our platform to make payments in 55 currencies. People can shop, make in-app purchases, donate, and buy tickets through our suite of apps.
Second, I find this mindset very un-American. I came to this country and became a proud citizen because of its value system, with the opportunity to create products that improve the lives of many and provide a good life for my family. One of the core principles of our value system is a commitment to a fair competitive environment. Anyone or any company that provides reliable solutions to problems should have a fair chance.
While Facebook has more work to do in rebuilding trust, it has consistently provided tremendous value to consumers involved in similarly important services. Take communication products as an example; WhatsApp and Messenger help billions of people communicate at a fraction of the cost these consumers paid before these apps existed. When you think about it, we have played a key role in enabling people to communicate freely and without restrictions. This privilege was once reserved for the wealthy when international calls cost $1 per minute and text messages 25 cents per minute.
So I believe we deserve fair treatment. We can and should play a key role in improving the unacceptable conditions that persist for too many people, while the American way is to allow more competition and innovation to break decades of stagnation. Furthermore, at a time when the relevance of the dollar and our global influence are being challenged like never before, we should leverage the distribution and capabilities of some of our most successful companies to win this silent war against our national interests.
Let me also address the issue of scale. I understand and accept the need for additional scrutiny due to our size. Given Facebook's influence, some believe that Novi will be used by hundreds of millions of people globally immediately. As we know from our experience launching and scaling other payment experiences, this is not how it develops. Regardless of how long people have used Facebook, they must make a conscious choice to open a Novi account. As part of creating a new account, Novi requires comprehensive due diligence on customers, including identity verification through the upload of government-issued ID, so onboarding new customers takes time. Novi also cannot operate in specific jurisdictions until it has obtained the appropriate licenses and complies with local regulations and standards, so we will operate in a limited number of countries.
I have also heard concerns about our ultimate intentions. The argument is, "Clearly, you must have a nefarious plan to make money from this; you can't be doing this out of goodwill!" I cannot blame people for having this thought. But this statement stems from a misunderstanding of the tech industry and the spirit embraced by most very successful tech companies.
We first focus on solving significant problems for people at scale. Ultimately, a way to monetize and sustain the work is found. In this case, our business model is very clear. We are a challenger in the payments industry, and we will offer free domestic and international peer-to-peer payments for those using the Novi wallet. We believe people will prefer a free and more convenient service over those that are much more expensive and not consumer-centric. Once we have a meaningful customer base, we can offer cheaper merchant payments to businesses around the world and still profit from merchant services.
Where is the future of money headed?
Finally, I have been reflecting on Mark Zuckerberg's vision for the Metaverse. Thinking about money in the Metaverse is actually very helpful for how we design our products and the underlying infrastructure that supports them. After all, what would currency and payment systems look like if they were invented today for a purely digital world? They certainly would not resemble our current infrastructure.
We need a global, open, interoperable, near-real-time, low-cost, compliant global currency protocol that enables people, creators, and businesses to seamlessly transfer funds and innovate with programmable money. Wallets need to support NFTs. Real-world contracts and ownership will be replaced by smart contracts. While this may sound disconnected from the reality experienced by those we want to serve—those left behind by the current system—it is not, in fact.
Change should have happened long ago. It will happen in some way. Novi is ready to launch. It is regulated, and we are confident in our operational capabilities to exceed our high standards for compliance. We believe the delay in providing cheaper, interoperable, and more accessible digital payments is unreasonable. We will continue to persevere and prove that we can be a trusted participant in this industry and bring about positive change through our involvement.
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