Interbank Market News Scan: How close is Facebook to becoming a digital nation-state?

The Takeaway: Brokers and traders should pay close attention to how Facebook addresses regulation of Diem

Yesterday I shared some insights about Amazon’s potential for building a digital nation based on the creation of its own digital token.  The company signaled efforts in this area by announcing a search for staff with experience in creating digital currency.  Writing about their efforts naturally led me to thinking about the efforts of another large platform manager, Facebook.

Given over 2 billion subscribers to Facebook’s platform and millions of daily users, The Menlo Park, California-based company seems like another likely candidate for “digital nation” status.  Arguably it is ahead of Amazon in the creation of its own digital currency, the Diem.  But is it ahead of Amazon when it comes to putting in place the transactional environment necessary for a “digital country?”

Facebook’s purported mission, according to its annual report, is to “give people the power to build community and to bring the world closer together.”  Facebook generates almost all of its revenues from advertisement and while it considers Amazon a competitor in the advertisement space, Facebook has not invested in transportation, storage, or distribution systems for goods and services or subscriber content production.  In my opinion, these channels have boosted Amazon’s value as an issuer of digital coins because they represent the underpinnings of a transactional environment.  Transactions are the underpinnings of growth in output and income and while there are notices of items for sale in numerous Facebook groups and advertisement appearing on users’ profiles, Facebook is more of a personal data aggregator than it is a market for trade.

Lastly, what also works against Facebook is its history of data privacy breaches.  Both aisles of Congress have come down on Facebook for its lack of transparency in notifying its subscribers as to how the company uses consumer data.  These privacy concerns have also leaked into Congress’ assessment of how the company’s proposed digital currency would be incorporated into any potential data grabbing strategies.

I believe what is more important to Congress than its rhetoric about consumer protection and privacy is how a digital currency provided by a behemoth digital platform could challenge the United States’ ability as a tax and customs jurisdiction.  Should a significant number of miners, farmers, merchants, and other business entities start using Facebook’s digital currency to exchange among themselves and with Facebook’s end user subscribers, Facebook becomes a new nation-state.

Facebook hopes to have Diem launched by the end of 2021.  What impact the current variation in the corona virus and the ensuing Covid disease will have on deployment is unknown.  Right now, speculators and broker/dealers may not have Diem on their radar, but they should, like Amazon, prepare for a large platform issuing its currency and also determine how Diem should be valued.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

Rates reported by the Federal Reserve (Release Date 27 July 2021)

Effective Fed Funds Rate: 0.10%

Discount Window:  0.25%

Prime Bank Rate: 3.25%

3-month Treasury bill: 0.05%

6-month Treasury bill: 0.06%

1-year Treasury bill: 0.08%

Prices

Exchange rates of interest as of 9:02 am EST

Currency pairExchange rate
AUD/USD*0.7381
EUR/USD*1.1802
GBP/USD*1.3826
USD/CAD*1.2543
USD/CHF*0.9162
USD/JPY*110.1800
USD/MXN*20.0290
USD/BTC+0.0000
USD/ETH+0.0005

Sources: *Reuters +OANDA

Interbank market news scan: Facebook’s Diem can help the dollar remain the global reserve currency …

Links to follow today ….

Central banks, ECB. Global stocks held steady on Thursday ahead of the European Central Bank’s monetary policy update and despite COVID-19 lockdown restrictions in Europe being extended and cases rising globally. Global stocks stabilize ahead of European Central Bank meeting despite steep rise in COVID-19 cases in Asia | Markets Insider (businessinsider.com)

Central banks, Norway. Norway’s central bank will test various technical solutions for a central bank digital currency (CBDC) over the next two years, it said on Thursday. Norway to test solutions for digital central bank currency | Nasdaq

Central banks, Canada. The Federal Reserve and the Bank of Canada will use drastically different playbooks for the remainder of their nations’ respective economic recoveries. The US central bank has indicated it will leave rates near zero for the foreseeable future, and that it isn’t even considering reining in its emergency asset purchases. Canada’s central bank is taking surprising steps to cool the nation’s red-hot virus recovery – and the approach directly conflicts with the Fed’s ultra-easy stance, even with the US further along (msn.com)

Central banks, remittances, Kenya. Remittance inflows into Kenya in March were up 27% year on year to $290.8 million, the central bank said on Wednesday. Kenya’s remittance inflows in March up 27% yr/yr -central bank | Reuters

Central banks, United Kingdom, ECB. Sterling slipped on Thursday, holding below $1.40 before a European Central Bank meeting, as investors weighed up the outlook for an economic recovery from COVID-19 in the UK. Sterling slips versus euro; currency markets quiet ahead of ECB meeting | Nasdaq

Central banks, Facebook, cryptocurrency. Now known as diem, the Facebook-backed digital coin is expected to launch later this year, albeit in a much more limited form. When it finally arrives, diem won’t come with the same fanfare and controversy of the original idea envisioned by the social media giant nearly two years ago. Facebook-backed Diem aims to launch digital currency pilot in 2021 (cnbc.com)

Central banks, ECB, digital currency. Only a few years ago, central bank digital currency (CBDC) was seen as something exotic. Sweden’s Riksbank was alone among high-income countries in exploring it, a fact attributed to its population’s uniquely low use of cash. Now official e-currencies have gone mainstream. www.ft.com

The market opening. The rates to start your day ….

As of 8:10 am EST, Bloomberg reports that the yield on the three-month Treasury note is at 0.01%, down from yesterday’s 0.03% while the two-year note remained at yesterday’s 0.15% rate. The ten-year and thirty-year Treasurys are trading at 1.57% and 2.27%, respectively and relatively unchanged from yesterday.

The Federal Funds rate, the rate at which banks lend to each other overnight in support of their reserve requirements, is at .07%, while the Fed Funds target rate is still at .25%. The prime lending rate is 3.25%. All three rates unchanged from yesterday.

Exchange rates of interest as of 8:45 am EST….

Currency PairsRates as of 8:45 am EST 22 April 2021Rates as of 9:55 am EST 21 April 2021Percentage change in rates
EUR/USD1.17931.2024-1.9%
GBP/USD1.37851.3891-.0076%
USD/CAD1.25721.2629-.0045%
CAD/XCD2.14622.1462unchanged
USD/XCD2.70002.7000unchanged
USD/TTD6.66916.6721-.0004%
USD/BBD2.00002.0000unchanged
CAD/TTD5.30125.3050unchanged
CAD/BBD1.58991.5874unchanged
Source: OANDA

The Opening Takeaway: Could Facebook’s cryptocurrency be the longer term digital play?

Facebook appears to be leveraging the experience it has garnered on America’s Capitol Hill. When the Facebook-backed digital coin Libra found itself targeted by backlash from members of Congress, the company and its stable coin project partners had to go back to the drawing board which included a rebrand of the coin (from Libra to Diem); a little reorganizing of the stable coin project’s membership; and pursuing a payment services license from Switzerland’s financial regulators. See Facebook-backed Diem aims to launch digital currency pilot in 2021 (cnbc.com).

By going the stable coin route, where a cryptocurrency pegs its value to the value of a country’s currency, in this case, the United States, Facebook and its Diem partners, knowingly or not, have made baby steps to pacifying government critics in the US who are concerned about Diem’s threat to the stability of the US political-economic system. This is simply code for “We have to stop Facebook from disrupting our tax and customs regime.” The claims of concern over privacy also seem a bit bogus given that Congress has passed up a number of times over the last decade and a half to promulgate any comprehensive laws that would not only have codified network neutrality but also privacy over America’s digital networks. Besides, as the US slowly gets to testing its own central bank issued digital coin, it too will have to address why taxpayers should be less concerned about government intrusion into privacy as opposed to Facebook.

Facebook is in a position to leverage its network effect generated by over 2 billion daily users and its e-commerce and advertising platform. Its subscribers can enjoy some sort of “dual nation” status where they exchange goods and services on Facebook’s platform using Diem, thus creating a sense of exclusivity. Sort of like an Amazon Prime membership on steroids where only members i.e. Diem-using subscribers, can come and play. And knowing that Diem can be exchanged for US dollars will put Facebook subscribers’ minds at ease. If the Facebook subscriber is not concerned about convertibility, then the US government should have less of a consumer protection argument to throw around.

Another potential benefit may carry over to the Federal Reserve. As it hems and haws over the development of a central bank issued digital currency, it could study the Facebook template, observing in real time how a digital nation-state operates. Also, there is the potential for a test case for conducting digital foreign currency exchange made easier due to Diem being a stable coin.

Lastly, from a foreign policy perspective, the US should look favorably on more of the world’s economies having indirect access to the dollar via Facebook’s stable coin. Using, buying, and selling Diem amounts to using, buying, and selling US dollars. This indirect use of the greenback would keep the dollar out front as the world’s reserve currency.

Alton Drew

Dollar continues decline; Twitter and Facebook CEOs testify before US Senate today …

As of  8:22 am AST, 17 November 2020:

How to read the chart:

CAD/USD: If you come to the United States with one Canadian dollar (CAD)and wish to sell it for a US dollar (USD), the market price is .76351 USD.

USD/CAD: If you take a US dollar (USD) to Canada and wish to sell it for a Canadian dollar (CAD), the market price is 1.30956 CAD

CAD/USD=0.76351   USD/CAD=1.30956

CNH/USD= 0.15204   USD/CNH=6.57601

EUR/USD= 1.18446   USD/EUR=0.84417

DKK/USD =0.15903     USD/DKK=6.28648

NGN/USD= 0.00261    USD/NGN=379.042

JPY/USD=0.00956      USD/JPY=104.59

INR/USD=0.01343       USD/INR=74.3520

JMD/USD=0.00672     USD/JMD=145.669

GYD/USD=0.00469       USD/GYD= 204.735

GHS/USD=0.17092     USD/GHS= 5.81221

XCD/USD=0.37037        USD/XCD= 2.70

KES/USD = 0.00909       USD/KES= 108.384

Source: OANDA

Major political/legal event in the United States

President Trump nominates Joseph Barloon to the US Court of International Trade

Yesterday, President Donald Trump sent the name Joseph L. Barloon to the United States Senate as a nominee for a seat on the United States Court of International Trade.  Mr Barloon currently serves as general counsel to the United States Trade Representative and serves as the acting deputy USTR for China Affairs.

Source: Executive Office of the President

Facebook, Twitter CEOS to testify before Senate sub-committee

Today, Facebook chief executive officer Mark Zuckerberg and Twitter chief executive officer Jack Dorsey will testify before the U.S. Senate Committee on the Judiciary.  The leaders and founders of the two social media giants will be asked questions about censorship during the 2020 general election.

Source: United States Senate Committee on the Judiciary

Longer term yields tick up; Twitter’s Dorsey, Facebook’s Zuckerberg to testify before Senate.

As of 7:55 am 17 November 2020, U.S. Treasury rates and Federal Funds rates are as follows:

3-month: .08%

6-month: .08%

12-month: .11%

2-year: .18%

10-year: .88%

30-year: 1.64%

Fed Funds Rate: 0.08%

Federal Reserve Target: 0.25%

Prime Rate: 3.25%

Source: Bloomberg

Major political/legal event in the United States

President Trump nominates Joseph Barloon to the US Court of International Trade

Yesterday, President Donald Trump sent the name Joseph L. Barloon to the United States Senate as a nominee for a seat on the United States Court of International Trade.  Mr Barloon currently serves as general counsel to the United States Trade Representative and serves as the acting deputy USTR for China Affairs.

Source: Executive Office of the President

Facebook, Twitter CEOS to testify before Senate sub-committee

Today, Facebook chief executive officer Mark Zuckerberg and Twitter chief executive officer Jack Dorsey will testify before the U.S. Senate Committee on the Judiciary.  The leaders and founders of the two social media giants will be asked questions about censorship during the 2020 general election.

Source: United States Senate Committee on the Judiciary

Facebook, Google, and Twitter have never been tech companies …

Today, the United States Senate Committee on Commerce, Science, and Transportation will convene a hearing to discuss whether firms like Facebook, Google, and Twitter can maintain immunity from civil penalties under Section 230 of the Communications Act of 1934 as amended by the Communications Decency Act of 1998. Specifically, under 47 USC 230(c), we read the following:

(c)Protection for “Good Samaritan” blocking and screening of offensive material

(1)Treatment of publisher or speaker

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

(2) Civil liability

No provider or user of an interactive computer service shall be held liable on account of—

(A)any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or

(B)any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in paragraph (1).

How the chief executive officers from Google, Facebook, and Twitter answer today’s questions as to whether and how their companies edit content posted on their platforms should provide fodder for any future litigation or regulation under the Communications Decency Act of 1998. There is still the likelihood, based on chatter in the press, that Section 230 itself could be repealed. The push back against repeal may come from smaller platforms such as Parler, an online platform that touts itself as a place where people can “Speak freely and express yourself openly, without fear of being “deplatformed” for your views. Engage with real people, not bots. Parler is people and privacy-focused, and gives you the tools you need to curate your Parler experience.”

If people can speak without inhibition (or likely facts) on a platform like Parler, smaller entrants into the information platform markets will want protection from posts that are seen as indecent and protection when they take actions to combat indecent speech.

Politically, the issue of whether online companies lose their liability protections under the Communications Decency Act of 1998 will become less of an issue after 20 January 2021 under a Joe Biden administration. The political Right have been raising the most hell regarding Section 230 given their concerns that conservative voices have been squelched by Twitter and Facebook. The political Left have been more concerned about online privacy issues, that these companies have abused the data they collect from their platform’s subscribers.

Compared to Donald Trump who has been leading the charge against what he sees as liberal bias by these platforms, Joe Biden himself has been relatively quiet on the issue, although he reportedly, along with the President, endorses repealing Section 230 in its entirety. The chairman of the senate commerce committee, Roger Wicker, Republican of Mississippi, is against a total repeal.

On first blush, based on their behavior, these companies lost the protection afforded them under the Communications Decency Act of 1998. They have been able to hide behind the moniker of “tech company” for so long that they have been given a pass when they use algorithms rather than human editors to modify or divert content. Acting like a newspaper opens them up to libel laws and would require a digital attorney saying yay or nay on millions of posts made every day. This would near destroy their current business model and cause them to transform, I believe, to a hybrid paid, unpaid system for subscribers or compensate content providers.

Will regulating social media benefit content providers in the African Diaspora?

Late last May, President Donald Trump stepped up his battle with social media by issuing an executive order intended to prevent the censure of political speech expressed on platforms such as Twitter and Facebook.  Mr Trump allegedly saw the last straw when Twitter showed the nerve to fact check the President by attaching a number of links to some of Mr Trump’s tweets.  He didn’t like that.

Mr Trump is not alone in his frustration with social media.  Other Republicans and conservatives have complained in recent years about what they deem as bias against conservative political viewpoints and alleged liberal political positions taken up by executives at the social media companies.

To combat the alleged bias, Mr Trump issued an executive order that would call for the Federal Communications Commission to issue rules that clarify portions of the Communications Decency Act of 1996 (47 USC 230).  The Act excludes Twitter, Facebook, and other interactive computer services from civil liability where they exercise good faith in removing and otherwise not accepting certain harmful content.  Taking censorship action beyond the scope of the “Good Samaritan” exceptions would paint them as publishers and cost them their protection from civil liability claims.

Specifically the Act reads as follows:

(c)Protection for “Good Samaritan” blocking and screening of offensive material

(1)Treatment of publisher or speaker

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

(2)Civil liability. No provider or user of an interactive computer service shall be held liable on account of—

(A)
any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or

(B)

any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in paragraph (1).[1]

Mr Trump would like rules that clarify the interaction between section (c)(1), exemption from treatment as a publisher, and section (c)(2), exemption from liability of a publisher, of the Communications Decency Act.  My issue is whether Mr Trump’s proposed path of action in any way hinders the ability of the African Diaspora community to exchange ideas and content for commercial purposes?

Maya Dollarhide defines social media as a:

” …. computer-based technology that facilitates the sharing of ideas, thoughts, and information through the building of virtual networks and communities. By design, social media is internet-based and gives users quick electronic communication of content. Content includes personal information, documents, videos, and photos. Users engage with social media via computer, tablet or smartphone via web-based software or web application, often utilizing it for messaging.”

A high percentage of adults within the African Diaspora use social media.  According to Pew Research, 69% of African American adults use at least one social media site compared to 73% of whites.  Whites and blacks appear on par when it comes to social media usage.

When it comes to commercial reasons for using social media, 29% of consumers use social media platforms to research or buy products and services.  Although the “social” or lately the “political” component of social media gets a lot of attention these days, there is a marketing component to social media where these networks allow for businesses to engage with their customers.  Social media provides a relatively lower cost alternative to traditional media marketing mechanisms.  A well done social media campaign can have information go “viral” about goods or services, and send this information instantaneously around the globe.

We have to be mindful that the drafting and implementation of rules to be used to keep social media companies in compliance with the Communications Decency Act may not come to pass depending on the outcome of this fall’s election.  Should Mr Trump lose in November, the Democratic victor will likely put in place a Democratic chairman and along with his or her Democratic colleagues squash the idea of going forward with any rules that give the impression that the Commission has entered the business as social media speech police.

Even if Mr Trump wins and a Republican majority remains in place at the Commission, I believe the Commission will craft very narrow rules in order to prevent any First Amendment violations.  More importantly, rules that keep social media companies from acting as editors benefit the global exchange of commercial information between members of the African Diaspora.

While I doubt that it is ever in the best interest of Facebook to edit or alter purely commercial communications, advertisements, etc. between an African American wholesaler in Atlanta, Georgia and potential retail distributors and/or end users in Accra,  Ghana, added protections that keep communications unimpeded cannot hurt.

The narrower the rules, the better it is for our self-interests.