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