Novi, Facebook’s digital wallet, announced a pilot in October that would enable people in the US and Guatemala to send money to each other fee free. Although Facebook had ambitions for its own stablecoin, originally named Libra, this wallet has gone ahead without it and is using the Paxos stablecoin instead.
Libra has since been rebranded as Diem, and a separate organisation was set up to handle its launch. Although regulatory approval has not been forthcoming for Diem, there are still plans to integrate it into the Novi wallet at a later date. David Marcus, a co-creator of Diem and Head of Novi, has stated his intentions: “I do want to be clear that our support for Diem hasn’t changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live. We care about interoperability and want to do it right,” he tweeted.
Diem is likely to face opposition, even though these days the Diem Association is a separate organisation and run independently from Facebook. Even Novi’s watered-down trial was met with fierce resistance. A number of US Senators signed an open letter that stated, “Facebook cannot be trusted to manage a payment system or digital currency when its existing ability to manage risks and keep consumers safe has proven wholly insufficient.”
By launching with the Paxos instead of Diem, Novi has shown how it is easier for corporations to leverage existing stablecoins rather than build something from scratch. For one thing, it overcomes some of the regulatory objections. Paxos describes its Pax dollar as the industry’s first and most liquid regulated stablecoin. And Novi’s Marcus described the Pax dollar – or USDP – as a “well-designed stablecoin that’s been operating successfully for over three years and has important regulatory and consumer protection attributes.”
Unlike other cryptocurrencies – such as bitcoin – stablecoins are backed or pegged to fiat currencies or other assets to smooth out the volatility. However, there have been concerns about what some stablecoins are actually backed by. With USDP, Novi explains that its reserves are fully backed by the US dollar and are held 100% in cash and cash equivalents, which enables users to cash out their Pax dollars into fiat currency at a fair value.
Paxos is already part of a growing industry of Stablecoin as a Service, a white-label proposition that corporates can use to brand their own digital dollars. Paxos argues that participants in a corporate’s ecosystem can transact nearly instantly and with nominal fees if they use a stablecoin.
For many corporates, going down this white-label route would be much easier than trying to do what Facebook attempted and building something on their own. There are reports of corporates, such as IBM, building their own propositions. And Walmart has reportedly been working on its own stablecoin. In 2019 it filed a patent, but so far the project has been kept under wraps and further details have not been revealed.
Stablecoins for corporates are useful if there is a closed network, or ecosystem, of users that need to transfer value. For example, if a corporate’s suppliers use the same bank as them, they could use a bank-issued stablecoin to pay them rather than relying on the traditional cross-border payment rails.
A number of banks have announced they are working on their own stablecoin projects. J.P. Morgan, for example, designed its JPM Coin back in 2019 and it is used for payments between its institutional clients. The US bank stated in an announcement that JPM Coin is both a payment rail and deposit account ledger, which enables J.P. Morgan clients to transfer US dollars that are held on deposit at J.P. Morgan between themselves.
This, and the Novi trial, give a hint of what is possible with stablecoins. Although it is new territory for most corporates right now, in the future, the use of stablecoins is expected to take off, especially if they take advantage of Stablecoin as a Service solutions.