Donald Trump supporters lay siege to the US Capitol on January 6, 2021. Image: Facebook

The new year got off to a shaky start for social-media companies, with their platforms facing heat from lawmakers and regulators over their relationship to the Capitol Hill riots. Facebook and Facebook-owned platforms in particular have earned notoriety across the political spectrum.

While the Democrats were quick to question the role of the social-media company in enabling the rioters in the days leading up to the march on the Capitol to organize through hashtags such as StopTheSteal and FightForTrump, the Republicans have not held back on their criticism of the social-media giant for de-platforming many of its representatives, the most notable one being President Donald Trump’s account.

Facebook has been at the center of other controversies as well, for playing a key role in promotion of the white supremacist rally in Charlottesville, Virginia, in 2017, the violence at the State Capitol in Lansing, Michigan, and at Trump rallies calling for election results to be decertified.

This notoriety comes against the backdrop of US Federal Trade Commission suing Facebook for illegal monopolization at the end of 2020 and the recently released privacy policy of WhatsApp creating widespread panic among its users. The introduction of the stablecoin “Diem” will only exacerbate the situation.

Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the coin, relative to some “stable” asset or basket of assets. According to reports, Facebook is looking to release its stablecoin Diem backed by the US dollar early this year.

The risk landscape associated with the rollout of new technologies within the context of a large social-media firm is vast and complex. In particular, there will be three major impediments to Diem’s success in 2021.

Regulatory challenge

The most noteworthy risk for a social-media company seeking to launch a new product such as a cryptocurrency like Diem is the headwinds it will face from regulators seeking to understand the platform and predict the risks and challenges it may pose from its operations.

The proposed stablecoin to be backed by short-term assets and government securities faced increased scrutiny from regulators in Europe to East Asia as early as 2019. While rebranding efforts such as the name change from Libra to Diem, pegging it to the US dollar over a basket of fiat currencies and operating it through an association based out of Switzerland are proactive attempts at distancing the coin from the parent Facebook, these will not pacify regulators.  

Diem will combine the technology and data powerhouse of Facebook with fixed assets and government securities, which will increase its ambiguity for investors and users. This ambiguity will obligate different governments and financial regulatory bodies to investigate and scrutinize the initiative.

Technological products coupled with financial assets expose the social-media company to scrutiny from different angles – competition, policy, financial stability, and monetary policy.

The potential of new technologies to cause disruption across multiple sectors makes regulatory risk a top priority. Evidence for this would be the increase in legal expenses for the technology firms of Silicon Valley over the past three years in North America, Europe and South Asia.

Data and privacy

In February 2018, Facebook was found guilty by German and Belgian courts of violating privacy laws. This judgment was followed by a data breach at Facebook in the summer of 2018, leading to the loss of data on 30 million users’ accounts.

These incidents were preceded by the Cambridge Analytica scandal that led to a total revaluation of control over data, privacy, and third-party access.

These back-to-back data breaches, policy violations, and the larger impact on Facebook’s reputation make a strong case for focusing risk-management efforts on the monetizable commodity of the firm, namely data.

With the recent changes in WhatsApp’s privacy policy bringing about concerns on data security and privacy for many individual users and businesses, the European Union’s General Data Protection Regulation and similar data-protection measures exert pressure on technological firms to increase their data protection measures, leading to a negative effect on their bottom line.

Furthermore, the risk of third-party apps or companies using a social-media company’s platform to harvest vital data of its users or leverage the obtained data to influence political outcomes will be the second-most-important risk for social-media companies looking to launch technological products. These violators can be application partners, non-state actors, or even governments.

Political risk

New technological products often introduce tools that enhance user connectivity and enable people to grow their networks beyond their immediate circle of friends and family. This enhancement threatens the political stability that governments in the developing world seek to protect.

The Indian government blocking the Internet and shutting down WhatsApp (owned by Facebook) to suppress dissent and to limit further escalating protests in both the disputed region of Kashmir and in its capital city New Delhi prove that the impact of social-media products on the domestic politics of countries is not negligible.

Social-media platforms are then faced with the dilemma of which party to kowtow to – the Democrats or Republicans, the pro-democracy protesters in Hong Kong or the Hong Kong administration?

New cryptocurrency products such as Diem that envisage increasing financial inclusion in the developing world should expect such dilemmas and challenges from the financial regulating authorities of countries and from governments trying to curtail financial access in regions they fear will threaten their national security.

While blockchain technology has been adopted by many multinational corporations across the globe, the acceptance of technological products such as cryptocurrencies is still in its nascent stages.

Over the past decade, social-media and technology firms such as Google, Amazon, Facebook and Apple – the so-called GAFA – have grown exponentially, and this growth has brought in new risks to their organizations and to their users. Facebook in particular has never faced a dearth of controversy.

Given these challenges and its history with the authorities, 2021 may not be the best year to venture into the world of digital currencies.  

Akhil Ramesh

Akhil Ramesh is a Non-Resident Vasey Fellow at the Pacific Forum. He has conducted extensive research on the political and economic environments of the Indo-Pacific region, with a particular focus on South Asia. He has worked for premier risk-consulting and non-profit organizations and in the blockchain industry in New York City and Washington, DC.

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