Facebook relaunches Libra/Diem cryptocurrency project: what did they give up on?
I already wrote about Facebook Pay and the Libra cryptocurrency in my blog two years ago. Then we were just getting acquainted with the projects, but today they already have a whole story, and it is not entirely simple. The news about the reboot prompted me to write an update for Libra.
There were compelling reasons for revising the Libra/Diem crypto project. In 2019, Facebook and 27 partners loudly announced a project with great ambitions. The Libra Association, now known as the Diem Association, said it plans to launch a global stablecoin backed by a basket of currencies including the US dollar, euro, yen and pound sterling. The backlash from world governments has been fierce. While Facebook executives said they were just one of equal partners in the association, US lawmakers embraced their involvement with concerns about protecting user data or giving the already powerful Facebook a financial services foothold.
Against the backdrop of criticism, the Libra Association has lost some of its members best equipped to deal with financial regulators, including Visa, Mastercard and PayPal. In the end, the Libra Association decided to postpone the launch of the multicurrency coin. In May 2021 the news about its reboot was published. So what is the Diem Association’s new plan?
Don’t be surprised if you hear Diem instead of Libra, because the cryptocurrency changed its name back in 2020. In this way, they demonstrated the “organizational independence” of the project from Facebook on the way to obtaining approvals from regulatory authorities. Facebook’s reputation has left a trail of uncertainty over the security of user data. In Switzerland, where its headquarters were located, Diem never received the necessary license from the financial regulator.
Now the Diem Association, a Facebook Inc. group and 25 other companies are relocating their core operations to the United States. Let me remind you that before that the management planned to go through the registration procedure with the Swiss regulator FINMA. The new plan includes an agreement with Silvergate Capital Corp., an important player in the cryptocurrency industry, that will issue coins and manage Diem’s dollar reserves. Silvergate Capital jumped about 20% in extended trading following the announcement of the deal. Diem Networks US, a subsidiary of the Diem Association in the United States, will operate a blockchain-based payment system that allows Diem’s stablecoin transfers in real time, and will register as a monetary services company with the Treasury Department’s Financial Crimes Unit. The new plans, while simpler to implement, are a big departure from the vision presented by the Libra Association in 2019.
Diem’s ambitions narrowed. The desire to move beyond social media towards e-commerce and global payments had to be postponed. The current members of the association are Facebook, crypto companies like Coinbase Global, and others like Uber Technologies and the Shopify commercial platform. While Diem’s path forward may be easier than Libra’s, the association has yet to explain how the project is fundamentally different from the many existing dollar-backed stablecoins such as USD Coin.
Diem also announced that the company is continuing to develop a global payments network with the idea that it will serve its own stablecoin or even central bank digital currencies if world governments decide to issue them. The association believes that the coin with built-in consumer protection and anti-crime provisions will be liked by regulators and companies that want to use the network. Let me remind you that many central banks, including banks in the United States, Europe and China, are in the process of researching or creating their own digital currencies. If this happens, Diem will be able to adapt its network to them.
Diem CEO Stuart Levey called the project promising for the United States, as it could lower the cost of sending money around the world, be it coins issued by Diem or the digital currencies of central banks that many countries are considering. He also noted the importance of encouraging innovation in this area, as the US cannot afford to be left behind in the digital race. The launch date of the pilot project is still unknown.