Facebook wanted to revolutionize finance with a global digital currency – then regulators came along.
The token, first proposed in June 2019 with the name libra, was originally intended to be a universal currency tied to a basket of state currencies such as the US dollar and the euro.
After fierce opposition from regulators around the world, the organization overseeing the project lost key supporters, including Visa and Mastercard. The group eventually watered down their plans and settled on several “stablecoins” backed one-on-one by various government-backed currencies, as well as a multi-currency coin.
The Facebook-backed digital coin now known as Diem is expected to hit the market later this year, albeit in a much more limited form. When it finally arrives, they won’t have the same fanfare and controversy over the original idea that the social media giant envisioned almost two years ago.
The Diem Association, a Switzerland-based non-profit overseeing the development of diem, plans to launch a pilot project with a single dollar-pegged stablecoin in 2021, according to a person familiar with the matter.
The person who preferred to remain anonymous as the details have not yet been released said this pilot will be small and will mainly focus on transactions between individual consumers. There may also be an option for users to purchase goods and purchases, the person added. However, there is no confirmed start date, so the timing could change.
“It really has gone off the radar in a remarkable way,” Michael Casey, chief content officer of cryptocurrency publication CoinDesk and former financial journalist told CNBC.
Diem was subjected to intensive scrutiny when it was introduced. Given the wide reach of Facebook – 2.8 billion monthly users were active in the fourth quarter of 2020 – central bankers and politicians feared that the currency could jeopardize currency stability and possibly enable money laundering. Facebook’s involvement also raised concerns about protecting user privacy.
“It was such an amazing challenge to the international order that the backlash was just very strong,” said Casey.
According to Casey, a major problem was that the diem posed a threat to the dominance of the US dollar. Two months after Facebook unveiled the Libra, former Bank of England Governor Mark Carney proposed a new digital currency based on a global shopping cart that could detract from the dollar’s status as the world’s reserve currency.
Diem’s technology has “changed dramatically in the past year and a half from a naive blockchain to a very sophisticated blockchain that seeks to answer some of the questions posed by regulators,” said Ran Goldi, CEO of the Digital Assets Group is building an infrastructure, so that merchants can accept Diem as a payment method.
“I think it’ll come through the gates this year,” said Michael Gronager, CEO of blockchain analytics firm Chainalysis. “It would be a missed opportunity if not.”
“At the same time,” Gronager added, “this is one of several initiatives that are taking place, and it is similar to Tesla buying $ 1.5 billion worth of crypto. This is just part of a big move, not a new move . “
Indeed, Diem – or Libra – may have been the great crypto story of 2019. But bitcoin and cryptocurrencies have gained significant momentum over the past year, with bitcoin recently climbing to a new all-time high above $ 60,000 and big firms like Tesla and Square making big bets on digital coin. Meanwhile, the crypto exchange Coinbase went public in a landmark direct listing on the Nasdaq.
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The Diem Association has lost numerous members and leaders nearly two years after it was first revealed.
Visa, Mastercard, and Stripe were some of the earliest companies to pull out of the club. An exodus of other members followed, including PayPal, eBay and Vodafone. Meanwhile, the project has also suffered a number of notable divergences, from Kevin Weil, head of Facebook’s planned Novi digital wallet, to Dante Disparte, Diem’s chief public affairs officer.
At the same time, Diem underwent a complete overhaul, renaming itself from Libra earlier this year, and strengthening its leadership team with great people like CEO Stuart Levey, who was formerly HSBC’s Chief Legal Officer.
Diem is currently in talks with Swiss financial regulators to obtain a payment license. This is a critical step that would move the organization further on to get their digital currency project off the ground.
“A big step in our dialogue with regulators has been a step-by-step approach,” Diem’s chief economist Christian Catalini told CNBC’s Joumanna Bercetche last month.
“We will gradually roll out different functions and use cases, applications in different areas,” he said, adding that members large and small must be subjected to strict anti-money laundering controls.
“As soon as we get the green light, we will experiment with a small number of users and a small number of players,” said Catalini. The goal is to make sure the technology and reserve system works as expected, he added.
And although it starts with a limited pilot, the group plans to bring in dealers and other partners at some point. For the time being, it will remain tight.
“What you get with an institution like Facebook that supports a stablecoin is much better distribution,” Gronager said. “You can put it in apps, add it in lots of other places, and I think that will be strong.”
“We’ll see when it starts, how it turns out, but already today, much of the interest in crypto is also speculative,” he added. “It will basically allow more people to get into crypto easily.”
However, this also brings with it user data concerns, an issue that clouded the project due to the history of Facebook privacy scandals. Diem says privacy is “very serious”.
“Diem himself will not have any private information about customers,” said Catalini. “Some of our members have made commitments to keep social and financial data separate.”
Still, diem has achieved a global race between central banks to find their own strategy for digital money. People’s Bank of China is leading the way, testing a digital version of the yuan in a number of cities, while the UK’s central bank is looking into whether or not to issue its own digital currency. And some experts say we shouldn’t count the day yet.
“The story of digital money in the 2020s will be the growth of tokenized money,” a team of Citi analysts led by Ronit Ghose, global head of banking research, wrote in a research note last week.
“The central banks … and Big Tech … are building new payment formats and channels in addition to the broader introduction of the cryptocurrency,” wrote the analysts at Citi. “Stable coins like Diem could benefit from the huge network effects of their big tech sponsors.”