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What does the collapse of Meta’s Diem mean for other stablecoins?

By Daniela Ešnerová


Updated

A hand holding phone with diem logo on a display against blue backround with Facebook logo.
Diem co-founder previously stated the project would be ‘phased out’ if the Fed was to issue its own CBDC. – Photo: Shutterstock

This week officially spelled the end to Meta's (formerly Facebook) ambitious project to create the stablecoin, Diem (formerly Libra).

Although the project claimed noble goals including the delivery of services to over a billion of the most disadvantaged people on the sidelines of the financial system, it came under intense scrutiny from a suspiscious regulatory system from the very beginning.

As the demise of Diem is now finalised, government authorities continue to keep a keen eye on private stablecoins, while developing their own versions in the form of central bank digital currencies.

Doomed from the beginning?

“Despite giving us positive substantive feedback on the design of the network, it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead," said Diem's chief executive Stuart Levy, in a statement explaining the eventual sale of the project's remaining assets to crypto banking specialist Silvergate .

Diem was initially established in June 2019 as Libra, created by Facebook and backed by the Libra Association, a consortium of companies which included Visa, Shopify and Uber.

The ambitions were simple but far reaching, as it's white paper – Libra: The path forward – explained: “a simple global currency and financial infrastructure that can empower billions of people.”

Three months later Mark Zuckerberg, the founder of Meta/Facebook, which at the time had 2.37 billion users, pitched the project to a prickly and suspiscious US Congress. During his testimony he defended Libra as a service that could potentially introduce over a billion unbanked people worldwide into the financial system.

“Being shut down out of the financial system has real consequences for people's lives and it is often the most disadvanteged people that pay the highest price,” Zuckenberg told the US lawmakers.

“I believe that this problem can be solved and that the Libra can help,” he added. 

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'You're trying to help the drug dealers'

But not all were sold on Zuckerberg's proposal and he received some stinging criticism from the floor of Congress. 

“For the richest man in the world to come here and hide behind the poorest people in the world, and say that’s who you’re really trying to help. You’re trying to help those for whom the dollar is not a good currency – drug dealers and tax evaders,” California's representative Brad Sherman told the dumbfounded entrepreneur.

Indeed, the hearing set a tone for all future approaches to the project from regulators, policymakers and central bankers alike – and it began to scare off the stakeholders. Among the high-profile members of the Libra Association to back down in October 2019 were Visa, Mastercard, PayPal and eBay.

New dawn, new name

In 2020, Libra was rebranded into Diem – 'new day' – hoping to mark a fresh start. 

“Now transitioning to the name ‘Diem’ which denotes a new day for the project, the Diem Association will continue to pursue a mission of building a safe, secure and compliant payment system that empowers people and businesses around the world,” Diem said in a statement explaining the name change.

Meanwhile the project's design also changed over time: Libra was initially supposed to be backed by a basket of individual fiat currencies, but following scrutiny from worldwide regulators, this plan changed to creating different versions of the stablecoin pegged against single corresponding fiat currencies – euro, dollar, sterling.

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Regulatory change of heart

Since Zuckerberg first presented Libra to Congress many governments and regulators have realised the potential benefits of stablecoins, and some 60 central banks are currently developing central bank digital currencies (CBDC). Canada, China and Jamaica have ran pilot schemes, while Nigeria and the Bahamas, have already launched their CBDCs.

"If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options," a letter from the President's Working Group (PWG) stated in November 2021.  

The PWG warned, however, that Congress must act quickly, recommending that stablecoin issuers should have regulatory requirements as banks to lower the percieved risk.

“To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level."

Three weeks later, US senators on the banking committee probed issuers of the main private stablecoins including Tether Coinbase, Gemini, Paxos, TrustToken, Binance.US and Centre about their financial stability.

Libra/Diem legacy?

Christian Catalini, co-creator of Diem said: “We started with a very bold – and possibly ahead of its time – white paper that had a number of gaps, but was also responsible for accelerating progress on the public sector side towards central bank digital currencies.”

“A longer account is for another day, as the dust will need to settle for an objective assessment of the contributions (if any!) to the space. It has been an incredible learning experience and rollercoaster.”

“Today we pass the baton to Silvergate. They have been one of the first Federal Reserve member banks to understand the potential of crypto, and are now in a great position to bring a stablecoin to market that follows the PWG framework.” 

“When it comes to financial inclusion, stablecoins were never the end game, and with CBDCs we may witness the rise of truly open, interoperable public infrastructure that can support competition in payments and financial services in the way Libra/Diem could have done,” he added. 

Catalini was previously quoted in May 2021 as saying that Libra would “phase out” its stablecoin if the Federal Reserve was ever to create its CBDC.

“Diem has committed to fading out, for example, Diem dollar, if there were such a thing as a digital dollar issued by the Fed,” said Catalini said during Consensus 2021 conference according to Leaders Insights.

More "acceptable" promoter

“We all gave our whole hearts, blood, sweat and tears to what I will always call Libra," Libra/Diem's creator David Marcus wrote on Twitter earlier this week.

“We were mission driven and were in it for the right reasons (that remain as valid today as they were then).” 

“Here's to yet another chapter with a maybe more “acceptable”  promoter driving the vision forward. There will be ample time in the future for me to properly reflect on the behavior of certain politicians and regulators along the way, but for now... onward!” 

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