Diem Crypto (Libra) – Facebook owned Currency

 

KEY POINTS

·         Diem, the digital currency project backed by Facebook, has abandoned plans to secure a payment license from Switzerland’s FINMA watchdog.

·         The organization will move its operations to the U.S. and has partnered with crypto-friendly bank Silvergate to issue a dollar-backed stablecoin.

·         Formerly known as Libra, Facebook’s digital currency was met with much opposition from regulators when it was first announced in June 2019.

Facebook-backed digital currency project Diem has withdrawn its application for a Swiss payment license and will instead shift its operations to the United States.

The Diem Association, which oversees development of the Diem digital currency, had been pursuing a payment system license with Switzerland’s FINMA watchdog. Diem has now dropped plans to secure Swiss regulatory approval, while its U.S. subsidiary has partnered with Silvergate, a California state-chartered bank, to issue the token.

While  plans take the project fully within the US regulatory perimeter and no longer require a license from FINMA, the project has benefited greatly from the intensive licensing process in Switzerland and the constructive feedback from FINMA and more than two dozen other regulatory authorities from around the world convened by FINMA to consider the project,” Stuart Levy, Diem’s CEO, said in a statement.

Diem plans to move its operational headquarters from Geneva to Washington, D.C., where its U.S. unit is based. Following the announcement, FINMA said Diem’s application for a Swiss license had been at the “advanced stage” but that the group now planned to launch its payment system from the U.S.

Formerly known as Libra, Facebook’s vision for a digital currency was met with a severe backlash from regulators when it was first announced in June 2019, with central bankers and politicians worried it could undermine sovereign currencies like the dollar, enable money laundering and infringe on users’ privacy.

Diem had initially proposed a universal currency tied to a basket of major currencies and government debt. After much regulatory opposition, the group then switched its focus to multiple “stablecoins” backed one-to-one by different currencies, as well as one multi-currency coin.

For now, Diem is only planning to issue a U.S. dollar-backed stablecoin, called Diem USD. Unlike bitcoin, which uses a public ledger system and isn’t controlled by any single authority, Diem’s technology will be open to only a few participants, such as Facebook and other members of the Diem Association. Stablecoins are also designed to avoid the price volatility seen in cryptocurrencies like bitcoin.

Silvergate will be the exclusive issuer of Diem USD and will manage its dollar currency reserve. Silvergate has become a go-to for cryptocurrency businesses shunned by traditional lenders.

Digital currencies have been wild rally in bitcoin and other digital currencies. Institutional investors have shown growing interest in bitcoin, while major firms like Tesla and Square have made big bets on the digital coin.

At the same time, central bankers are also grappling with the concept of digital currencies. The People’s Bank of China has been racing ahead with trials of its digital yuan in various cities. And there have been growing calls for the U.S. Federal Reserve to develop a digital version of the dollar.

However, some in the crypto industry think that digital innovation around currencies might be best left to the private sector.

Governments can help set the rules of the road and make sure monetary policy can be emitted, financial crimes can be thwarted. But the government shouldn’t be in the business of building technologies,” Jeremy Allaire, CEO of crypto firm Circle, told CNBC in an interview last week.

Bottom of Form

Stablecoins are cryptocurrencies that peg their value to more stable assets, often a government-issued currency. The USD stablecoin will be issued by California-based Silvergate Bank, which will also manage the Diem USD reserve.

Formerly known as Libra, Diem hasn't gotten much love since the association publicly launched in mid-2019. Partners have bolted from the project, details have shifted and legislators have criticized the plans. Nonetheless, Facebook has indicated that it will press on with the project, whose ambitions have been curtailed over time. 

Why  Facebook want a cryptocurrency? 

This isn't actually Facebook's cryptocurrency. It's a project of the Diem Association, which Facebook originally co-founded as the Libra Association. The association, which will serve as a monetary authority for the cryptocurrency, to empower billions of people, adults without bank accounts who could use the currency.

But Facebook has its own interest in digital cash that predates Diem. The social network ran a virtual currency, called Credits, for about four years as a way to make payments on games played within Facebook. Mark Zuckerberg, Facebook's CEO, has said that sending money online should be as simple as sending photos. Diem is designed to make it easier and cheaper for people to transfer money online, which might also attract new users to the social network. But Zuckerberg acknowledged that having people use cryptocurrency would likely benefit Facebook by making advertising on the social network more desirable and, therefore, more expensive.

Facebook may also have other plans for the cryptocurrency. A new subsidiary will run a wallet for holding and using the digital currency. Originally called Calibra, the wallet was redubbed Novi in May with a mission of helping people around the world access affordable financial services

Direct control over Diem

Facebook is one of the members of the Diem Association, the nonprofit that will serve as a de facto monetary authority for the currency. The association hopes to grow to 100 members, most of which will pony up $10 million to get the project going. Each member has the same vote in the association

Association members dropped out

Some of the bigger founding members appear to have gotten cold feet. Seven of the original 28 founding members -- that's a quarter of them -- dropped out before the association's inaugural meeting in Geneva. The exits included PayPal, eBay, Stripe and financial services giants Visa and Mastercard. The departures are big losses because those members brought expertise in payments and transfers technology. The other dropouts are Mercado Pago, the online payments platform of Argentina's Mercado Libre marketplace, and Booking Holdings, an online travel company that runs sites including Priceline, Kayak and OpenTable.The association currently has 26 members.

Diem and other Cryptocurrencies

Let's start by addressing how it's similar to other cryptocurrencies, such as bitcoin and ether. Like them, Diem exists entirely in digital form. You won't be able to get a physical note or coin. And like other cryptocurrencies, Diem transactions are recorded on a software ledger, known as blockchain, that confirms each transfer. The Diem blockchain will be managed by the founding members in the early stages but is supposed to evolve into a fully open system in the future.

Diem will be pegged to real assets, a format widely known as a stablecoin. That contrasts with bitcoin, ether and some other cryptocurrencies that aren't backed by anything and swing wildly in response to speculation.

Initially, the plan was to use a basket of assets to anchor the cryptocurrency's value. The association didn't say what those assets would be but indicated they would be denominated in major global currencies, like the dollar and the euro, which don't fluctuate intensely day to day. The association will buy more of the underlying assets to create, or "mint," new Diem when people want more of the cryptocurrency. When people cash out, the association will sell those assets and "burn" Diem. 

Backing a currency with an asset isn't anything new. In fact, it used to be common. The US dollar was backed by gold until 1971. The value of the Hong Kong dollar is pegged to the US dollar and managed by a currency board, which can issue new notes only if it has enough in reserves.

Cryptocurrencies compare to the dollar

The US dollar is tried and true and pretty much accepted anywhere in the world. Some countries like the dollar so much that they use it instead of their own money. And dollars earn interest, though at current rates that won't add up to very much.

Of course, the dollar has weaknesses. Using dollars, particularly across borders, can be expensive because banks take a cut to convert them into local currencies. If you're using dollars on a prepaid card, the credit card company is probably charging the merchant a portion of your purchase. And if the US government prints too many dollars, inflation could follow.

Cryptocurrencies can make it easy to send money directly to someone. Bitcoin transactions aren't actually untraceable, though they can be very difficult to trace. Similarly, bitcoin use isn't absolutely anonymous. It's pseudonymous, meaning that your bitcoin address is recorded even though your identity isn't. 

Some cryptocurrencies, notably bitcoin, have a cap on the number of coins that can be minted, meaning that owners of existing coins don't have to worry about the arbitrary creation of new ones, although that could create other issues in the future.

Facebook can use financial data for ads!

 When the plans were first unveiled, Facebook took pains to point out its wallet was housed in a subsidiary of the social network. The arrangement was designed to allow the wallet company to be regulated by authorities and prevent money laundering and other financial crimes. The company also said it would keep financial data separate from Facebook's social data.