Per Diem

Known as Libra until the end of 2020, Diem will be a big story in the worlds of cryptocurrency and payment systems in 2021.  You may not have heard of Diem yet, but you soon will, and will recognise the name of the man behind it: Mark Zuckerberg, CEO of Facebook. 

What exactly is Diem?

Diem is spoken about by its developers as a cryptocurrency and payment system in the same breath.  The “Diem Project” may successfully unify these two features with a dedicated token and blockchain mapped onto a mass user base (such as Facebook subscribers, for example) – what some refer to as a “hybrid approach”.  But calling the technology a payment network or system, not just a cryptocurrency, also has important and strategic public-relations value that may help distinguish it from competitors.  And it will also undoubtedly win Diem fans and accolades from the nascent DeFi (Decentralized Finance) sector, identified as a “hot new crypto trend”.  

Bitcoin, one of Diem’s key competitors, especially since Tesla and its CEO Elon Musk strongly backed it, continues to take investors on a veritable roller-coaster ride in 2021.  With recording-breaking peaks and, as some say, such as the UKs Financial Conduct Authority (FCA), inevitable plummets in value, Bitcoin remains the archetype and what most people think of when they think of cryptocurrency.  Part Tulip Mania, part Goldrush, the craziness surrounding Bitcoin is not a recipe for long-term consumer confidence in what remains the alternative and somewhat anarchic world of cryptocurrencies. 

There has been a notable shift in opinion and tone from many national and central banks concerning the opportunities and challenges of so-called Central Bank Digital Currency (CBDC), the Bank of England, for example, in the last year.  But the aims of CBDC take us far from the dizzying spectacle of Bitcoin.  Instead, we find ourselves in the far more prosaic, bureaucratic, and boring world of centrally issued electronic money and so-called stablecoins, which, as the name suggests, resist the lurid fluctuations of Bitcoin.  Unsurprisingly, therefore, Diem include in their future plans integration with CBDCs, a more reliable and amenable space through which Diem can secure a global footing.     

But it’s worth reminding ourselves at this point that the centralisation of financial power and monetary policy was what the likes of Bitcoin aimed to undo, not influence.  So, we are going to see a tumultuous period over the next few years as the ideological aspirations that set Bitcoin apart from stablecoins and CBDCs are ironed out.  And, perhaps like hybrid electric cars, Diem could offer consumers the acceptable face of cryptocurrencies during a period of critical transition between old and new financial systems that proves the roots of its future success.

New coin on the block

Diem, the promised new coin on the block in 2021, aims to achieve many, altogether more sober, everyday objectives and aspirations compared to Bitcoin.  That was not always the case, however.  Building on Zuckerberg’s early vision, the first iteration, Libra, promised no less than a rewiring of the global financial infrastructure to empower billions of people built on a permissionless network, a promise met with shock and awe by lawmakers and regulators in most of the world’s major economies in 2019.   

A change to these lofty aims followed in the wake of Zuckerberg’s failure to convince lawmakers and regulators that Libra was really just a good way to empower the unbanked of the world.  Today the priorities for Diem seem rather tame in comparison, seeking instead to integrate ‘smoothly with local monetary and macroprudential policies’ and complementing ‘existing currencies by enabling new functionality, drastically reducing costs, and fostering financial inclusion’ (White Paper 2.0, 2020, p.1).  Whether Diem can or will achieve what its developers and backers would like it to, only time will tell.  But apart from the latter of those aims, financial inclusion, there is nothing new to see here.  Hence, some have rebuked Diem (or Libra, as it still was at the time) for being little more than another PayPal. 

Key to understanding the rebrand from Libra to Diem at the end of 2020 was to allow the governance arm, the Diem Association, to create distance between it and Facebook and assert its independent credentials.  To placate the fears of regulators, not least FINMA, the Swiss Financial Market Supervisory Authority - the Swiss government body responsible for financial regulation of Diem by virtue of the fact that the Diem Association has chosen to locate itself in Switzerland - the Diem Association also expanded its executive team and a board of directors to bring a wealth of (traditional) banking and finance experience to the table. 

But Diem has not entirely lost its anarchic “glint in the eye” that defines so much of the crypto space.  Evolving into a fully decentralized, permissionless system may be beyond Diem, but its desire to, in time, lessen the constraints of traditional banking and financial regulation remains.  We might, therefore, better think of the Diem Association like scaffolding supporting a new building, which, when inevitably removed, will reveal Diem in all its “freestanding” architectural glory.  Or (and let’s push the metaphor even further), we might choose to think about the Diem Association like a pair of training wheels on a bicycle, with the aim of stabilising a new cyclist and giving them confidence as they learn.  And, once all the basic manoeuvres have been mastered, off come the training wheels and away we go!  The Diem Association will set standards, but it’s not meant (or designed) to last forever.         

Post-Facebook?

Opinions remains mixed across political and corporate institutions regarding the ultimate role or the actual benefit of cryptocurrencies compared with existing payment and monetary systems. CBDCs may put a small dent in the concerns of many, whilst also answering some intransigent questions regarding whether the world needs cryptocurrencies.  Diem, therefore, has several mountains to conquer to gain and maintain relevance in the market.  And among them is carving out a place for itself among the thousands of crypto-currencies, -tokens and -assets now operating across myriad public and private blockchains.  The obvious question for consumers and businesses alike is: Why bother with Diem at all?   

Facebook’s role as co-founder of Diem may help answer that question.  Despite the targeted attacks on the principal aims of Libra (Diem) by lawmakers and regulators that questioned whether it would proceed at all, the cryptocurrencies association with Facebook gives it a massive socio-economic and cultural launching-pad from which to build its brand and credibility.  In 2018 when Mark Zuckerberg first mooted the idea of a cryptocurrency, the motivation was, at least in part, the need for Facebook to address the growing influence of its Chinese competitors, Alibaba and WeChat, both of which already had mature, integrated payment systems in their platforms.  The need for Facebook to maintain market dominance remains integral to this story and to the future of Diem.  

But Diem’s association with Facebook could also prove a tremendous problem for the nascent coin in attracting new users from beyond Facebook’s existing user-base.  This is because Facebook was, and still is, dealing with consumer and political backlash over data privacy concerns and the spread of disinformation on its platform.  So whilst the Facebook user base continues to grow, there is no guarantee that a payment system will either convince those sceptical about Facebook’s motivations or methods, or provide added value for those yet to join the mass ranks of Facebook subscribers. 

Conclusion

When launched, Diem will undoubtedly make waves in international banking and traditional and non-traditional financial services.  The colossal cultural, economic, and political weight of Facebook guarantees, at the very least, Diem’s inclusion in discussions of what payment systems and even money looks like in the future.  But many of the Diem Association’s key aspirations, such as reaching the unbanked of the world and enabling financial inclusion, remain poorly defined.  And such aspirations, as noble as they might at first appear, risk slipping off the Diem priority list as the Association falls into traditional battles to win market share, enervate competitors, and maintain robust capital reserves.