An analysis on Diem — The Facebook backed cryptocurrency
Facebook shared its plans to start a cryptocurrency Libra back in June 2019. The plan was to build a cryptocurrency by forming an independent membership association along with 28 other companies. But the response to this proposal wasn't very positive. Many regulators had voiced their concerns stating that private companies creating currencies will impact the sovereignty of countries.
Based on discussions with various regulatory bodies and policymakers, the direction of the membership association was pivoted. Libra was renamed to Diem which means ‘day’ in Latin and the association itself was renamed into Diem association to give it a new brand name.
Diem currently plans to launch multiple single currency stable coins which are pegged to local currencies. The first stable coin is getting released in the US this year and it would be pegged to the dollar. This would shortly be followed by trials in other markets.
Diem is a Switzerland-based non-profit association that oversees Diem's development. The objective of the association is to do governance/oversight of the Diem network and oversee the operations of the Diem payment system.
“The Diem project will provide a simple platform for fintech innovation to thrive and enable consumers and businesses to conduct instantaneous, low-cost, highly secure transactions,” — Stuart Levey, Diem Association’s CEO
There are currently 26 members in the Diem association. Facebook is involved via Novi, a regulated financial company created by Facebook. The other major players among the members are:
Paypal, eBay, stripe, Visa, and Master card were founding members of Diem which then exited the project before the inaugural meeting because of strategic differences.
Diem association is currently planning to create 2 sets of coins:
- Stable coins — which will be having a specific face value in local currencies like the Dollar or euro.
- Multicurrency coin (≋XDX) — will be composed of multiple local stable coins and would be used for cross-border settlements.
So by the looks of it, XDX will be the major cryptocurrency and stable coins will be more of a way to fund and exchange money when transactions happen in different countries.
The introduction of stable coins seems to be intended to overcome regulations and to ensure that if a country releases a digital currency, it can easily replace the stable coin with digital currency.
Diem association has mentioned on its website that all the Diem coins will be backed by a reserve of assets consisting of
- Cash equivalents
- Government securities (short team)
The reserve of assets will give more confidence to businesses and users that if they purchase Diem coin, they can redeem it into local currency at a later point.
SWOT analysis on Diem:
- Huge user base (2.7 billion+) Facebook and its associated social networks have.
- Strong companies are currently members of the Diem association and it can include more companies once coins are released.
- Inhouse market places and payment systems members have will help easily integrate Diam as a payment method.
- Even though led by a non-profit, Diem is perceived to be controlled by Facebook. Many people don't consider Facebook to be very transparent especially when data leaks or scandals happen.
- Speed of development has been slower and things have changed a lot from when initial plans for Libra were announced.
- Private currencies will not be welcomed by nations.
- Customer protection and consumer privacy will be tougher to tackle when services are operating in multiple nations.
- Enabling universal access to financial services, without having to worry about exchange rates and money transfers
- Bring advantages of blockchains into payments
- Enabling merchants/users to easily get paid from anywhere in the world.
- Become a leader in payments
- Regulatory approval will be tougher in various markets since Diem can be used as a substitute for local currency
- Can get banned in some markets because of the presence of crypto transactions
- Other cryptocurrencies are also getting widely accepted by companies
- Competitors like Amazon also have plans to release digital currencies soon.
A lot has changed from when Facebook initially created its plans to launch its own cryptocurrency. With Bitcoin and other cryptocurrencies becoming mainstream, there are currently multiple options for people to do payments via cryptocurrency. Technical know-how is what's preventing a lot of people from using cryptocurrency for payments.
If Facebook and Diem association can build a cryptocurrency and integrate it into payment methods seamlessly, this would help introduce many people to use digital payments.
Regulators will still be worried about private currencies competing against local currencies. No government would like to lose control over their own currencies and any effort will get taken out by outright bans. So it would be interesting to see how Diem would be able to convince regulators and policymakers in accepting Diem as a payment method.