In June 2019, the social media giant Facebook published the details for a much discussed digital currency platform called “Libra”. Nowadays Libra is known as Diem, with the project undergoing a major renaming to smooth out regulatory wrinkles.
A year and a half later, the Diem Association still has to bring a digital token onto the market with official approval from the Swiss authorities. Even if the Swiss Financial Market Authority (FINMA) grants a payment license for the project for digital currencies, Diem will present its offerings in a global landscape that is far more broken in terms of regulations for digital currencies than it was 18 months ago.
The stable coin regulations seem to be the focus of attention for governments in key economic blocs such as the United States and the euro zone. China continues to accelerate the pace of its national digital yuan project, and despite initial claims to the contrary, Beijing authorities appear to have a more domestic agenda for the e-yuan.
Major crypto markets in terms of trading volume such as India and Nigeria are increasingly becoming anti-privately issued digital currencies. If Diem started today it would be four major digital currency transaction theaters where the legality of the project’s “coin” would be low at best.
When does Diem start?
In November 2020, the Diem Association announced plans for a limited start of their project with a US dollar pegged digital token. Far from the ambitious plans for a “Facebook coin” backed by a basket of fiat currencies, which heralded the debut announcement in 2019, this new USD stablecoin was a consequence of the successive rebranding attempts made by the noisy backlash among global financial regulators were required.
January came and went, and now February is almost over, but no trace of the Diem USD stablecoin. Swiss FINMA has not yet approved the license for Diem’s payment system, but recent developments in the country in the area of crypto and blockchain regulations should positively influence Diem’s application.
Switzerland has established itself as a crypto-friendly nation and allows the space for digital assets to flourish within its borders. In early February, the first phase of the country’s blockchain law, which focuses on corporate reforms, went into effect. In the meantime, the second part of the new legal framework, which provides regulatory clarity for trading crypto-securities, will become law later this year.
Plans for launching Diem received another boost with the announcement of the partnership between the crypto-security outfit Fireblocks and First Digital Asset Group – a payment provider on the Diem platform. As part of the collaboration, the two companies have created a secure wallet that financial institutions can use to conduct transactions on the Diem network.
In response to Cointelegraph, a FINMA spokesman declined to comment on the status of Diem’s application but confirmed that the licensing process is still ongoing. The Diem Association did not immediately respond to Cointelegraph’s request for comments on the matter.
Jackson Mueller, Head of Politics and Government Relations at Blockchain Compliance and Financial Market Infrastructure Securrency, says Diem is unlikely to launch in the first quarter of 2021. In an interview with Cointelegraph, Müller remarked:
“Several representatives of the Diem association have made it clear that a rollout will not take place until they meet regulatory expectations and requirements, and it is currently unclear whether and to what extent the association is on the verge of achieving this.”
Private stable coins in the crosshairs of the supervisory authorities
Diem’s announcement in the summer of 2019 seemed to stimulate financial regulators around the world to test stable coins. The likely network effect of a digital currency benefiting from Facebook’s 2.8 billion users appeared to spark intense discussions between national and international regulators.
According to Müller, government control over privately issued stablecoins has increased: “The conclusions and results of these efforts are currently unclear, which I believe will pose further challenges for the Diem launch in the first quarter.”
Aside from the series of Congressional hearings held in 2019 after Diem’s announcement, some Congressmen are pushing for stricter rules on stablecoin. If the measures were passed, private stablecoin issuers would be forced to adhere to banking standards.
Intergovernmental bodies such as the G-7 and G-20 have also expressed concern about stablecoins, with Diem often singled out. These bodies have published numerous papers and research studies highlighting the potential of private stablecoins to disrupt existing financial systems.
The European Central Bank recently asked the legislators of the European Union for veto rights on stable coins in the euro area. If this were allowed, the ECB would have the final say on stable coin rules, the promulgation of which is enforceable across the European Union. Indeed, the ECB set the core of its reservations about stable coins, particularly those that were not issued by recognized financial institutions, stating:
“The additional requirements laid down in the proposed regulation for major issuers of stable coins are therefore to be welcomed. However, these additional requirements may not be sufficient to counter the growing risks with stable coins being widely used as a means of payment or a store of value in several countries of the Union. “
In addition, ECB President Christine Lagarde is a well-known critic of stablecoins and cryptocurrencies in general. Hence, it is likely that the ECB, which has a right of veto over stable coin rules, will place strict compliance mandates on issuers in the eurozone.
Officials in Germany are also among Diem’s louder opponents in the euro zone. While the country is by no means against crypto, Federal Finance Minister Olaf Scholz has stated several times that the country’s government will be against Diem’s operation in Germany.
According to Ran Goldi, CEO of the First Digital Assets Group, a large part of the negative assessments by the European regulators are based on a lack of understanding of the Diem model. “I think the ECB is still looking at Diem as a new currency rather than a representation of existing money (as in, they think this is still the scales, a basket of currencies),” Goldi told Cointelegraph, adding, “They should they take time to learn more and maybe realize that there is no threat to their economy. “
CBDC: Central banks respond to Diem and private stablecoins?
Aside from the risk of downright onerous regulatory measures, several governments have also begun to look into the creation of their own central bank digital currencies. These sovereign digital currency projects appear to be central banks’ response to the perceived threat from privately issued stablecoins.
Given that digitization appears to be the next phase in the evolution of money, old financial metrics like Agustín Carstens, General Manager of the Bank for International Settlements, have advocated central banks playing a key role in the transition to digital currencies .
According to a recent BIS survey, around 86% of major central banks are studying CBDCs. China’s e-yuan project is currently undergoing multiple test protocols. The country’s banks are supporting the adoption of bootstraps by creating hardware wallets for digital currency / electronic payment.
Connected: China is accelerating the release of CBDC and testing the infrastructure before accepting it
There also appears to be a significant amount of international collaboration related to CBDCs. Recently, the central banks of China, Thailand, the United Arab Emirates and the Hong Kong Monetary Authority have partnered to create a cross-border CBDC. These international collaborative projects appear to be aimed at creating protocols for interoperability between national CBDC projects.
In India, the country’s central bank has confirmed that it is actively developing a digital rupee. According to a recent statement by Shaktikanta Das, Governor of the Reserve Bank of India, the RBI is “very in the [CBDC] Spiel ”and would like to follow China’s footsteps in order to create a digital companion for its national currency.
Meanwhile, the Indian government is reportedly on the verge of enacting a general ban on cryptocurrencies that will include stable coins. People with knowledge of the plan have speculated and said that crypto owners will be given a transition period to sell their assets in digital currency.
India is Asia’s third largest economy and a potential market base for Diem payment transactions. Another big arena like China with its DCEP could already be difficult for Diem to achieve significant acceptance.
In Europe, the ECB wants a veto right on stable coins, but has stated that any digital euro created by the central bank will be exempted from the digital currency regulations that apply to other stable coin issuers. Nigeria – Africa’s largest economy – has banned banks from serving crypto exchanges.
Even with a license from FINMA, Diem could overcome some regulatory hurdles, as the major economies are not trying to allow their old banking systems to be disintermediated without a fight.