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Will Facebook's Diem Dollar Overthrow The US Banking System?

Billionaire Investor
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EDITOR NOTE: There have been very few “single” years in the history of global finance where multiple forces have come to a head in such a way that risks the destruction of the very “theater” upon which these forces collide. 2021 is going to be one of them. On April 1, non-bank companies (like Amazon, Facebook, Square, and Walmart) will have the green light to flood the market with loans, siphoning a huge share of legacy bank liquidity and profits. On September 30, the International Monetary Fund will be reevaluating its SDR in preparation for a global launch that will put nations under the yoke of its own globalist currency. But racing ahead of America’s own “digital dollar” is Facebook’s Diem--a digital currency that may operate in the same way as the SDR. It will be a single currency that can be transacted globally to facilitate cross-border payments with a simple tap on your mobile device. When it comes to command over the digital pathways connecting the world, tech companies like Facebook know every turn. The Fed, IMF, and the entire legacy banking system can neither compare nor compete with legacy tech. The battle for monetary dominance in the digital space will likely raze the entire banking industry to the ground. Financial institutions like JPMorgan, Citibank, and VISA--not even mentioning the smaller regional banks that service the smaller households and businesses across America--are about to see Trillions of dollars in wealth wiped away. These trillions, by the way, comprise YOUR MONEY, deposited in a savings or checking account. This is a new “unexpected” factor that may bring about a banking collapse, and it will happen sooner than later, meaning that your funds are at dire risk of being converted into the bank’s capital should it undergo failure. Banks are not the only thing to collapse as a result of currency digitization. Your privacy, your transactional data, access and control over access to your money, and the “value” of your money--all of these are going to be wiped out either as a secondary effect (collateral damage) or, strangely, as a primary objective. Like any revolution that burns anything in its path, The Great Reset will have many factions and many battles ahead. And these are the forces that are coming together to vie for supremacy in the public space of monetary policy and action, and in the private space of financial dominion, surveillance, and control over your money.

Citi’s annual Digital Money Symposium, now in its eighth year, is always an interesting affair and attracts notable speakers from across the payments industry. This year, one of the highlights was a virtual fireside chat with Christian Catalini, co-creator of Diem (formerly Libra) and chief economist at the Diem Association, who talked about the more measured approach the group is taking to launching its cryptocurrency.

When Libra broke onto the world scene in June 2019, its backers – Facebook and other platform players like Uber, Spotify, eBay and (plus 24 more companies) – had great ambitions embedded in its whitepaper.

The group was planning to launch a stablecoin within a year to “enable a simple global currency and financial infrastructure that empowers billions of people”. The Libra coin was going to be backed by a reserve of safe assets and built on a permissioned blockchain to reduce the cost of payments, especially cross-border payments.

However, the idea that with a flick of a switch almost a quarter of the world’s population could transact on a global level outside the traditional financial system sent shivers through the protectors of the system. Regulators, supervisors, policymakers, finance ministers and central bankers were quick to throw up barriers to Libra’s launch, but this move by Facebook also spurred them to ramp up experiments with central bank digital currencies (CBDCs), with some of them now close to becoming a reality.

Fast forward a few years, some of the original members departed, notably Visa, Mastercard and PayPal, and the Libra concept was reimagined in response to regulatory criticism. Libra was rebranded as Diem in December 2020, with significant changes to the original whitepaper, although it is continuing to pursue a payment system licence through the Swiss Financial Market Supervisory Authority, or Finma.

The first major change is that it has moved from being a multi-currency to a single-currency stablecoin, such as a Diem euro or Diem dollar. Mr Catalini explained that this helps to mitigate currency substitution risk, one of the major concerns raised at the outset. The coins will be backed one-for-one by high-quality liquid assets, such as 90 days or less US Treasuries in the case of the Diem dollar, which will be the first coin available on the network, according to Mr Catalini. Diem will also follow Basel III's capital requirements and put in place additional buffers to account for potential losses from credit, market, liquidity and operational risks.

The overall design could support a transition towards CBDCs, according to Mr Catalini. “You could imagine a future where if a CBDC becomes available in any of the jurisdictions where Diem is operating, the network could integrate directly with the public sector effort and provide additional functionality and features when it comes to payments on top of the public sector rails,” he said.

The second major change addressed concerns around financial crime. The new design excludes un-hosted, or self-hosted, wallets, which are personal virtual wallets that are not provided by a financial institution or crypto service and, therefore, have not gone through know your customer or anti-money laundering checks. In tandem, the Diem Association has also abandoned the idea of transitioning to a permissionless network, where anyone can add nodes to the blockchain.

Mr Catalini also signalled Diem’s intention to operate in close co-operation with a number of global custodian banks. “The banks will be the direct interface between virtual asset service providers (Vasps) and the network. For example, consumers in the US will only be able to access the network via a Vasp, such as a wallet or an exchange, that is already regulated and licenced in the US to perform those exact activities,” he said. “And the Vasp itself can only acquire, buy and sell coins through a bank that also needs to be regulated in the relevant jurisdictions.”

Despite addressing several of the most pressing regulatory challenges, Diem, by its very nature, may not be able to solve one of the biggest concerns: that a private company (or group of companies) could control the global payments system.  

In their book, ‘The Pay Off: How changing the way we pay changes everything’ (coming out in July), Swift’s ex-CEO Gottfried Liebbrandt and former head of corporate affairs Natasha de Terán argue it is the act of making a payment, not money itself, that makes the world go round. Get payments right and economic activity prospers; get them wrong and economic activity could be stifled.

When considering the Libra/Diem developments, the authors acknowledge that one global currency underpinned by a single organisation would be simpler, doing away with a swathe of intermediaries (including Swift). However, they pose the question that has plagued many within the industry, especially the regulators: do we really want a social media company at the epicentre of the global financial system?

Originally posted on The Banker

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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