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After the Diem Association announced that its project was coming to a close, VIXIO spoke with experts to assess just how impactful the stablecoin project ended up being.
On January 31, the Diem Association’s chief executive admitted that the rumours that had been swirling were true. The project had sold its vast assets and would be winding down in the coming weeks.
Over the years, a number of key individuals have departed the company for other crypto jobs, including with the likes of Circle, while David Marcus, the Facebook executive overseeing crypto ventures, also left the company last year.
Mark Zuckerberg, Facebook’s chief, also stopped talking about Diem. In fact, Meta’s latest financial results were released on February 2, and include no mention of the project.
However, it was not meant to be like this. In the early days of Libra, the world anticipated a private monetary initiative being driven by Meta (then, of course, Facebook).
"I wasn't surprised by the news, from the beginning the project had a lot of questions that couldn't be addressed,” said Dr. Iwa Salami, a financial law professor at the University of East London.
The various versions of the project failed to alleviate the concerns of central banks and monetary authorities about how a privately issued currency that could became widely used would be managed, she pointed out. “Even by attempting to denominate the Diem in national fiat currencies, it was not able to allay these concerns as it would have still resulted in a situation where the Diem would have been backed not just only by cash but also by cash equivalents, including commercial papers and other debt instruments.”
Yet, many believe that it has left a huge legacy for a project that ultimately failed to take off and was in existence for only two and a half years.
“I think as the book is written on the early years of the growing crypto economy and the regulatory approach, Libra/Diem will be an important early chapter,” said Ari Redbord, legal and government affairs chief at TRM Labs, a blockchain platform.
Although regulators had been talking about how to regulate digital assets for years, the ability of Libra to reach 2bn Facebook users changed the game, he said. “I was at the US Treasury Department in June 2019 and can tell you that there was real palpable urgency to address potential risks.”
For example, the Treasury Department would meet with representatives from the then Libra Association and travel to Switzerland, where it was headquartered, to meet with Switzerland’s Financial Market Supervisory Authority (FINMA), which had recently received an inquiry from the Libra Association asking for an assessment of how it would classify the Libra project. “We even worked with teams from Libra to fashion an acceptable AML policy.”
The urgency that Zuckerberg’s stablecoins project fostered among regulators has been monumental, he said.
“Libra was a wake-up call to regulators and it really was the beginning of the regulatory frameworks that are still being discussed and developed,” he said. “If regulators and lawmakers were particularly hard on Libra, it was because of the urgency of 2.5bn Facebook users being able to send funds across borders at the speed of the internet and because it was really the beginning.”
Beyond burgeoning regulatory frameworks for crypto-assets, there has also been the rise (and rise) of the central bank digital currency (CBDC).
"The Diem project definitely galvanised momentum for CBDCs,” said Nilixa Devlukia, director at PaymentsSolved.
While Sweden's Riksbank was working on a CBDC project before, others have launched, and central banks' interest in the matter is definitely a result of the Diem Association, she argued.
But in spite of their stern reaction, Devlukia dismissed the thought that central banks or other regulators should be pleased about its downfall.
“Diem highlighted the problems that payments have, particularly when they are cross-border. The white paper galvanised a lot of action on cross-border payments including the Financial Stability Board’s Roadmap,” she said. “It would be wrong to see Diem's winding down as a win when its aim was to solve this problem."
What will become of stablecoin regulation now?
When the EU unveiled its legal framework for crypto-assets, many were cynical about its motives.
Although the European Commission’s spokespeople talked about wanting innovation in the trading block when it came to digital finance, many concluded that the Markets in Crypto-Assets (MiCA) regulation had one aim in particular — strict oversight of Diem.
Eero Heinäluoma, a member of the European Parliament (MEP), told VIXIO: “It is true that the MICA proposal was to a large extent inspired as a response towards the possible risks private stablecoins could bring, and then in the first place was thought about Libra/Diem.”
"People in the commission have admitted that MiCA was a pushback to Diem,” agreed Jón Gunnar Ólafsson, legal counsel at e-money firm Monerium. “The definitions were a mimic of the Libra white paper. There are many stablecoins out there that are live and there is innovation happening, but none of them are using the model that the commission originally suggested."
I think that it would be wise for the EU to revisit the MiCA legislation before it becomes law, he argued. “It would make sense to research a little better, and take a look at what is happening in this industry.”
"Growth in the stablecoin industry is pretty fast, and the biggest players could be regulated by the e-money directive. The EU has really good legislation here that could mitigate the risks that the big stablecoin players pose."
Members of the European Parliament left and right, do however see the need to progress with the MiCA legislation.
“While Diem was certainly one of the main catalysts for the MiCA proposal, MiCA goes beyond just regulating Diem,” said Markus Ferber, a German MEP.
First, there are other large stablecoins that would benefit from a sound regulatory framework, the centre-right politician said. “Look for example at Tether that goes from scandal to scandal while at the same time being an important medium of exchange in the crypto markets and having a market cap in the ballpark of 80bn dollars.”
Furthermore, MiCA also addresses the market for other fungible crypto-assets and not only stablecoins, he said. “I believe the general principles of the commission proposal are still valid and still sound.”
Nonetheless, he noted, the EU must remain open for innovation and not be too prescriptive in its regulatory approach. “Otherwise, there will simply be no crypto asset services providers to be regulated in the EU.”
“We’ve been working now for a while on the proposal, and believe that the necessary guarantees for the protection of financial stability are built in, in our proposals,” said Heinäluoma, who sits with the centre-left caucus of the European Parliament.
One clause that lawmakers added into the commission’s MiCA proposal was a veto right for the European Central Bank (ECB), which in the original draft was left to national competent authorities. “This is essential to safeguard the financial stability now and in the future, which is also to be the position taken by the Council,” he said, referencing the council of 27 EU ministers who are the third piece of the legislative process in the EU.
It is critical that digital finance is an area that is well regulated and supervised, the Finnish MEP said. “Here, MICA regulation will play a key role. We will see whether there is a big appetite in the EU for these stablecoins.
“At the same time in the digital sphere, I think it’s also important to support the ECB initiative for the digital euro. This is a valuable project, which, once well designed, could become a safe and trusted means of payment,” he summarised.
