Facebook-Backed Diem Project Quits Stablecoin Bid

On January 31, the Diem Association confirmed the sale of its intellectual property and other assets to Silvergate Capital Corporation, a previous partner in the Diem Project.

The sale marks the end of Mark Zuckerberg’s ambitious Diem Project, which intended to make monetary transfers faster and more affordable. The Diem Project was started by Facebook, now Meta, with the intent to launch its own cryptocurrency Libra which would allow people to spend money or buy something with almost zero transaction fees. In a press statement, Stuart Levey, the CEO of Diem Association, highlighted Diem’s efforts to minimize privacy risks and reduce financial crime and blamed US Senators for Diem’s end.

Explaining the reason for the decision, Levey said, “Despite giving us positive substantive feedback on the design of the network, it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead.”

“As a result, the best path forward was to sell the Diem Group’s assets, as we have done today to Silvergate,” he added.

Senators feared that the Diem could facilitate illegal activities such as money laundering and privacy breaches and could even challenge fiat currencies like the US dollar. And most importantly, they did not trust Facebook with the protection of consumer data and management of a payments network.

Although the Diem Association tried to separate itself from Facebook by renaming its project from Libra Association to Diem Stablecoin Project, it has faced hurdles and skepticism from regulators since the very beginning. And with time, as the scrutiny over the Diem project accelerated, its ambitions were scaled down further and further.

The Trajectory of Diem

Diem Association (originally Libra) had planned to launch a stablecoin which was to be backed by a basket of global currencies. However, within a few months of its launch, Zuckerberg was called to Capitol Hill to explain and justify his cryptocurrency ambitions. In the hearing, US Senators highlighted Facebook’s involvement in election interference, running discriminatory housing ads, and failing to protect customers’ privacy – due to which they underlined that Facebook cannot be trusted with launching its own cryptocurrency.

The potential to undermine sovereign currencies, promote money laundering, and privacy issues associated with the Diem project were the major concerns of the US Senators, which is why they asked Zuckerberg to shut down the work on the project immediately.

Soon after this hearing, several major companies like VISA, MasterCard, and PayPal withdrew from the Diem project completely. After this backlash, the project greatly scaled down its ambitions and decided to launch a US-dollar stablecoin called Diem USD.

It also moved its operations from Switzerland to Washington DC and withdrew its application for a Swiss payment license from FINMA, the financial regulator of Switzerland. This was the time when the Diem Association partnered with Silvergate Capital Corporation to issue a stablecoin backed by the US dollar. It was a significant shift from its original plan of developing global stablecoins backed by a group of various national currencies.

Later in 2021, the Diem Association planned to finally launch its digital coin, but the operations were scaled down again, and it was only able to launch the Novi wallet, a crypto wallet, without the Diem cryptocurrency, the most awaited feature.

Facebook launched the Novi wallet as a part of its pilot program in the US and Guatemala in October 2021. It allowed users to instantly send and receive money using Paxos stablecoin. The project was launched in partnership with Coinbase, which manages the custody of cryptocurrencies.

However, any plan to incorporate a Diem US dollar stablecoin into the Novi wallet was immediately quashed when five US Senators issued an open letter to Mark Zuckerberg and David Marcus, head of Facebook Financials, to immediately stop its pilot program and its work towards Diem.

According to the regulators, Facebook did not satisfy the regulatory requirements, due to which it cannot be trusted with the Novi Pilot program. They fear that Diem can pose a direct threat to the financial security and stability of the country.

The trajectory of Diem demonstrates that it was unable to follow its vision even after having 25 partners all across the world, rebranding and downplaying the original project and separating its identity from that of Facebook.

The regulators were not happy with the combination of a commercial firm managing a digital wallet or issuing stablecoins which is why the project was shut down completely. They feared that this would give Facebook a lot of economic power that could challenge the sovereignty of the US financial infrastructure.

However, Silvergate plans to launch a US-dollar backed stablecoin later this year. It is yet to be seen whether it will be able to launch the much-awaited stablecoin, which has been running into regulatory problems since the time it was envisaged.

The Bottom Line

Cryptocurrencies have been grabbing headlines these days, especially after the great year Bitcoin had in 2021. Everyone wants to jump on the crypto bandwagon and take advantage of the opportunities offered by the crypto market. However, it is extremely important to note that cryptocurrencies cannot enter the mainstream until the crypto market and crypto platforms create a safe and transparent environment for their investors.

As seen in the case of Facebook and Diem, trust, accountability, and transparency form the foundation of decentralized cryptocurrencies. If these platforms fail to fulfill these promises, they will be shut down by regulators. The case of Facebook also demonstrates the importance of regulatory approval. Greater regulation not just protects investors but also lends more legitimacy to the crypto platform.

For instance, if a company issues a cryptocurrency that meets all the regulatory requirements, more and more investors will be interested in buying that new currency. Therefore, it is important for companies thinking of creating their own cryptocurrencies to get regulatory approval before advertising and investing in their project. Nonetheless, Facebook’s case sets a precedent for other companies on how they should not navigate in the US regulatory framework.

About The Author
Ian Kane is the Co-Founder at Unbanked, a global fintech platform built on blockchain. Kane has worked in technology & digital media for over 10 years with a heavy focus on business development, sales, and strategy.