Diem: A Dream Deferred?

Facebook learned pretty quickly it wouldn’t be able to “move fast and break things” in the world of payments. Finance requires trust, and the company had none when it announced its stablecoin project, then called Libra, now called Diem, in 2019. The social media company was widely seen as having enabled the spread of disinformation, and the Cambridge Analytica scandal showed it losing control of user data, a factor highly relevant to discussions of Libra.

As the Diem-attached Novi digital wallet readies for market – two years later, a lifetime in crypto – it remains to be seen whether regulators and the public will be willing to accept and use this corporate-driven attempt to create a global payments medium. 

“We deserve a fair shot,” David Marcus, Facebook’s head of financial services, wrote in a blog Wednesday. But even when it comes to trustless, blockchain-based services, reputation matters, as does the public’s faith. 

I agree with Marcus that even a toned-down version of Diem would provide “a lot of value.” The banking system is painfully unjust, and Facebook has the reach to provide hundreds of millions of people access to financial services they never had before. 

(Marcus noted the social network enabled $100 billion in payments over the past four quarters, though there wasn’t an indication where those transactions originated.)

At the very least, Diem will familiarize a new generation with the foundational technologies – wallets, QR codes, hashes – that make crypto run. And perhaps it will set a race to the bottom on fees for financial services or set the expectation that monetary systems should be built on open, interoperable protocols. 

In its initial form, the would-be stablecoin libra was revolutionary in scope. Backed by an ever-changing basket of fiat currencies, developed and governed by an association of 100 companies and organizations, the novel currency would have challenged the status-quo banking and payments industry. 

It almost certainly would have interfered with governments’ monetary policy, if it grew large enough, by effectively pushing locals to trade their fiat currency for libra on a huge scale. It also could have introduced data privacy or money laundering risks: In fact, one of the major concerns over libra was that Facebook itself seemed likely to harvest a lot of payments data. Regulators the world over ordered the project to halt development. 

So on its second attempt, the Facebook-led Libra consortium took a different tack – it sought regulatory approval, pared down its vision, moved its headquarters from Switzerland to the U.S. and rebranded – leaving the stain of Libra behind. Diem is a radically different project, to create fiat-pegged tokens issued in partnership with a bank. 

Was that the right choice? Crypto is an industry filled with brash thinkers and bold ideas – our greatest strength and weakness. Our heroes infamously “test in prod,” deploying code in live, unaudited environments. There are hacks and exploits every week, as well as innovations stacked on innovations. 

Some would say scaling back was Facebook’s only choice. Consultant Richie Hecker wrote Libra’s original vision was “doomed to fail,” because it had too many moving parts. CoinDesk’s Nikhilesh De called it “buzzword boogaloo.” Even its creators expressed doubts about how Libra was revealed to the world.

“To me they were selecting the path of greatest resistance – building their own blockchain rather than using an existing one, going with a complicated basket of currencies and commodities rather than something people can understand like the U.S. dollar (or some other fiat currency) plus the economics were convoluted,” Figure founder Asiff Hirji said in an email. 

In “Facebook: The Inside Story,” Wired editor Steven Levy tells the story of an upstart social network with the aim of connecting the world, getting people to share more, even if that comes at the expense of their privacy. 

There are numerous instances where Mark Zuckerberg, Facebook’s founder, weighs growth and “sharing” over the reasonable concerns of his executives or users. There was the decision to switch the default status of posts from "friends-only" to "public.” Or the Instant Personalization change in the platform API that led to the Cambridge Analytica data scandal.

The very mindset that enabled Facebook to become a data and advertising juggernaut cost it the public's trust. And, maybe where it mattered most: in democratizing finance. “I’ve heard multiple conversations about how this proposal would be so great if only Facebook wasn’t involved,” Marcus noted.

“The advantage of high price stability and regulatory compliance may lead some merchants and other corporate users to adopt it,” Darrell Duffie, a Stanford professor of finance who has written extensively on stablecoins, said over email. He added that diem is not Facebook, and that there appears to be a firewall around the data diem produces – though U.S. regulators and legislators might find that hard to swallow, which is the nut of Facebook’s problem.

Is diem what the world needs?

“It’s a good start,” Duffie said.