The initial vision of libra – the controversial Facebook-led digital currency that since been renamed diem – was “naive,” the project’s co-creator said at Consensus 2021 today.
But Christian Catalini, also the chief economist at the Diem Association, said the creators have learned their lesson and diem would be a success in the long term.
Diem went through multiple iterations since the initial publication of an ambitious white paper in 2019. Since then, the project got multiple slaps on the wrist from regulators worldwide, acquired and lost partners, scaled back its ambitions, moved to Switzerland, then returned to the U.S. earlier this May.
This May, Diem partnered with the U.S.-based Silvergate bank to issue a dollar-backed stablecoin.
Catalini explained the evolution of the project during his appearance on CoinDesk TV’s “First Mover” show on Wednesday, as a part of CoinDesk’s Consensus 2021 conference.
“We’ve been extensively engaging with the regulators across the globe, and as a part of that, our project has evolved in a number of dimensions. We’ve added additional controls to protect consumers, to combat financial crime on the network,” Catalini said.
Commenting on the keynote address of Federal Reserve Governor Lael Brainard on Consensus two days earlier, Catalini said he fully agreed with Brainard’s critical stance on CBDCs after the governor said they “may expose consumers and businesses to risk.”
“When you look at the stablecoin landscape today, many things are called stablecoins,” Catalini said, questioning the existing players’ stability and economic design.
Diem will be a totally different animal, Catalini said.
The project is willing to serve as a placeholder for the digital dollar, a U.S.-dollar backed CBDC (central bank digital currency) project that has been discussed over the recent months.
“What we’re really suggesting is more of a public-private partnership. We see this almost like a temporary exercise, where issuers like Silvergate in collaboration with Diem will be issuing a diem dollar, but the moment there is a CBDC … We are the only issuer of a stablecoin, to my knowledge, that committed publicly to phasing out our own token and replacing it with a CBDC token,” Catalini said.
He envisions the evolution of the U.S. financial system as a tech stack where a CBDC will serve as a base layer, and diem as “a payment network that enables new use cases and applications, on top of what the public sector will deploy,” Catalini said.
Back in the US
Because the regulatory environment in the U.S. has been evolving, Diem now feels more comfortable in the Western hemisphere, Catalini said of the organization’s move from Switzerland to the U.S. And as the project moved from a currency basket to a single currency-backed token, namely, the U.S. dollar, it felt right to have a home base in the U.S.
“Under that regime, I think the FINMA license is not going to be required anymore, so we’re withdrawing our license applications,” he added.
When it comes to the world’s financial regulators, the Diem group is stepping very carefully: “We made it very clear that we wanna work together with central banks and find solutions that do not interfere with local rules and regulations,” Catalini said.
For that reason, people in countries with unstable currencies that might want to use a dollar-backed stablecoin as a store of value, just like they often use the U.S. dollar now, should not view diem as a solution: “The design of our network is really meant to mitigate the risk of currency substitution.”
Back in the summer of 2019, when the financial world was buzzing around Facebook’s token project, the company expressed great ambitions about libra (now diem), aiming to create “opportunities for the billions of people around the world that are excluded or are underserved by the incumbent financial players,” including banking services like lending.
The reality curbed those ambitions. However, Diem is still committed to serve the unbanked – just not that fast.
“We’ll have to work over time to develop better identity standards. It’s very difficult to differentiate a good user from a bad actor, so our work probably will take multiple years to unfold,” Catalini said.
EDIT (16:22 UTC, May 26, 2021): This story was edited to clarify that Diem won’t need a FINMA (Swiss Financial Market Supervisory Authority) license.