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  • In June 2019, Facebook announced the blueprint for a brand-new digital currency

  • that would transform the way money moves around the world.

  • What if everyone was invited to the global economy with access to the same financial opportunities?

  • It was called Libra, and the announcement sent the financial industry into a spin.

  • Central bankers and politicians around the globe expressed concerns over a broad range of issues,

  • ranging from money laundering to financial stability.

  • After months of growing backlash, major backers abandoned the venture

  • and key figures declared the existing project a failure.

  • But the association managing Libra wasn't giving up that easily.

  • It released a new white paper in April 2020 to placate regulators.

  • In it, the currency was rebranded as Diem.

  • The Diem proposal is ultimately a watered-down version of the original idea,

  • but that was just what was needed to get the project off the ground.

  • The Facebook-backed currency is expected to launch in 2021.

  • So, what has changed?

  • We were extremely naive in the first version of our white paper.

  • We had a number of ideas, and to some extent it was really exciting to see

  • that the public sector's reaction to those ideas accelerated the pace of innovation.

  • Christian Catalini is the chief economist for the Diem Association,

  • the Switzerland-based nonprofit which oversees the currency's development.

  • He walked me through the changes he's hoping will make Diem

  • more palatable to regulators, starting with the coin itself.

  • Libra was originally pitched as a universal currency,

  • backed by a basket of central bank-issued money including the dollar, euro and Japanese yen.

  • Now as Diem, they plan to launch multiple coins instead, each backed by a single nation's currency.

  • The first to be piloted will be the Diem dollar, which will be pegged to the U.S. dollar.

  • There are plans to launch a multi-currency coin as well, but that will be further down the line.

  • So a big step of our dialogue with regulators has been actually talking about a phased approach to launch.

  • We moved to a design that really starts with single currency stablecoins,

  • and therefore is a much more natural evolution of the current system.

  • Stablecoins are a type of cryptocurrency that derive their value from an underlying asset,

  • like government money or gold. As you likely guessed from the name,

  • they tend to see less price fluctuations than other cryptocurrencies like bitcoin.

  • But a global, reliable alternative to government-backed money

  • could be destabilizing for some emerging markets.

  • The fear is that Diem could be used as a substitute for,

  • or even replace, a country's own volatile currency.

  • This has already happened with the U.S. dollar in countries like Zimbabwe and Ecuador,

  • which were struggling with high inflation. This phenomenon is known as dollarization.

  • No stablecoin today actually has a good solution towards dollarization.

  • Say you're operating in a country that is going maybe through hyperinflation,

  • you have to be compliant with all local regulations. Maybe we will have to convert after a certain balance

  • to local currency, that essentially cuts out the channel of dollarization

  • and really mitigates a lot of the worries about capital substitution.

  • The latest version of Diem also walks back on another key feature,

  • the idea of eventually becoming permissionless. Unlike private cryptocurrencies,

  • oversight of the coins will be controlled by the Diem Association.

  • Its existing 26 members will be tasked with operating the Diem payments system,

  • minting coins and managing reserves. While some original members of the association

  • such as PayPal, Mastercard and eBay have dropped out,

  • new ones like Shopify and Singapore sovereign wealth fund Temasek have opted in.

  • Unlike a permissionless blockchain product, like bitcoin, which the whole point is that it doesn't require trust,

  • that it relies on network effects, that the validation is baked into the code

  • rather than being reliant upon on third parties validating. Diem doesn't work like that.

  • Diem has these, the members, the validators, and you have to trust them.

  • For that reason I'm not convinced that as a system it's necessarily an improvement on the existing one.

  • Building trust is key to Diem's success, but its link to Facebook makes that difficult.

  • Facebook's reach is huge.

  • It had 2.8 billion monthly active users in the fourth quarter of 2020.

  • That's a big advantage when it comes to the distribution of Diem,

  • but the company's history of privacy scandals gives critics some pause.

  • Privacy is about the wallet, you know, not about the currency.

  • Dave Birch is an expert on digital money.

  • He's referring to the Novi Digital Wallet, which is owned and controlled by Facebook.

  • A digital wallet is what makes sending and receiving digital currencies possible.

  • Users will be able to add their local currency to the wallet.

  • Novi converts it into a Diem digital currency and transfers it to the recipient in an instant.

  • Novi will be accessible from Facebook's apps like Messenger and WhatsApp.

  • The scale could allow it to become one of the largest reservoirs of financial information in the world.

  • What most people will be nervous about, I'm sure, is all of that transaction data going to Facebook

  • to be used for advertising and other purposes, which they don't really benefit from themselves

  • and I think it's down to Facebook to reassure people.

  • But Novi has stressed that these fears are unfounded, saying transaction history will only be visible to customers.

  • We also put the question to Diem.

  • What do you say to people who are concerned that one's financial identity,

  • so what I'm spending my Diem on, could be eventually merged

  • with their digital identity, so my social media profile.

  • We take privacy extremely seriously. Diem itself will not have

  • private information about the customers. Some of our members made commitments with regards to

  • data separation between, for example, social and financial data.

  • The Diem Association has also taken concerns about financial crime such as money laundering on board.

  • If you don't know who the money is going to and from, you can't track or trace or do anything effectively.

  • And governments will never allow that because you don't want it to become

  • a mechanism for money laundering, and crime, corruption of all kinds.

  • Diem now requires its members to undertake some of the same

  • rigorous anti-money laundering checks required by traditional financial institutions like banks.

  • For example, they will have to verify a customer's identity to make sure they are genuinely who they claim to be.

  • Finally, there are also some important monetary policy effects to consider,

  • not least because of the enormous reserves that would be needed to support Diem if the coins prove popular.

  • The ambition of Diem is that it should appeal to billions of people,

  • there should be billions of users, so that implies there's going to be trillions of coins.

  • And every one backed by cash or cash equivalents. That is one heck of a lot,

  • sitting in a very large fund, being managed by a fairly opaque group of institutions.

  • And that is a fund easily big enough to move markets and easily big enough to hold central banks to ransom.

  • Whether Diem is widely adopted or not, it has been credited with spurring

  • central banks into creating digital currencies of their own.

  • China, Sweden, Singapore, the U.K. and Venezuela are all working on CBDCs, or central bank digital currencies.

  • The moment a CBDC becomes available we can stop operating the reserve,

  • what I call the analog retrofitting of the faster digital rails on the older fiat rails

  • and start operating at, you know, digital speed.

  • Diem is currently in talks with Swiss Regulator FINMA to secure a payment system license.

  • This would mark a significant milestone for the digital currency,

  • supplying it with the seal of approval from regulators that was absent before.

  • Only then will it be able to launch, and we will find out if it is indeed a Novi Diem, or Latin for 'new day', after all.

  • Thanks for watching. Would you use a Diem coin?

  • Let us know in the comments below and don't forget to subscribe.

In June 2019, Facebook announced the blueprint for a brand-new digital currency

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How the Facebook digital currency dream has changed | CNBC Reports

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    Summer posted on 2021/04/28
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