Tuesday, 15 December 2020, 12:24
Last update: about 45 minutes ago
Global regulators particularly those in Europe feared that Libra, at least in theory, could drastically change or even undermine their hegemony. Unlike bitcoin and other cryptocurrencies, whose appeal is limited to a subset of people, Libra had the potential to reach billions of users in a relatively short period of time. As a result, investors, crypto enthusiasts and regulators themselves say Libra has raised the stakes for financial authorities, forcing them to take a more serious look at digital currencies. Facebook-backed cryptocurrency Libra has been rebranded “Diem” and renamed its social networking firm’s wallet Novi, in a renewed effort to gain regulatory approval by stressing the project’s independence. Libra as a cryptocurrency project has been a rollercoaster since it was announced last year, facing huge criticism from regulators, asking for a scaling down of ambitions. One recalls how the Libra concept was floated by Facebook last year which has now been slimmed-down last April after regulators and central banks raised concerns it could upend financial stability, erode control over monetary policy and threaten privacy.
The Financial Times reported that the launch of Diem could be happening as early as January, saying that it would go ahead after approval by authorities. Switzerland-based Diem Association, the digital token’s governance body, is in fact currently awaiting approval from the Swiss Financial Market Supervisory Authority. The new Diem project would develop policies on anti-money laundering, terrorist-financing and sanctions compliance and in a wide swept volte face ditched earlier plans to allow anyone to join its network. In practice, Diem would operate as a digital currency, providing an alternative to the US dollar and other currencies managed by foreign governments. Just reflect on the level of public scrutiny faced by co-founder Davis Marcus and the CEO of Facebook, Mark Zuckerberg. This deluge pushed them to hit restart from a public relations perspective when last year they tried to launch Libra crypto currency.
One appreciates how Libra, as a blockchain project, had earned its share of notoriety between Congressional hearings and international regulatory scrutiny that led to the change of name and structure of Libra. Diem will stand out compared to other cryptocurrency offerings due to it being a stable coin, meaning it will be backed by real assets. However, the Diem Association hasn’t commented yet on their assets of choice and according to The Financial Times it is quite likely that Diem will be backed against the US dollar. Diem has the potential to bring huge benefits in the form of speed, efficiency and financial inclusion.
Furthermore, they act as a store of value for savers in countries that do not have stable domestic currencies, akin to the dollar movement that exists in many emerging-market countries today. How can one describe the advantages of stable coins? Well-structured “stable coins” emboldened with appropriate legal, regulatory and governance controls have a valuable role to play in the world economy and could bring the benefits of crypto technology to an entirely new generation of users. Diem, which as stated earlier was formerly known as Libra, is the most high-profile “stable coin”. It has been a concept since 2019 when Facebook first announced its intentions on Libra which sadly was met with great alarm by global regulators. Libra was reviewed by the House Financial Services Committee which saw its co-creator, David Marcus testify at hearings. One may ask, why are regulators and central banks so concerned about “stable coins”?
These are cryptocurrencies that aim to stabilize their value compared to another asset – be it one fiat currency, a basket of fiat currencies or commodities. The idea is that by stabilizing its value, it can be used as a means of payment. In Malta, cashless transactions are becoming increasingly popular. It is clear, that if Diem should also catch on in Malta at some point, it would need ad hoc regulations to plug any loopholes. While the controversial Diem coin may struggle to see the light of day next year, Facebook Pay is a done deal. This exciting social network will start with its own payment service. With this service, users should be able to send money to other users or shop in in-app shops. Donations can also be processed. Security is promised by PIN protection in payment transactions. The product is versatile as it can be used on Facebook itself, Messenger, Instagram and WhatsApp. It is not yet certain when Facebook Pay will be available in Malta, or generally in Europe, yet according to the company’s statement, Facebook now works with partners such as Paypal and Stripe on the processing of payment processes and can rest on existing infrastructures. The other side of the coin shows that there are scaremongering doubts from US lawyers and financial officials on such crypto assets that are growing about possible money-laundering, drug trafficking or financial loopholes and tax evasion.
However, it is in the news that the People’s Bank of China is planning a comprehensive digitization of the Chinese currency under the title “DCEP”. The Chinese currency Yuan is to be replaced in the long term. This would make China the first country to introduce a national digital currency. The cryptocurrency would first be accessible from commercial banks, which then circulate the digital coins on to citizens. Since there are currently speculations that DCEP will be a central currency, under this assumption, it would be subject to the authority of the Chinese government. Chinese banks could therefore get an even tighter control over flight of capital.
Looking to the future, the entry into force of any mainstream cryptocurrency could hit banks hard. The G7 finance ministers fear that any major currency should not be in the hands of a private company since they would have the same privilege as nations, but without undertaking the responsibility and obligations that go with it. The G7 ministers have called for tighter regulation of digital currencies, thus stalling the birth of Facebook’s Libra.
Back to Malta… Quoting a study of the Central Bank of Malta, it reveals that electronic payments are also becoming increasingly popular and it seems only a matter of time before cards and other cashless payment methods, such as Revolut, will completely replace banknotes and coins.
In conclusion, will Christmas bring in the exciting news that Facebook has now fine-tuned its financial strategy and will eventually give birth next year to Diem? Stop press – do not expect any Diem coins in your Christmas stockings!
The writer is a partner of PKF Malta Ltd, an audit and business advisory firm