A fresh look at Facebook’s stablecoins initiative to gain greater independence and the approval of the Swiss regulator FINMA.
Libra Blockchain was born on 18 June 2019, initially from a deal club of Founding Members belonging to the world of payment systems, of which Facebook is one of the most relevant. They designed a decentralised programmable database in order to achieve low volatility of the cryptocurrency that should serve as a means of payment for millions of people around the world. A stablecoin or cryptocurrency with an underlying fiat money, in various currencies, that would serve as a means of payment under the umbrella of large private corporations. Alarm bells soon went off and all the world’s central banks were threatened by the threat of losing their exclusive power to issue money as a means of payment, and began to see the issue as a danger to the financial stability of states, at which point several of its founding members abandoned the initiative (Booking Holdings, eBay, Mastercard, Mercado Pago, PayPal, Stripe and Visa Inc., Vodafone).
After more than a year of iteration, on 1 December 2020, they have decided to go for issuing a stablecoin with an underlying only in US dollars to facilitate its approval and marketing in the United States. To this end, it has recruited members of recognised prestige in the world of finance (HSBC, Credit Suisse, …) and regulators in order to pivot the initiative in more autonomous operational and corporate governance terms that will lead to authorisation by the Swiss regulator. They have proposed a new global payments system under the umbrella of a financial services foundation by using a new programming language (“Move”) to implement the logic of transactions and smarts contracts on the Libra Blockchain, together with the use of the consensus mechanism based on Libra BFT (Libra Byzantine Fault Tolerance). Adopting and iterating blockchain data structures, achieving correct operation, even in cases of compromises or node failures, and with a low latency consensus protocol. With a better performance in efficiency and energy than those based on proof-of-work used in other blockchains, and finally with a protocol that is focused on validating transactions through a quorum of validators mechanism.
The new project is known as “The Diem project”, the new day, and will provide a simple platform for fintech innovation that will allow consumers and businesses to instantly and inexpensively perform highly secure transactions for the purpose of financial inclusion while simultaneously protecting the integrity of the financial system by detecting and excluding illicit activities.
The launch of Project Diem is scheduled for January 2021, following the expected regulatory approval, as well as FINMA’s approval of the payment system licence for a subsidiary of the Association that is headquartered in Geneva.
With this cold water in the wind, European central banks are at least two years away from the creation of their own programmable sovereign digital money, and ECB member Fabio Panetta, speaking at a conference at the Bundesbank on the future of means of payment, expressed concern that they are not up to the task of reinventing sovereign digital money.
He also expressed concern about the risks that stablecoins will face for their users, such as credit, market and liquidity risks, as well as potentially systemic risks. However, he has stated that the risks could be mitigated if the issuer were to invest the underlying in monetary reserves in the form of deposits at the central bank, thereby eliminating the risk that stablecoin investors would have to bear, through the use of their wallets, which is now no longer called “Calibra” but “Novi” (Nova via), confirming the integration of the Api into WhatsApp and Messenger, making sending money as easy as sending a message.
The main concern is that the Libra Association will succeed in implementing a means of payment that replaces the government issuer’s legal tender, under a club or membership fee for the platform.
Preliminary work on both crypto-assets (MIGA) and the digital euro, hitherto in the shadows, has been hastily published, with international initiatives that have so far experimented with blockchain and DLT technology now coming to light.
In Europe, the European Central Bank has initiated a preliminary trial with four objectives:
- The first is to test the compatibility of the digital euro with existing clearing and settlement services.
- The second is to explore the interconnection between decentralised distributed ledger technologies and the central systems made available by the central bank.
- The third objective is to investigate the use of the payment mechanism through an electronic digital identity system.
- And finally, they will analyse the functionalities of the hardware operational environment that will allow offchain transactions to operate, while guaranteeing user privacy.
A real challenge against the clock.
The strategy of sitting back and watching what will happen is not at all advisable, and will put pressure on the European Central Bank, as well as the European Parliament and Council to regulate stablecoins and to decide what to do and how to distribute and issue a programmable sovereign digital money, the digital euro, potentially reinventing money in digital form, although it will undoubtedly coexist with fiat money for a long time to come.
As of December 2020, the Diem stablecoin initiative includes the following participants:
- Payments: PayU Checkout.com
- Technology and marketplaces: Facebook’s subsidiary Novi
- Financial, Farfetch, Lyft, Spotify, Uber, Shopify
- Telecommunications: Iliad SA
- Blockchain: Anchorage, Bison Trails, Coinbase, Xapo
- Venture capital: Andreessen Horowitz, Breakthrough Initiatives, RibbitCapital, Thrive Capital, Union Square Ventures, Slow Ventures, Temasek
- Nonprofit and multilateral organisations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking , Heifer International
Many issues will have to be resolved before the regulator before the project receives its approval, but with the redefinition of the project it seems that a Marketplace with a universal means of payment, the Diem, will be created. A real big challenge.
We are impatiently awaiting its launch, which will undoubtedly be a major shake-up for payment systems as we know them today.