Facebook Sells Off Doomed Diem Currency Project, What Does It Mean for Crypto?

A Recap of Facebook’s Failed Experiment with Libra and Diem

Not that it’s happened, it really isn’t a surprise that Diem has closed down permanently. The beleaguered digital currency faced a number of hurdles over its short existence, all of which combined to make it very difficult for it to continue in any viable form.

First announced in June 2019, Facebook CEO Mark Zucerkberg declared that Libra’s mission is to “create a simple global financial infrastructure that empowers billions of people around the world.” The idea was to integrate a wallet app (then called Calibra) into WhatsApp and Messenger, which together would allow Facebook’s users to send the Libra digital currency to each other (and to businesses).

At the time of its unveiling, 28 organizations (including Facebook) banded together to create the Libra Association, which would oversee the operation and governance of the Libra digital currency and the Calibra wallet. Libra would be a stablecoin backed by a basket of different fiat currencies.

However, the project quickly encountered flack from governments and regulators, with the European Central Bank’s Benoit Coeure plainly spelling out the main issue in September of 2019: virtual currencies such as Libra “could challenge the supremacy of the US dollar.” Likewise, then-President Donald Trump said of Libra that it would have “little standing or dependability” and that the “only one real currency” in the United States is the US dollar.

And soon enough, several founding members of the Libra Association pulled out, including PayPal, eBay, Visa and Mastercard.

It’s probably safe to say, in retrospect, that this was the killer blow for Libra, which rebranded itself as Diem in December 2020, with its Calibra app being rechristened as Novi. It also announced a scaled-back pilot in April 2021, involving a single stablecoin pegged to the US dollar, rather than multiple digital currencies backed by multiple fiat currencies (as an updated plan for Libra revealed in April 2020).

In May 2021, the Diem Association also moved from its original base of Switzerland (where it had hoped to gain licensing) to the United States, where it partnered with the state-chartered Silvergate Bank. However, the pilot announced in April 2021 never materialized, with Diem announcing a much smaller pilot in October involving the Pax dollar (USDP), in partnership with Paxos and Coinbase.

Unfortunately, despite the massive downscaling of its ambitions and plans, Facebook (now describing itself as Meta) has finally decided to pull the plug on Diem. And the reason was, again, made abundantly clear by Diem Association CEO Stuart Levey in the official announcement:

“Despite giving us positive substantive feedback on the design of the network, it nevertheless became clear from our dialogue with federal regulators that the project could not move ahead,” he wrote.

What This Means for Crypto

The press release announcing the closure makes for some very instructive reading as far as the cryptocurrency market and industry is concerned.

Indeed, the quote above from Levey is even more troubling than it might seem at first. It reveals not only that regulators were opposed to the project, but that they were opposed to the project despite “giving positive substantive feedback” on its designs. Put differently, no matter how the Diem Association redesigned and restructured Diem, the US government remained categorically opposed to it.

Another quote from Levey in the same statement is even more telling: “In the United States, a senior regulator informed us that Diem was the best-designed stablecoin project the US Government had seen.”

This is bad for crypto. Just how bad it’s hard to tell at this stage, but the underlying message of the whole Libra/Diem fiasco can’t be highlighted enough: the US government will simply not tolerate any rival to the US dollar. It will do everything in its power to prevent such a rival from operating, as signaled by the quotes above from Coeure, Trump and Lewey.

Yes, Libra and Diem may have been especially offensive to the US government due to its creation by Facebook, probably one of the most controversial (and distrusted) corporations on a planet defined by controversial and distrusted corporations. Facebook really had the financial resources to make Libra or Diem big, which accounts for why the digital currency was roundly criticized by regulators worldwide.

However, while crypto may feel safe in the knowledge that Bitcoin nor other cryptocurrencies are quite big enough yet to pose a similar threat to the US dollar’s hegemony and the global economy, investors can almost be sure that crypto will increasingly attract the attention of regulators in coming months and years.

As mentioned above, the IMF recently warned that cryptocurrencies “such as Bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution, raising financial stability concerns.” It warned that crypto is no longer “on the fringe of the financial system” and that the increasing correlation of cryptocurrencies with stock markets indicates that Bitcoin and its ilk could pose a threat to stability.

Studies and surveys have shown that cryptocurrency ownership is growing. It may be only a matter of time before Bitcoin or some other cryptocurrency transforms into a genuine rival to the US dollar, at least as far as its reserve status goes. In fact, the US dollar’s share of global foreign exchange reserves reached a 25-year-low last year, indicating that its position as the world’s reserve currency may be in danger.

Of course, such a scenario is still a long way off, while the United States Congress has largely proposed light-touch regulation to date as far as cryptocurrency is concerned. Still, given just how quickly Diem came crashing to a halt, it’s worth keeping in mind.