Meta Crypto-dream Dissolved
Facebook (FB), now Meta, is a logical supporter of the Metaverse as an opportune way to create new data channels and stickier users, but as part of the Facebook/Meta Metaverse dream, the company had been ‘developing’ an in-house cryptocurrency since 2018 through a subsidiary named Calibra, under the crypto name of Libra, which along with the name of the subsidiary (changed to Novi), was changed to Diem in 2020. The concept was to offer Diem through Messenger and WhatsApp to the “half of the adults in the world that don’t have an active bank account” and to the “70% of small businesses in developing countries that lack access to credit.”
Under the Facebook plan, Diem was to be a safe and private currency that can be used for any transaction, and was to guarantee that no data (except in limited circumstances) would be shared with Facebook or any 3rd party, although “if a Calibra product feature can be personalized or improved with data from Facebook”, customer permission will be requested, adding “We may also use customer data to conduct research projects related to financial inclusion and economic opportunity with, for example, academic institutions and NGOs, though any published results will only contain aggregated statistics.”
Facebook created the Libra Association (changed to the Diem Association) to oversee the Diem network and was intending for the Diem to be a stablecoin, but not pegged to a single currency but rather a basket of currencies, which means that the value in local currency would vary, albeit likely less than Bitcoin or other unpegged currency. The assets backing the currency were to be held by a ‘geographically distributed network of custodians with investment grade credit ratings’ in order to increase security, and Diem was to beinflation neutral as the number of Diem coins will be adjusted to the value of the exchanged currency, either by adding or destroying Diem coins, with Facebook and 3rd parties collecting interest on Diem reserves.
Unfortunately, Libra/Diem faced considerable opposition, particularly in Europe where Facebook and Google (GOOG) were facing substantial fines for anti-trust violations, with the French foreign Minister stating “It is out of the question” that Libra “become a sovereign currency, It can’t and it must not happen,” and the German European Parliament representative posting on his Facebook account that the company could become a “shadow bank” and that regulators should be on high alert. With the scrutiny that Facebook’s original Libra announcement caused, and the added warnings from European regulators, Facebook postponed the launch of the currency and renamed it Diem, which seems to be a go-to concept that Facebook uses to deflect bad press or increased scrutiny.
However on January 31, the CEO of Diem stated that the Diem Group’s assets and IP were being sold to Silvergate Capital Corp (SI) for $182m (+ $30 in associated costs), essentially selling the rights to the Diem stablecoin and the blockchain network associated with the currency, giving Silvergate its own stablecoin, although the press release seemed to indicate that the current Diem Association would be wound down, and the operations melded into Silvergate’s Federal Reserve Bank organization and the Silvergate Exchange Network, a 24/7 digital network that allows SEN network customers to move dollars to and from any other Silvergate customer account using a stablecoin.
With the assets behind Diem, and the negativity of its association with Facebook, Silvergate has bought a way to provide a stablecoin intermediate for its customers, which is especially attractive given the release of the Fed’s “Money and Payments: The US Dollar in the Age of Digital Transformation” report which we highlighted in our 01/21/22 note. The report favored stablecoins over other cryptocurrencies, although we expect the Fed is still a bit away from adopting a CBDC (Central Bank Digital Currency) and has put much of the onus on Congress to pass legislation that would put such currencies into a federal regulatory framework that would give the public an understanding that such a currency would not require deposit insurance, but would be a direct liability of the Federal Reserve, with no credit or liquidity risk, something Facebook was not able to provide.
Under the Facebook plan, Diem was to be a safe and private currency that can be used for any transaction, and was to guarantee that no data (except in limited circumstances) would be shared with Facebook or any 3rd party, although “if a Calibra product feature can be personalized or improved with data from Facebook”, customer permission will be requested, adding “We may also use customer data to conduct research projects related to financial inclusion and economic opportunity with, for example, academic institutions and NGOs, though any published results will only contain aggregated statistics.”
Facebook created the Libra Association (changed to the Diem Association) to oversee the Diem network and was intending for the Diem to be a stablecoin, but not pegged to a single currency but rather a basket of currencies, which means that the value in local currency would vary, albeit likely less than Bitcoin or other unpegged currency. The assets backing the currency were to be held by a ‘geographically distributed network of custodians with investment grade credit ratings’ in order to increase security, and Diem was to beinflation neutral as the number of Diem coins will be adjusted to the value of the exchanged currency, either by adding or destroying Diem coins, with Facebook and 3rd parties collecting interest on Diem reserves.
Unfortunately, Libra/Diem faced considerable opposition, particularly in Europe where Facebook and Google (GOOG) were facing substantial fines for anti-trust violations, with the French foreign Minister stating “It is out of the question” that Libra “become a sovereign currency, It can’t and it must not happen,” and the German European Parliament representative posting on his Facebook account that the company could become a “shadow bank” and that regulators should be on high alert. With the scrutiny that Facebook’s original Libra announcement caused, and the added warnings from European regulators, Facebook postponed the launch of the currency and renamed it Diem, which seems to be a go-to concept that Facebook uses to deflect bad press or increased scrutiny.
However on January 31, the CEO of Diem stated that the Diem Group’s assets and IP were being sold to Silvergate Capital Corp (SI) for $182m (+ $30 in associated costs), essentially selling the rights to the Diem stablecoin and the blockchain network associated with the currency, giving Silvergate its own stablecoin, although the press release seemed to indicate that the current Diem Association would be wound down, and the operations melded into Silvergate’s Federal Reserve Bank organization and the Silvergate Exchange Network, a 24/7 digital network that allows SEN network customers to move dollars to and from any other Silvergate customer account using a stablecoin.
With the assets behind Diem, and the negativity of its association with Facebook, Silvergate has bought a way to provide a stablecoin intermediate for its customers, which is especially attractive given the release of the Fed’s “Money and Payments: The US Dollar in the Age of Digital Transformation” report which we highlighted in our 01/21/22 note. The report favored stablecoins over other cryptocurrencies, although we expect the Fed is still a bit away from adopting a CBDC (Central Bank Digital Currency) and has put much of the onus on Congress to pass legislation that would put such currencies into a federal regulatory framework that would give the public an understanding that such a currency would not require deposit insurance, but would be a direct liability of the Federal Reserve, with no credit or liquidity risk, something Facebook was not able to provide.
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