Libra—now 'Diem'—looks more like P2P than currency

Libra is distancing itself from Facebook not only through a name change, but also by attempting to draw attention toward its digital payment rail instead of the creation of alternative money.

By changing its name to Diem, Libra will "reinforce its organizational independence" as the project seeks regulatory approval, the organization said Tuesday. “The Diem project will provide a simple platform for fintech innovation to thrive and enable consumers and businesses to conduct instantaneous, low-cost, highly secure transactions,” said Stuart Levey, the Diem Association’s CEO, in a press release.

There's some housekeeping in the change. Facebook in May renamed its Calibra blockchain unit to avoid confusion with Libra. All derivatives of "libra" seem to be gone, as Calibra is called Novi and is tied to Facebook's less controversial digital wallet. That wallet will be used to store Diem but won't manage the stablecoin.

"This is about creating a new account more than a new currency," said Richard Crone, a payments consultant, adding the introduction of Apple Card and Google's checking account are pushing a trend toward embedding financial services in a payment rail that has instant scale because of a huge existing user base.

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While it's always operated as a distinct entity, Libra hasn't been able to untangle itself in people's minds from its origins within Facebook — an issue which has fueled nearly two years of pushback and complaints from politicians and regulators around the world. Diem will still have enough proximity to Facebook's digital wallet to benefit from the social network's scale.

There were two reasons for Libra, now Diem, to assert its corporate independence more forcefully in the eyes of regulators. One is the overall controversy that surrounds Facebook over issues such as security and data privacy. Both of these issues are important in any payment network. Yet Facebook has been hit by a series of breaches, and its executives are routinely called before Congress to testify on issues of consumer privacy and how the social network uses consumer information.

There was also concern that Libra, as a decentralized anonymous cryptocurrency, would operate beyond the reach of central bank monetary policy, potentially destabilizing currency markets globally.

“It’s obvious that Diem is pursuing a more secure infrastructure in order to reach compliance. It may add on time to their eventual emergence in the marketplace but it’s also a necessity to provide a trustworthy service that aligns with their mission statement,” said John Buzzard, a senior analyst for fraud and security at Javelin Strategy & Research.

Since the original Libra white paper was released in June 2019, Facebook has taken several steps to make the initiative more attractive to regulators. A subsidiary in Switzerland was set up to manage the project, and the white paper was updated in 2020 to change the structure of the stablecoin. Instead of backing Libra from a series of traditional currencies, the stablecoin in each country would be backed by that country's currency in an attempt to demonstrate visibility to regulators.

Diem is now expected to launch in early 2021 as a single coin backed by the U.S. dollar, according to the Financial Times, though Diem did not comment on its structure. Simple dollar-backed stablecoins are often used as a way to encourage consumers and merchants to use cryptocurrency for payments by assuaging fears over crypto's notorious volatility.

Deeper down in the statement, Diem said it is "forgoing the future transition to a permissionless system while maintaining its key economic properties." The company would not provide comment for this story.

The difference between a permissionless blockchain and a permissioned blockchain will likely reduce the number of direct participants in the stablecoin's network in favor of a system that can process payments faster and provides more visibility into the parties running the network.

Permissionless blockchains like bitcoin and Ethereum don't limit the number of participants who can add a node, or a component of the blockchain that exchanges data with other nodes on the network. Ripple, for example, is a permissioned blockchain, which is more centralized and smaller, though is less prone to delays in transactions — making Ripple a popular choice for banks and e-commerce sellers looking to streamline international payments.

Facebook's stablecoin was slated to debut as a permissioned network, but eventually evolve to a permissionless network. Permissionless networks have fueled bitcoin's controversial past as an alleged venue for money laundering.

Several mainstream blockchain projects, including from Bank of America, use the more regulator-friendly permissioned blockchains. In Bank of America's case, its parent application is for a blockchain-powered peer-to-peer network. The difference between permissioned and non-permissioned blockchains is mostly invisible to consumers and other end users.

Diem is seeking a payment system license from Swiss financial regulators, which use input from central banks and regulatory authorities in other countries.

As Libra, the project has had struggles keeping members; PayPal and the large U.S. card brands departed because of the regulatory pressure, though the later addition ofShopifyhas added some payments expertise. The pandemic's impact on banking and the related push to digital should help Diem's financial inclusion goals, according to Crone.

"Coronavirus has magnified the need for platform-driven embedded banking at the edge of the network, with branches having limited access or being closed, and the need for instant issuance," Crone said.