Facebook’s Diem is an Existential Threat to Traditional Banking

According to reports, Facebook could launch its long-awaited digital currency in January 2021 in the form of a stablecoin backed by US dollars. The company first announced its intentions by publishing a white paper in 2019. Since then, central banks and regulators have jumped into action. They are right to be concerned. Stablecoins, particularly those whose name changed with the Diem, have the potential for massive network effects. They bring new risks to consumers and savers, as well as to the global financial system.

However, they can also bring considerable benefits in the form of speed, efficiency, and financial inclusion. Stablecoins can act as a store of value for savers in countries that do not have stable domestic currencies. It is similar to the dollarization that exists in many emerging market countries today. Well-structured stablecoins with proper legal, regulatory, and governance controls have a valuable role in the global economy. They could bring the benefits of cryptocurrency technology to a whole new generation of users.

Diem, formerly known as Libra, is the highest-profile stablecoin. Indeed, Diem is widely appreciated for adding rocket fuel to the central bank investigations into central bank digital currencies, or CBDC. Besides, it was greeted with great alarm by the global regulatory community.

Why do stablecoins concern regulators and central banks so much? 

Stablecoins are cryptocurrencies aiming to stabilize their value compared to other assets. Whether it is a fiat currency, commodities, or a basket of fiat currencies. The concept is that by stabilizing its value, it can be used as a means of payment.

In fact, the previous generation of crypto assets like Bitcoin failed to achieve this. Bitcoin is still too volatile, something highlighted by last month’s price action.

Stablecoins are entirely different. By their very nature, they aim to act as a “store of value,” a fundamental characteristic of money. Therefore, they could serve as a means of payment.

With Diem, there is also the possibility of massive network effects. Facebook has 2.7 billion monthly active users, which means that Diem has the potential to become an instant “medium of exchange” in much of the world.

In October 2019, the G7 issued a document on stablecoins. It acknowledges the benefits that stablecoins could bring in the form of faster, cheaper, and more inclusive global payments. Meanwhile, it focused on the legal, regulatory, and supervisory challenges of this innovation. The document highlighted the risks to monetary policy, financial stability, the international monetary system, and fair competition.