Switzerland-based nonprofit Diem Association aims to launch a pilot with a single stablecoin pegged to the U.S. dollar in 2021. The association oversees the development of Facebook’s digital currency, Diem.
According to a report, this pilot by Facebook will be small in scale. It will primarily focus on transactions between individual customers. There could also be an additional option for users to purchase goods and services. This is a much more modest expectation for Facebook’s digital currency than proposed initially in 2019.
Facebook initially proposed its digital currency project in June 2019, under the name Libra. At that point, the project had the much larger ambition of acting as a universal currency. Its value would have been tied to a basket of sovereign currencies such as the USD and EUR.
However, almost immediately, the project began seeing strong opposition. Given the ambition of a universal currency and the breadth of Facebook’s reach, central bankers and politicians condemned the project. They feared the currency could threaten monetary stability and potentially enable money laundering. There were also concerns over whether Facebook would prioritize the safety of users’ privacy. These issues caused the project to lose major backers, including Visa and Mastercard.
Threat to the dollar’s dominance
Another prominent concern was that the project could lead to threatening the dominance of the U.S. dollar. For instance, just two months after Facebook unveiled its Libra project, it already had this influence.
At the time, former Bank of England Governor Mark Carney proposed a new digital currency that would have been based on a global basket of goods. This could potentially have diminished the dollar’s status as the world’s reserve currency.
The maintenance of the US dollar as the world’s reserve currency remains a top concern for US policymakers. According to a Bloomberg report, the Biden administration is scrutinizing the development of China’s digital yuan. They fear it could be used to evade sanctions and affect the dollar’s dominance. Additionally, the US Federal Reserve Chairman highlighted the important role of the dollar in the Fed taking its time to issue a digital dollar.
Next step for Diem
Libra has now rebranded as Diem and is in talks with Swiss financial regulators to secure a payment license. This could be the first crucial step in enabling the digital currency to make payments.
“A big step of our dialogue with regulators has been a phased approach to launch,” said Diem’s chief economist Christian Catalini. He added:
“We are going to be phasing in different functionalities and use cases, applications in different areas.”
Once they receive permission from regulators, Catalini said they would begin experimenting with a small number of users.
As cryptocurrencies gain greater adoption and central banks work towards issuing their own digital currencies, Facebook’s Diem will benefit from the network effect of the social network’s 2.8 billion monthly users.