When Facebook presented its Libra project to the public in 2019, it startled banks, central banks and politicians. Could Facebook thereby displace state currencies? Would the central banks lose control of the monetary system?
After almost two years it has become quiet about the project. The only thing left to be heard was that the name was changed from Libra to Diem and that Kevin Weil, the leading head of the whole thing, announced his departure on Twitter in March 2021.
Could it be that the whole project was wrongly conceived from the start? An indication of this is the fact that Libra partially moved away from the idea of its own currency as early as April 2020. Libra was initially planned as a currency basket composed of important currencies.
Since the euro would only have had a share of around 30 percent, Libra users in the euro area would have been exposed to a considerable exchange rate risk. Therefore, in addition to the currency basket diem, there should now also be euro diem, dollar diem or yen diem.
Top jobs of the day
Find the best jobs now and
be notified by email.
The problem remains that you first have to purchase a credit with Diem before you can pay with it. For these credits, Diem does not want to guarantee that they can be exchanged 100 percent back into traditional euro credits at any time.
Diem openly speaks of the fact that if you run on the system you have to wait for the repayment or pay a special fee for it. At a bank that would be a reason for bankruptcy. Even if Diem promises to invest all funds safely, there is still a risk of loss. The more people trust Diem with their money, the greater it becomes.
Not a good idea from the start
This means that Diem has considerable weaknesses compared to PayPal. With this system you can pay without having to have a PayPal balance. Payments are simply debited to a commercial bank account or a credit card account. Paypal balances have the legally binding character of bank balances.
PayPal, with which you can now pay with 26 currencies, also makes it clear that a successful global payment system is characterized by the fact that it makes currencies easily exchangeable.
So from the beginning it was not a good idea to want to create your own currency. Currencies are like languages that people find difficult to part with. That may be different in developing and emerging countries. But here the problem arises for Diem that the Internet distribution leaves a lot to be desired. There are digital payment systems operated by mobile phone providers. So Diem is not needed for financial inclusion.
If something is to come of Diem, it will ultimately have to be based on the successful PayPal business model. However, that would require a complete restart.
More: Diem instead of Libra: digital currency is becoming an expensive lesson for Zuckerberg.