Diem will increase dollar liquidity and the euro will become relatively uncompetitive
Recently, the social giant Facebook has been inundated with news about its digital currency project. On December 2, Facebook changed the name of its proposed digital currency Libra to Diem, and a few days before that, the Financial Times reported on Nov. 27 that three people involved in the Diem project said that Diem will be launched as early as January 2021. According to one of the sources, only a single currency anchored to the U.S. dollar will be issued initially, and Diem anchored to other currencies and to a basket of currencies will be introduced later.
This is another major step forward for Diem following the release of its white paper.
Since the launch of Diem, it has been attracting a lot of attention. Before the launch of Diem, we interviewed Yanxi Gu, the founder of Liyan Consulting Company, to further explain Diem, its value to the U.S. dollar, and whether it will compete with the U.S. dollar CBDC. Here is the AMA content:
Host: Diem has had a bit of a tortuous development. Recently there have been rumors that it may be on the verge of launch, and that initially it will only issue a single currency anchored to the US dollar. You seem to have expressed the opinion before that Diem will definitely be launched. What do you think of Diem and what is its greatest value? What is the biggest challenge?
Gu: Most people don’t know much about Diem. I’ve been following Facebook since it was planning to make a stablecoin. Initially, Facebook planned to make stablecoins mainly for the Indian market, for cross-border payments. But when the white paper was released in June 2019, Diem’s plans changed.
In terms of currency issuance, Diem differs from the current currency issuance system. In simple terms, there are three main components to currency issuance: the central bank, which issues monetary policy and issues money; the organization that facilitates the circulation of money; and the underlying clearing and settlement system.
Diem’s model is to circulate Diem stablecoins through the association’s members and settle them in Diem’s underlying blockchain system.
The two most important elements of Diem are the underlying blockchain and its independent association organization, especially the positioning of the underlying blockchain as superior to current fiat currency clearing systems. When the underlying payment system and settlement system are built on the blockchain, Diem can link nodes in a network environment, enabling peer-to-peer payments. Such a payment system allows it to be very imaginative, not just for peer-to-peer monetary payments, but it also can use smart contracts to do the financial products and businesses that are currently used in the banking and securities industries.
The Diem Association’s members are mostly industry-leading companies, and if it follows its plan of having 100 members of the same size private companies around the world, then it will be a very large organization. In promoting its stablecoin, the association is similar to a central banks and its commercial banking system.
Diem has always been under regulation. The name change is also to emphasize the independence of the project and to gain regulatory approval.
Host: From the news, we can see that Diem will soon launch a stable coin similar to the US dollar, which has many forms in the digital currency market. Can you talk about this?
Gu: According to reports, Diem will first launch a digital currency anchored to the U.S. dollar and may later launch stablecoins anchored to other currencies.
The U.S. has relatively lax policies, so some large Internet and technology companies are exploring stablecoins based on the U.S. dollar.
Currently, both USDT and USDC, GUSD, PAX, and other compliant USD stablecoins are in demand, and because of the high demand, they are being extended to other areas.
The difference is that USDC, GUSD, PAX, etc., and the upcoming Diem stablecoin are all compliant stablecoins. But USDT is not, and it is only a matter of time before the U.S. government to do something about it.
The U.S. market system is market-driven, and even regulators are focused on serving the market, so there is no reason for the U.S. government to remove the dollar stablecoin for compliance.
U. S. officials have been very open-minded and unique in their policy on the U.S. dollar stablecoin. Brian Brooks, acting director of the OCC, said that since there are already many U.S. dollar stablecoins in the market, is there a need for the U.S. to issue U.S. dollar CBDCs? If there are 40 to 60 million people in the U.S. market who already own crypto digital currencies, then there is a demand for them, and it is important for regulators to ensure that their interests are protected and that the market is fair, and the government cannot restrict their demand. In addition, the OCC issued a letter of clarification that the Federal Bank can provide custodial services to issuers of digital dollars, which will facilitate the creation of a stablecoin for the U.S. dollar.
Recently, the OCC will also establish a payment license that will allow non-bank institutions to offer payment services throughout the U.S. The payment license will be available throughout the U.S. without the need to apply in every state, which is convenient and lowers barriers to entry.
Diem will enhance the flow of dollars instead of competing with it.
Host: Just as people worry about the impact of digital RMB on Alipay and WeChat payments, it seems fair to think that if central banks start to implement CBDC, they will probably grab the same market as new financial programs like Diem, and will they compete in the future? What kind of competition is it?
Gu: Diem’s launch of a stable currency anchored to the U.S. dollar is an enhancement, not a competition, to the U.S. dollar. It is based on the existing USD in the market and is not an additional creation of currency to compete with the USD. In fact, this will facilitate the global spread of the dollar.
If a dollar-based CBDC were to emerge, it would likely take two forms, wholesale or retail. Wholesale is generally the Federal Reserve’s injection of a certain amount of dollars into commercial banks, in the form of U.S. Treasury bonds; Retail is the direct use of dollar-based CBDC for daily payments. At present, it is not known which way will be used, and whether it will be issued is still under consideration. But even if it is issued, it is said to be four years away.
Diem’s position is not for wholesale, but for retail only, and Diem’s association membership is also used among retail users.
There may be an overlap in serving retail customers if a dollar-based CBDC is issued. However, this issue is being explored on the basis of dollar-based CBDC, and there is considerable uncertainty as to whether they will be issued. One consideration is that it would have to be superior to the existing circulation of dollars, but the technology in the current market is such that only distributed bookkeeping technology, i.e., blockchain technology, can be superior to the existing centralized clearing system.
So, perhaps the dollar-based CBDC may use some sort of distributed bookkeeping technology, but it is unlikely that the Fed will adopt Diem’s underlying blockchain. While the market speculates about this possibility, I think it is unlikely.
Diem has been somewhat of a catalyst in promoting CBDC. It is a highly influential project that has attracted a lot of attention since its launch. In fact, there are already many dollar-based stablecoins on the market, but Diem’s emergence is pushing stability to a higher stage, thus attracting special attention from central banks.
One other issue of concern is that Diem has indicated in its white paper that it is willing to work with various central banks to issue CBDCs on the Diem blockchain, which is a big headache for central banks. For example, if countries with relatively good credit choose to use Diem to issue their digital stablecoins, or even their CBDCs, to get their currency circulating on the network, Diem could cause even more problems.
If Diem and the central bank work together, it is a good opportunity for the central bank to increase circulation. But on the other hand, if the circulation is very strong and Diem has a strong influence on the digital currency on top of it, it becomes a troublesome thing. The current influence of big tech companies on many aspects of society is a foretaste of what is to come.
If some central banks choose to use Diem, this will present a challenge for fiat currency that does not choose Diem for CBDC issuance.
So, it’s a double-edged sword that’s hard to balance.
EU guidelines and market conditions are no longer conducive to competing with the dollar.
Host: According to a recent report by the Bank for International Settlements (BIS), at least 36 central banks around the world have released digital currency plans as of mid-July. However, the US dollar and the euro do not seem to be active in developing CBDC, so how do they view CBDC and what plans do they have in this regard?
Gu: Currently, there are voices in the U.S. community discussing the dollar-based CBDC, and if it will be issued, it will be at least four or five years from now. However, since the U.S. dollar has become dominant globally, the stablecoin would be a global leader too. Thus, the U.S. government does not have a strong incentive to issue the U.S. dollar CBDC.
Looking at the situation with the euro, the most important thing for the EU is the perception issue, they are not happy with big tech companies issuing euro stablecoins and they don’t trust the private sector either. Recently, the German Finance Minister made it clear that he does not support digital currencies in the private sector, which is quite different from the attitude of the United States.
Diem has plans to issue a euro-based stablecoin, but the EU may not be interested. Members of the Eurozone’s financial regulators are generally wary and restrictive to Diem.
As things stand now, dollar-based stablecoins exist in various forms and will gradually grow, while euro-based stablecoins, which the market favors, have yet to emerge. The gap between the two is widening and the euro will become less and less competitive. The guiding principles of the EU and the current state of its market are not conducive to competing with the U.S. dollar in the digital currency.
In the long run, the euro will not have chances once the network of dollar-based stablecoin is formed. In fact, if the euro has a strong competitive edge in the digital currency space, it will also affect other forms of the euro, namely electronic bookkeeping, paper money and coins.
Given the current development of digital stablecoins in the euro area and the attitude of financial regulators in major European countries, it is unlikely that there will be a market for a compliant euro-digital stablecoin operated by a private sector entity. The U.S. dollar is rapidly establishing its advantage over the euro in the digital currency space.
Article from Li Feng
Translated by Yang(Mengyan Finance)