Goodbye Diem, Facebook's global payment dream

Author: Rhythm BlockBeats

Once highly anticipated by Facebook, Libra has now reached the brink of being sold.

According to insiders, Facebook's cryptocurrency stablecoin project Diem (formerly Libra) plans to sell itself to Silvergate, a bank that serves Bitcoin and blockchain companies, for approximately $200 million.

As a stablecoin project that once attracted global attention, Diem has faced numerous challenges over the past two years. From its vision of transforming the global payment system under the umbrella of a super social network to now having to be sold, it seems we are truly saying goodbye to Diem.

Who is Silvergate?

Silvergate, which may take over Diem, has long been connected to cryptocurrency. This name, which may be unfamiliar to most users, is an important partner for major U.S. cryptocurrency exchanges.

Silvergate is a Federal Reserve member bank established in 1988. CEO Alan Lane, after purchasing his first Bitcoin in 2013, recognized the market gap and has since dedicated Silvergate to providing innovative financial infrastructure solutions for the digital currency industry.

In addition to banking services, Silvergate is best known for its 24/7 real-time payment platform, the Silvergate Exchange Network (SEN). In just the fourth quarter of 2021, SEN processed over $200 billion in transactions, with top institutions like Coinbase, FTX, Binance US, Circle, and Paxos as users.

Even FTX's SBF has praised Silvergate, stating, "The time a crypto company goes through can be divided into the pre-Silvergate phase and the post-Silvergate phase. It is not an exaggeration to describe Silvergate's transformation of financial services for blockchain companies. SEN proves day after day that it is one of the key pillars of cryptocurrency settlement."

On May 12, 2021, after the Diem Association announced it would abandon its plans to register with Switzerland's financial regulator FINMA and return to the U.S., it found Silvergate and announced a partnership plan: Silvergate would become the exclusive issuer of Diem's dollar stablecoin, Dime USD.

From Facebook's perspective, collaborating with a bank like Silvergate, which is involved in the crypto space and is a Federal Reserve member subject to its regulation, is a high-quality option to seek regulatory approval.

However, in November 2021, the U.S. President's Working Group on Financial Markets reported that partnerships between stablecoin issuers and wallet providers or commercial companies could lead to excessive concentration of economic power, which could adversely affect competition. They also expressed concerns that users of a stablecoin deeply involved with a giant tech company would face excessive barriers and costs when switching to a new stablecoin.

Thus, Facebook could only choose to take a hit.

Alternatives to Diem?

Losing Diem does not mean Facebook has completely abandoned the direction of digital currency; they still have an option—Novi Wallet, formerly known as Calibra. The name change reflects that Calibra was specifically designed for Libra, and now that Libra is gone, the renamed Novi has completely discarded its original identity to continue carrying Facebook's payment dream.

Despite the backlash against Facebook's digital wallet due to data misuse, Facebook still has high hopes for Novi, planning to provide various financial services and even acquiring customer service chatbot company Servicefriend to enhance service quality.

At the same time, Novi has begun seeking partnerships with compliant stablecoin issuers Circle and Paxos, considering using USDC or PAX as its stablecoin. By the end of last year, Facebook's WhatsApp had started testing cryptocurrency transfers within the chat interface for some users in the U.S., using the Novi wallet.

Currently, Novi appears to be Facebook's last option in the cryptocurrency space. In their all-in approach to the metaverse, Novi may help them regain their dream of crypto payments.

The Troubled Fate of Diem

Since the release of the white paper in June 2019, any news about Libra has been a hot topic, as it is the latest product from a super social network with nearly 3 billion users. If successful, the potential impact on users would be immeasurable. During the market's bleak period in mid-2019, Facebook's entry into cryptocurrency brought a boost to the market. Just four days after Libra's launch, Bitcoin climbed back to $10,000 after nearly a year, eventually reaching a peak of $14,000 that year, with Bitcoin's total market cap soaring from around $160 billion to $228 billion.

However, Libra peaked upon its debut.

In the first version of the white paper, Libra aimed at creating a global payment network with a currency basket containing multiple fiat currencies, aspiring to become a payment giant.

With this vision, investment firms, blockchain companies, social media, telecommunications, e-commerce, ride-sharing, non-profits, music, travel, and payment super giants like Visa, Uber, eBay, Spotify, and Coinbase became partners of Diem, forming a super alliance that shone in Silicon Valley.

The partner lineup at Libra's launch

But while everyone envisioned Libra changing the payment landscape, regulators were not on board. They did not recognize Facebook's ambitions and were concerned about Libra's impact on the dollar's status and even on the U.S. itself, especially given Facebook's reputation as an "internet bully." The fallout from Facebook's data leaks and election manipulation still lingered, and regulators had become dismissive of this once-proud giant.

As a result, within four months of Libra's launch, Congress held three hearings, and even Facebook founder Mark Zuckerberg had to personally participate in hearings to ease tensions between the platform and regulators, but to no avail. Despite Zuckerberg sincerely assuring regulators that Libra would implement various KYC (Know Your Customer) measures and user protections, and even claiming that Libra would protect and enhance the dollar, regulators remained unconvinced. The anxiety of regulators was evident in their questions; with a company that has a history of data manipulation, who could trust that payment data for 3 billion people would be in safe hands?

Under regulatory pressure, several partners, including PayPal and eBay, withdrew from the super alliance, forcing Libra to revise its white paper. It first introduced a single stablecoin peg and then rebranded to Diem, pegging only to the dollar to meet regulatory requirements as much as possible. Ultimately, it was a case of diminishing returns; regulation did not allow Facebook to achieve its goals.

Although Diem continued to struggle, issuing statements claiming that what it was doing was still a "huge and excellent opportunity," insiders described Diem as a "zombie organization," existing in name only. Did they have no chance of success? Not exactly, but it was very slim, so small it could be ignored.

In September 2020, Diem co-founder Morgan Beller announced her departure; in March 2021, another co-founder, Kevin Weil, also announced his exit; and by the end of 2021, David Marcus, the head of Facebook's parent company Meta's cryptocurrency project, chose to leave as well. The global regulatory crackdown prompted these project leaders to retreat. The departure of these veteran figures has dimmed Diem's prospects.

Whether Facebook can sell Diem to Silvergate or not, a payment system based on stablecoins no longer seems to be a priority for Facebook; the metaverse is now the new tool Facebook is striving to use to change the global perception of it.

The grand global stablecoin project, which has lasted for two and a half years, is about to officially come to an end.