Gu Yanxi: For the euro, is Diem a wolf in sheep's clothing?
According to a Reuters report, German Finance Minister Olaf Scholz expressed his view that Diem's recent name change was just a cosmetic change after a recent G7 finance ministers' video conference. "A wolf in sheep's clothing is still a wolf. It is very clear to me that Germany and Europe cannot and will not accept Libra entering the market until compliance risks are properly addressed. We must do everything in our power to The monopoly of securing money remains in the hands of the state."
The interaction between the EU and Diem is a very interesting process. In Diem's original stablecoin design, it has included the euro as the second major currency in its basket of fiat currencies. The first US dollar accounted for 50%, and the second euro accounted for 18%. Diem was originally designed as a single digital stablecoin circulating globally. So the euro area is the market it plans to operate in. But the EU has maintained a vigilant and opposed attitude towards Libra from the very beginning. In order to meet the requirements of global financial regulation including the European Union, Libra has made essential changes in its version 2.0. It has adopted a neutral attitude to cooperate with various financial regulators and operate in accordance with the requirements of financial regulation.
In order to win the support of the European Union, the Libra Association has taken a series of measures to weaken the influence of the United States, the US dollar and Facebook in Diem, including changing the original English-based name to a Latin-based name. Such an effort is clearly aimed at gaining support from EU regulators. However, judging from the statement of the German Minister of Finance, Diem still needs to do a lot of work in order to issue a digital stable currency based on the euro. If we look at it from another angle, is Diem really a wolf in sheep's clothing to the euro? If the EU takes the same view against Diem as Germany's finance minister, what effect will Diem have on the euro?
In my previous article (“The battle between the euro and the dollar in digital currencies") pointed out in the article that the competition between the euro and the U.S. dollar in the field of digital stablecoins has begun to show a gap. At present, there are already several digital stablecoins based on U.S. dollar brands in the market. Now Diem expects to be released as early as January 2021 Launch a digital stablecoin based on the U.S. dollar. For other U.S. companies, issuing their own digital dollar stablecoin is also a viable strategy (see my articles "Should Amazon issue its own digital dollar stablecoin?" and "Why Say Google Pay’s strategic choice is wrong?”). In addition, the U.S. banking regulator OCC has actually adopted a regulatory attitude that encourages the market to issue digital dollar stablecoins. If more U.S. companies issue dollar-based digital stablecoins Therefore, the gap between the euro and the U.S. dollar in the field of digital currency will widen, thereby widening the competitive difference between the U.S. dollar and the euro in the market.
For the EU, they clearly see such a development trend very clearly. Therefore, the German Finance Minister also believes that the EU should issue a Euro CBDC. But even if the Euro CBDC is issued, the EU still needs to address the impact of the Diem digital stablecoin on the euro.
If Switzerland's FINMA approves the establishment of Diem and approves its discovery of its digital stable currency based on some fiat currencies, while the European Union rejects Diem's issuance of digital stable currency based on the euro, then the strategy adopted by the Diem Association is likely to be based on its basket of fiat currencies. Issue digital stablecoins based on other fiat currencies sequentially. That is to say, the corresponding digital stable coins will be issued sequentially based on the Japanese yen, British pound and Singapore dollar. Then the scenario that will appear is that the only digital currencies circulating in Europe are the Euro CBDC and the CBDCs of other central banks, and the CBDCs of various central banks and digital stable coins such as Diem are circulating outside Europe.
Since the future CBDC is likely not to use the same underlying infrastructure as Diem, Diem's digital stable currency will provide services in some areas that cannot be touched by CBDC. Various digital stablecoins based on Diem would thus be complementary to the corresponding CBDCs it supports. For the Euro CBDC, this lacks a means to compete with other fiat currencies in the basket. Therefore, for the EU, it is a more reasonable choice to formulate appropriate regulatory policies and limit the operation of Diem within a reasonable range. In September of this year, I proposed in an article ("European finance ministers may think about the strategy to deal with Libra from a different angle"), "For European finance ministers, they should adjust their strategies to allow Digital stablecoins like Libra operate within a controllable range. In this way, we can have a more accurate understanding of the impact of digital stablecoins on the currency market, and also help them develop a Euro CBC that can better meet market demand .”
Most importantly, the Diem stablecoin and its supporting infrastructure are a specific application of the development of blockchain technology applications. Other private institutions in the market will also use the same technology to develop similar payment mechanisms based on digital stable coins. So no matter what, the EU needs to formulate corresponding regulatory mechanisms in this regard.
But there are valid considerations in Germany's finance minister's view. An institution like Diem is likely to present itself as very neutral. But when it develops, it is likely to impose its own tendencies and interests on other groups in society. This directly violates the basic principles of financial supervision to ensure the interests of investors and protect the fairness and order of the market. Organizations like Diem will indeed have a huge impact on the issuance and circulation of the euro and overall economic activities.
First of all, if the Diem Association does not issue stable coins based on the euro, but can issue a large number of digital stable coins based on other fiat currencies, this in itself will have a significant impact on the economic activities of EU countries. Second, if the EU allows Diem to issue a euro-based stablecoin without corresponding appropriate regulatory policies, then the operation of Diem is likely to affect or even harm the monetary policy of the European Central Bank. After all, the monopoly position of big technology companies in the field of information circulation has begun to affect other activities in society. For such a big technology company that issues stable currency, its impact will be more extensive and far-reaching. So even if the EU allows the Diem Association to issue euro-based stablecoins, it also needs to put Diem under a strict and appropriate regulatory framework.
In terms of formulating corresponding financial regulatory policies, for a multinational international organization like Diem, it is not enough if only one financial regulatory agency adopts regulatory policies. Must be the financial regulatory agencies to jointly formulate common regulatory rules. Only in this way can organizations like Diem be effectively supervised. In this regard, how the Swiss FINMA approves the operation of the Diem organization is very worthy of attention. Switzerland is not a member of the European Union. So in theory, its policies are not bound by the EU. But the Swiss financial industry is an intimate part of the global financial industry. The Bank for International Settlements, known as the central bank of central banks, is also headquartered in Switzerland. Therefore, Switzerland's financial policy will definitely maintain close communication with the EU and other financial regulatory agencies, and its policies will definitely take into account the EU's basic position.
On the other hand, the EU will certainly also actively influence Swiss policy in this regard. Therefore, if the Swiss FINMA approves the operation of Diem in 2021, its approval policy is very likely to be the result of FINMA's communication with other financial regulatory agencies. Therefore, how FINMA approves the operation of Diem is very worthy of attention.
