Facebook's Encryption Journey Facing Regulations, Faltering
Stablecoins Diem and Tether (USDT) took center stage during a private meeting of the U.S. President’s Financial Markets Task Force yesterday, according to Bloomberg. Conference participants expressed concern about Diem network effects, which may stem from Facebook's audience size.
[Network effect: is an effect in an economy where the value of a product or service for one user depends on the number of other consumers of that product (service). After reaching a certain number of product or service users (called critical mass), network effects become significant. This is when the value gained from using the product or service is greater than or equal to the price paid. Since value is determined by the number of users, customer acquisition becomes easier after reaching critical mass. Due to positive network externalities, new users will value the service or product above its price. A key challenge for businesses operating in the online marketplace is attracting users to their critical mass. ]
Fantastic start to Facebook’s encryption journey
In mid-June 2019, Facebook announced the Libra project, a global stablecoin backed by a basket of currencies and other assets. The stablecoin ecosystem will be run by the not-for-profit Libra Association.
It is a new payment network based on a "secure, scalable and reliable blockchain," according to the white paper. Each Libra Token will be backed by a basket of currencies and other assets that together comprise the Libra Reserve. This is bank deposits and government securities from the most trusted central banks, promising low volatility. At the same time, however, the value of the token will not be pegged to any fiat currency.
Initially, the founding members of the Libra Association will serve as validator operators, after which the transition to decentralization will take place. This intention was appreciated by community representatives.
According to the white paper, the technical requirements for node operators are extremely strict: the servers are equipped with 16 TB SSD drives, and an internet speed of 40 Mbps to ensure 1000 Tps (throughput).
[Tps, in layman's terms, is the throughput of a system, which means the average number of transactions that the system can process per second, and is one of the important indicators to measure the performance of blockchain projects. ]
Founding members of the Libra Association include well-known companies such as Mastercard, PayPal, Visa, Booking Holdings, eBay, Facebook, Uber, Spotify, Vodafone, Coinbase, and Xapo. At the same time, no member of the group can have more than 1% of the vote (this also applies to Facebook).
The Libra Association will also create a security token offering called the Libra Investment Token, which will raise funds from accredited investors who can earn interest on the reserve.
Meanwhile, Facebook launched the Calibra mobile payment wallet, which allows you to send Libra tokens via Facebook Messenger and WhatsApp. If tokens are lost due to fraud, Calibra will compensate users for their losses.
Calibra, a Facebook division chaired by former Coinbase board member and Facebook vice president David Marcus, said:
"We heard you very well. You don't want your social data mixed with your financial data. We understand that we have to earn your trust. Calibra will take care of your privacy and does not itself collect users' personal data, transactions on the network will be pseudo-anonymous [addresses, timestamps and amounts will be public]. But custodial wallets may need to go through KYC procedures.”
Creating its own digital currency in the world's largest ecological application by the number of users, providing everyone with convenient and profitable financial transactions, the prospect of Facebook's encryption road looks quite optimistic.
Encounter supervision, fate turning point
In the immediate aftermath of Libra's announcement, the project has come under fire from regulators. As a result, many key members have left the Libra Association, including Paypal, eBay, Visa, and Mastercard.
First of all, some politicians from all over the world stood up and condemned, including US President Donald Trump, the finance ministers of France, Germany, and Russia, etc. Within days, U.S. regulators formed a task force and scheduled hearings in both houses of the U.S. Congress. It's clear that Facebook had to put in a lot of effort to get this project off the ground.
Among the European countries, France and Germany intend to block the development of the Facebook project head-on. French Finance Minister Bruno Le Maire said that the development of Libra in Europe will be hindered because it threatens the monetary sovereignty of countries. And the German government adopted a special strategy to regulate the blockchain in September as a means of cracking down on Libra and other stablecoins from private companies.
Only Swiss regulator FINMA gave the project a relatively positive review, saying that Libra's requirements will be strict but clear:
“Swiss regulatory requirements for payment systems and cyber risk management are based on current international standards, in particular the principles of financial market infrastructures. The currently envisioned Libra project will require a payment system license. In addition, the project must comply with AML requirements and create a The right ecosystem."
With the heavy suppression of supervision and the withdrawal of major members such as eBay and Visa, Libra's encryption road has turned around.
In 2020, change your thinking and reshape your brand
In April 2020, the Libra Association abandoned its original concept (a single global digital currency backed by a basket of national fiat currencies). Instead of a global stablecoin, it decided to issue multiple assets, each pegged to a different fiat currency.
The updated white paper describes that the Libra Association plans to develop multiple stablecoins, each of which will be pegged to a different fiat currency — the U.S. dollar, euro, British pound and Singapore dollar. The value of Libra Coin will be determined by the smart contract based on the fixed price of the stable currency.
While the new "guidelines" will focus on regulation, at the network level, the Libra blockchain will implement a system to ensure legal compliance, avoiding AML/CFT sanctions, and it will help to reach consensus with regulators.
Dante Disparte, vice-chairman of the Libra Association, pointed out that Libra has started the process of obtaining a license from the Swiss financial regulator FINMA. The support of Swiss regulators will enable the provision of currency and banking services.
They also plan to register with the U.S. Department of the Treasury's Financial Crimes Enforcement Agency (FinCEN) as a money service provider. This will mark the first step in offering currency exchange and remittance services across the United States.
In May 2020, Facebook rebranded its mobile payment wallet from Calibra to Novi. Novi Financial is the cryptocurrency subsidiary of Facebook Inc. In December of the same year, the Libra Association changed its name to the Diem Association, and the name of the Libra project was officially changed to Diem.
According to reports, the purpose of the name change is to restore Libra's broken brand image in the eyes of various regulators.
Robert Warner, the former director of the Financial Crimes Network (FinCEN), and Stuart Levy, the former Treasury Undersecretary for Terrorism and Financial Security, are among those who believe the rebrand could mean Facebook CEO Mark Zuckerberg Grid may have succeeded in convincing regulators to side with them.
In 2021, what will be the encryption road of Libra (Diem)?
It has been exactly two years since Facebook announced its blockchain project. The Libra stablecoin, originally conceived on June 18, 2019, is bold: a digital token backed by a basket of fiat currencies, overseen by a governing association of 100 different companies responsible for the development and governance of the project.
But the project never got off the ground. It seems like every regulator on the planet thinks it's a bad idea, Facebook CEO Mark Zuckerberg addresses Congress, Facebook blockchain head David Marcus addresses Congress (twice), People around the world are calling for an immediate stop. Eventually, the project underwent a name change and now aims to launch as a single fiat stablecoin with the help of regulated U.S. banks.
In May, the Diem Association announced that it was working with Silvergate Bank to launch a dollar-pegged stablecoin. Silvergate will be the official issuer of the Diem USD stablecoin, while Silvergate will also manage the reserves backing the token.
“We are committed to building a payment system that is safe for consumers and businesses, makes payments faster and cheaper, and leverages blockchain technology to bring the benefits of the financial system to more people around the world. We look forward to working with Silvergate to to deliver on this shared vision," Diem CEO Stuart Levey said in a statement.
This may also be why Diem’s stablecoin plans were discussed yesterday at a private meeting of the U.S. President’s Financial Markets Task Force.
The U.S. Stablecoin Regulatory Framework
U.S. Treasury Secretary Janet Yellen has called for the early establishment of a regulatory framework for stablecoins. She made the announcement at a meeting of the US President's Working Group on Financial Markets (PWG) in mid-July.
At the conference, participants discussed the rapid growth of stablecoins, their use as a means of payment, and potential risks to end users, the financial system, and national security.
PWG's analysis of the current legislative gap regulatory framework. The group plans to release regulatory documents for stablecoins in the “coming months.”
The PWG is made up of representatives from the FDIC, Federal Reserve, SEC, CFTC, Treasury Department and is part of the newest Comptroller of the Office of the Currency.
Yale University economist Gary Gorton and Fed lawyer Jeffrey Chang published a study the day before the meeting. They predict that in the absence of proper regulation of stablecoins, the U.S. will return to the era of 19th-century “barbaric banking.”
The Ideal Digital Currency Transfer Service: Reality or Myth?
The future of cryptocurrencies looks bright. Although the demand for digital currencies and the number of market participants are growing steadily, one of the main problems is the lack of infrastructure projects and protection against high levels of fraud. For example, in the ICO era, more than 80% of projects were identified as scams.
However, the industry is constantly developing, and there are more and more high-quality projects and high-quality encryption applications serving users.
The further use of cryptocurrencies in modern finance remains problematic. There is no doubt that some crypto companies will become leaders in the crypto services market if they can jump over the biggest hurdle — regulation. Obtaining a license recognized by most countries will provide digital asset services to citizens, which in turn will be widely disseminated globally.
Impact of Libra (Diem)
I still think Libra is one of the most important projects ever in the crypto industry, regulators were aware of and discussing cryptocurrencies long before Facebook got involved in the blockchain, but after the announcement of Libra, the reaction of regulators became significantly more serious urgent.
In the two years since, the Bank for International Settlements (BIS) has published a raft of documents on stablecoins, as have central banks. The U.S. President’s Task Force on Financial Markets released an advisory last year calling for further regulation of stablecoins and addressing retail usage and financial stability.
It also restarted many of the conversations around central bank digital currencies that have been accelerated by the pandemic. China is about to fully roll out its digital yuan, while the US released a report on its CBDC.
To be fair, it was mostly Facebook's involvement that got all the attention.
