Crypto Can (Still) Learn Much From The Failure Of Diem

If the shuttering of Diem passed some crypto investors and market watchers without much notice, that should not come as a surprise. This inauspicious and muted end for the project was caused by several factors, but it should be noted that this is the complete opposite of how this idea initially was introduced to the marketplace. One key factor that might refresh the collective memory of the market is the original name of this concept: Libra.

Yes, the stablecoin project launched and spearheaded by Facebook (now Meta), although purportedly in consultation with multiple other organizations, has officially folded. Remaining assets were sold, according to reports, for approximately $200 million to Silvergate – a major player in the crypto banking and fintech space. Such an end is obviously not what the creators, proponents, or supporters of this project had in mind when Diem debuted in 2019, so what exactly happened?

How did a project that combined the technical prowess of multiple organizations, the social media audience of Meta, and the rising interest in cryptocurrencies fail so spectacularly? Not only did Diem fail, but it failed to launch at all. The saga and struggles of Diem have been documented in many places, so instead of dwelling on those ideas, let’s take a look at some of the lessons that crypto organizations have learned, and should continue to learn, from this attempt.

Mixing business is risky. A leading cause of why Diem failed, and never even got off the ground, is the close association of the initiative with Meta. Although on paper there was an initial Libra Association of approximately 30 organizations, including major credit card companies, it was relatively obvious from the beginning that Meta was leading this idea. It might strike some that Meta is in hot water currently, but that is just a continuation of the political scrutiny the organization has faced for years.

The list of justified complaints and issues that policymakers have with Meta will not strike anyone as surprising. Online bullying, negatively impacting the psyche and mental health of users, privacy and data concerns, fake news, deep fakes, political misinformation, and medical misinformation are just a few of these issues.

In hindsight it was naïve to imagine that any social media organization – especially one continuously in the political crosshairs – would have any chance at launching a competitor to the U.S. dollar.

Lack of clarity is dangerous. Cryptocurrencies and the various cryptoassets that have sprung to life over the last decade or so have always been a touchy subject for regulators. The United States, perceived (and rightly so) as leader in innovation and welcoming home to new ideas, has been – comparatively – hesitant to adopt and integrate cryptoassets into financial markets. It took until the very end of 2021 for the first ETF to be approved for trading, and even this instrument does not track the actual spot price, but rather futures contracts.

Stablecoins, even now, but even more so when initially introduced, are perceived as a direct challenge to the supremacy of fiat currency for fiscal, monetary, and tax regimes the world over. What Diem found out the hard way, and numerous other stablecoin issuers have since incorporated into proposals, is that underlying characteristics and fundamentals must be disclosed transparently.

These disclosures include, but are not limited to, 1) how the stablecoin will be reserved, 2) what processes are in place to authorize or potentially censor transactions and users, 3) how stablecoins can be redeemed, 4) auditable records disclosed to the market, and 5) the intended use cases for this cryptoasset, including how use cases can be monitored.

Interoperability is critical. A core attribute of any stablecoin that has been developed and that has entered the marketplace is that any stablecoin intended for broader based utilization must have other uses outside of merely serving a payment function. That is not to say that stablecoin payments should be minimized. To the contrary, the fact that those payments have grown by 500% from 2020 to 2021 – as per the President’s Working Group Report – indicates that there is a substantial and growing need for such a function.

Something that Diem failed to ever address or even explain effectively was how its token would be incorporated in both permissioned and permissionless systems. This has been effectively and proactively addressed by more recent entrants into the sector, with stablecoins forming an integral layer in the decentralized finance (DeFi) ecosystem. DeFi has grown to be among the fastest growing sector of the cryptoasset economy, and the fact that stablecoins play an integral role in these operations solidifies the use case of these instruments.

Diem, on the other hand, was routinely criticized for not having alternative use cases – or even a plan to develop them – outside of the Meta payments.

Clearly there was a lot that was done incorrectly, or with a short-sighted mindset, with the Diem initiative; that much goes without saying. It would be simple to sweep this whole saga under the proverbial rug. and move forward confident that all lessons have been learned. Tempting, but short-sighted. As increasing numbers of organizations, including some of the same payment processors initially aligned with Diem, begin to think of developing stablecoin offerings, the lessons outlined here should loom large. Cryptoassets have come a long way, and developed far beyond initial origins, but stablecoins are still an emerging asset class, and should always learn from lessons previously taught.

Source: https://www.forbes.com/sites/seansteinsmith/2022/01/30/crypto-can-still-learn-much-from-the-failure-of-diem/