While Diem is a paper tiger, Papypal is the elephant in the room of digital payments21.04.2021
When Facebook unveiled its Libra project to the public in June 2019, it startled banks, central banks and politicians. Could Facebook use it to supplant government currencies? Would central banks end up losing control of the monetary system?
After almost two years, the project has gone quiet. The only recent news was that the name of Libra had been changed to Diem and that Kevin Weil, the mastermind behind the project, announced on Twitter that he would be leaving in March 2021.
Could it be that the whole project was misconceived from the start? One indication of this is the fact that Libra partially abandoned the idea of its own currency as early as April 2020. Libra was initially planned as a basket of major currencies. Since the euro would only have had a share of around 30%, Libra users in the euro area would have been exposed to a considerable exchange rate risk. This is why, in addition to the currency basket diem, there will now also be a euro diem, dollar diem or yen diem.
The problem remains that you need a Diem deposit so you can make payments with the Diem system. Diem does not want to give a binding guarantee that these deposits can be exchanged 100% back into traditional bank deposits at any time. Diem openly talks about having to wait or pay a special fee for repayment in the event of a run on the system. For a bank, that would be the trigger of a restructuring process. Thus, even though Diem promises to invest all funds safely, there remains a risk of loss. The more people entrust Diem with their money, the greater the risk.
Thus, Diem has considerable weaknesses compared to Paypal. With this system, one can pay without having to have a Paypal deposit. Payments are simply debited from a commercial bank account or a credit card account. Deposits at Paypal have the legally binding character of bank deposits. Paypal, where you can now pay with 26 currencies, also illustrates that a successful global payment system is characterized by the interoperability of currencies.
It was therefore not a good idea from the outset to try to create a currency of our own. Currencies are like languages that people find difficult to part with. That may be different in developing and emerging countries. But here, Diem faces the problem that Internet penetration leaves much to be desired. That's why, however, there are already functioning digital payment systems operated by mobile phone providers. Thus, Diem is also not needed for financial inclusion.
If Diem is to become a success after all, it will ultimately have to take its cue from Paypal's successful business model. However, that would require a complete reboot. But so far Diem is a paper tiger, while Paypal is the elephant in the room. It is surprising that central are so much afraid of the paper tiger, while they completely neglect the elephant.