Facebook’s Diem stablecoin won’t allow leverage, unhosted wallets

Facebook’s Diem stablecoin won’t allow leverage, unhosted wallets

To protect consumers, not only will the Diem (formerly Libra) stablecoin have at least one-to-one reserve backing, but it won’t allow the digital currency to be fractionalized or leveraged elsewhere. Christian Catalini, Chief Economist at the Diem Association, explained how during an OMFIF webinar.

OMFIF is a central bank think tank, and given the audience, Catalini was positioning Diem as a highly regulated and conservative stablecoin compared to the others currently available.

“There’s a tremendous amount of innovation happening in spaces like DeFi decentralized finance, but when you think about payments, it’s especially important to think about what kind of risk does leverage in the system through all sorts of very complex smart contracts and financial assets introduce into a payments network,” said Catalini.

The Association will require any Value Added Service Provider (VASP) or wallet provider to ensure its liabilities are also backed one to one by stablecoins.

When you think about DeFi today and the free movement of tokens, it seems tricky to keep tabs on the assets. However, Catalini explained that there would be no unhosted wallets. Hence the control comes back to the VASPs. The wallet requirement is primarily to address potential financial crime, but the side effect is it will help prevent leverage.

Diem dollarization risk

One of the questions addressed to Catalini was about how Diem will deal with the potential impact on the sovereignty of national currencies, so-called dollarization. There is a two-pronged approach. If there is only a Diem dollar then some will use it out of convenience. So the first solution is to roll out digital versions of the local currency.

But the dollar might be attractive if viewed as more stable than the local currency. Here the hosted wallet restriction helps again. Because Diem will only work with locally regulated VASPs, currency controls can be imposed. For example, if someone receives a remittance from abroad, they may be required to convert it into local currency.

Keen for lift off

Catalini was certainly making a pitch for Diem to get a regulatory green light. He spoke about the opportunity costs to consumers of not having innovations, especially during times like COVID-19 when digital solutions are beneficial. And he was keen to encourage competition.

“Our view is that the public sector would probably be best served by essentially betting on multiple networks and encouraging multiple networks to emerge and compete with each other,” he said.

“In essence, that retains optionality in a phase that’s like the early days of the internet. There’s no such thing as a dominant design or a way to solve the problem of payments and financial services on digital assets.” Some would say that’s not entirely true. The primary ingredient of any successful payment system is a network effect. And there’s no bigger network than Facebook, which is precisely the issue that’s scared the living daylights out of central bankers.

Catalini continued, “And there’s a very big risk of picking winners or even trying to deploy a public sector solution that is one that’s going to be used for multiple decades.”

Forget bitcoin, card firms should embrace stablecoin payments - Gartner

Research house Gartner has poured cold water on Visa’s recent move to support bitcoin trading on its network, arguing that the real revolution in payments would see centralised financial companies support stablecoin transactions on blockchains.

Earlier this week Visa outlined plans for the first pilot of its new suite of crypto APIs, following other industry players such as PayPal and Square in embracing the digital currency movement.

Gartner analyst Avivah Litan says that the move is welcome, and increase the “technical rails between consumers, businesses and blockchains, and help prepare the transition to future payment infrastructure”.

However, in a blog, she also notes that it is “hardly a revolution”. Having centralised financial companies that earn revenues by charging transaction fees at the centre of crypto goes against the peer-to-peer ideals of blockchain payments.

“Potential users are left to wonder if, in the future, they will have to pay these centralised services additional transaction fees for moving cryptocurrency across peer-to-peer blockchain networks, defeating the promise of blockchain,” writes Litan.

Her answer to this problem is for card brands and other established players to provide the on and off ramps for payors and payees using stablecoins, without being involved in the actual payment that would occur on the blockchain.

This would mean Visa and its peers would not get a transaction fee but would make money from issuers and acquirers using services such as risk management, onboarding and protections for balances.

Concludes Litan: “The question remains: will these centralised financial services companies go forward in line with the spirit of blockchain peer to peer payments at the risk of cannibalizing their existing central-clearing house based-revenue streams? The answer will depend on whether or not these firms have any practical choice.”

How Mastercard’s crypto strategy is distinct from its new stablecoin plans

The crypto space lit up late Wednesday when news broke that Mastercard was expanding the scope of its digital currency support.

Mastercard said in a blog post that it was moving to enable its systems to facilitate payments in the form of stablecoins directly to merchants who choose to accept them. Such a service will complement Mastercard’s existing crypto card-focused offerings, through which consumers can spend their cryptocurrencies via an issuer’s card – though in the end, the transaction is settled outside of Mastercard and in the form of fiat currency like the U.S. dollar.

The payments firm’s chief financial officer, Sachin Mehra, discussed the expanded offerings during a virtual event hosted by Goldman Sachs on Wednesday, according to a published transcript obtained by The Block. But more broadly – and, perhaps, more importantly – Mehra provided a clear-cut break down of how Mastercard views what he termed “sub-categories” of digital currencies: cryptocurrencies, fiat-backed stablecoins and central bank digital currencies, or CBDCs.

Mehra called crypto “an asset class,” adding: “It’s not a payment vehicle as far as we’re concerned.” He spoke about Mastercard’s crypto card program and indicated that such efforts would continue and grow over time. “We’re seeing tremendous growth in that space,” said Mehra, saying later:

“So that’s kind of – and we’ve got numerous agreements in that regard, which are already in play. And we’ll continue to do more and more of those because people want to be able to use that asset class to make payments at the point of sale.”

On the subject of stablecoins, Mehra noted that “we have plans to enable those, regulation pending, across our network.”

Mehra continued:

“So in other words, the delivery of those stablecoins and to allow the settlement of those stablecoins with those merchants who wish to be settling in those stablecoins on a forward-going basis. So we are enabling our network to allow for that to happen yet this year.”

Lastly, Mehra discussed Mastercard’s work in the area of CBDCs, which is perhaps a bit more theoretical given that such currencies remain in their nascent stage. Yet payments firms big and small appear to be positioning themselves as possible service providers should they take off – PayPal being one of those, according to statements from the firm’s leadership – and it seems that Mastercard is no exception.

“We can bring the technology,” said Mehra. “We have – we’re the leader – one of the leaders in terms of the patents we have developed in terms of DLT. And how we can help [central banks] at the infrastructure level and/or the application and services level is something we remain engaged with on numerous [fronts] with several central banks.”

Mehra concluded his remarks by calling the broader crypto sphere “a space to keep an eye on.”

“I think it will ebb and flow depending on what the flavor of the day is as it relates to cryptos. We’ve seen run-ups in crypto prices in the past. But broadly speaking, the use of digital ledger technology is something we will remain focused on.”

One potential conclusion from Mehra’s comments is that whereas Mastercard is interested in capturing value around the interest in cryptocurrencies, the payments firm views stablecoins as worth the investments required to integrate them into its systems. And as for CBDCs, those remain on the horizon – albeit one that might one day constitute an entirely new business line.