The Libra digital currency arrived in Geneva in 2019 to great fanfare. The Facebook backed project (since renamed Diem) did not please decentralisation enthusiasts but it was lauded for raising awareness of Crypto Nation Switzerland.This content was published on May 19, 2021 - 11:05
Since this article was published I have learned that Bertrand Perez, chief operating officer of the Diem Association since its conception in 2019, has resigned. His departure is connected to the strategic changes at the association.
At the outset, Geneva looked like a perfect fit for the project.
“Switzerland and specifically Geneva ensures that the association is plugged in to the international community and international financial system,” Diem’s former head of policy and communications, Dante Disparte, told me in 2019. “One of the important priorities for this project is financial inclusion, so proximity to civil society and international organisations helps us stay true to that mission.”
Now Diem has changed its mind and has decided to leave Switzerland. Why is that and what impact did Libra/Diem have during its short-lived stay?
To start with, it’s unclear whether the Diem Association will withdraw from Switzerland entirely, or retain some sort of skeleton operation here. Last week, it announcedExternal link a “strategic shift to the United States, resulting in a move of Diem’s primary operations from Switzerland to the United States”. In the process it has pulled the rug on a payment system license application with the Swiss financial regulator, despite being close to getting approvalExternal link.
I asked Diem whether it has any future plans in Switzerland, but it has not replied. Jérôme Bailly of the Crypto Valley Association says communication with Diem during its stay in Switzerland was sparse. He believes the Geneva office had less than 20 staff at its peak. And he can’t see any obvious reason for it to keep its doors open any longer.
US lawmakers see plenty of reasons why a potentially disruptive payments system, backed by a huge stockpile of US dollars and with access to billions of users, should not be based in Switzerland. The suspicion is that Diem was forced to move to the US for political reasons.
The project was also forced to abandon a single digital payment token pegged to a basket of currencies in favour of a series of separate “stablecoins” linked to individual currencies - starting with the US dollar. “It makes sense for Diem to focus all its efforts in the US market,” Bailly told me. “After all the setbacks, Diem is under pressure to launch a proof of value product.”
The Swiss regulator, FINMA, bent over backwards to accommodate Diem. “The project has benefited greatly from the intensive licensing process in Switzerland and the constructive feedback from FINMA and more than two dozen other regulatory authorities from around the world convened by FINMA to consider the project,” says Diem CEO Stuart Levey. But not enough to complete its license application.
According to Bailly: “Diem has faced problems negotiating with European Union countries who are not ready for a euro-backed stablecoin.” Another apparent reason for it to abandon its European base.
FINMA’s willingness to dedicate so much of its resources to the prestigious Diem project has had a knock-on effect for other blockchain projects. “I’m not sure whether Diem Association was a blessing or a curse for Switzerland,” tweeted Froriep lawyer Ronald KogensExternal link.
Shortly after Diem arrived in Switzerland, FINMA updated its regulatory guidanceExternal link relating to cryptocurrencies. This forced some blockchain projects to revise their plans, and in some cases, go through some of the regulatory process again. “Projects left Switzerland because they waited for a reply from FINMA and then had to re-submit their request to get legal certainty,” Kogens tells me. Some simply waved goodbye and headed for places like Britain, Liechtenstein and Gibraltar.
“I can see the importance of Diem but it’s frustrating that Switzerland expended a lot of effort for basically handing the project over to the US,” added Kogens. “The US regulator has a reputation for being strict with cryptocurrencies and blockchain, but most of the big companies, such as Coinbase and Kraken, are based in the US right under the eye of the SEC.”
Kogens emphasised that he is generally impressed with FINMA’s openness and forward-thinking approach towards blockchain-based financial innovations. But he noticed that the attitude of the Swiss regulator (and others worldwide) towards decentralised finance hardened once Libra/Diem washed up on Swiss shores. This was no longer a small-scale experiment - decentralised finance backed by Facebook suddenly assumed the power to move markets.
But the regulatory efforts might not all have gone to waste. Diem is not the only stablecoin project in the world. The Swiss stock exchange plans to launch its own digital payment token for its forthcoming digital assets exchange. Sygnum bank already has its own token payments system. And other projects, such as the Fnality banking consortium, could also come knocking at FINMA’s door in future.
As for Diem – they came, they left and they may or may not be back. For the time being, those fireworks have fizzled out over Geneva.