Facebook-backed Diem project lays groundwork for merchant acceptance

Diem began life as Libra, a Facebook-proposed cryptocurrency project that drew immediate backlash due to its affiliation with the social network. And while the project shed high-profile backers in its early days, it has since rebuilt itself with a narrower focus on merchants.

Key to the digital currency's development are the partners that came on at a later point. Shopify, for example, has joined to provide e-commerce expertise. And the Tel Aviv-based payment API company First has developed tools to manage Diem's blockchain, the project's coding, payment standards and protocols.

Diem is expected to launch within the next few months as a stablecoin, which pegs its value to that of a traditional currency. There's a growing acceptance of this model, as new regulations give merchants more confidence to accept stablecoins for payments. There's also a global trend toward central bank digital currencies, a signal of government support for the market.

"We've been in the blockchain industry for about five years," said Ran Goldi, First's CEO. "During that time we found out bitcoin and ethereum were more speculative, and humanity's chance to interact with blockchain will come through stablecoins and CBDCs."

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First built a platform that helps merchants connect to Diem and accept Diem stablecoin payments, managing the processing rail and the custodial wallet. It acts as a middle layer between the merchant acquirer's system and the merchant's bank.

Other Diem members include Checkout.com, which offers digital payments, analytics and access to a roster of clients such as TransferWise and Samsung. Another First integration is PayU, a Diem member that has added e-commerce technology in Latin America, Central and Eastern Europe, Africa, Asia and India in the past year.

"Not all payment service providers are tech-oriented companies," Goldi said. "They may want to enable stablecoins but may not be able to do it inside of the next two years or so because they are dependent on in-house technology to build that out."

Diem is hoping for an easier launch following two years of global regulatory pushback that spanned multiple political parties and nations. Diem's stablecoin model is meant to demonstrate visibility to regulators and to address claims Diem is operating outside of central bank monetary policy.

The rebranding from Libra to Diem was designed to emphasize the initiative's independence from Facebook, which originally organized Libra under its Calibra subsidiary. Facebook is one of Diem's 27 partners.

Last year, as consumers increasingly adopted digital payments, some started to view stablecoins as an option to automate payments, promote financial inclusion and control merchants' costs.

"A lot of merchants have very tight margins," Goldi said. "If they can cut any overhead for their business that's huge."

Circle, for example, has invested in expanding its stablecoin following an OCC ruling that allows banks to process stablecoin payments. And during Visa's most recent earnings call, CEO Alfred Kelly said the card network is actively seeking cryptocurrency partners and said stablecoins were no different than any other method of payment.

Writing for PaymentsSource, Vincent Chock, founder and group CEO of Legacy Trust, said stablecoins remove processing steps and fees from international transactions due to the underlying blockchain. This also makes payments less reliant on bank accounts and other centralized top-down payment processing chains.

Diem sees itself as a partner for central bank digital currencies rather than a rival. Several countries are working on or studying CBDCs as a way to improve government disbursements and to bring more people into the financial system by creating more direct relationships between governments and individuals. Writing for PaymentsSource, Eric Grover, a principal at Intrepid Ventures, said private-sector support or public/private partnerships for CBDCs would offset the cost of the projects.

Diem hopes to work as a white-label support for CBDCs, Goldi said, adding blockchain-supported CBDCs are part of a broader migration away from centralized money management.

"Stablecoins and central bank currencies are the next step before the economy goes full 'defi' in about 30 years," Goldi said.