We're a couple of years now since Facebook announced its own Cryptocurrency. It's called Diem (although you might know it by its original name, Libra), and it was backed by a large amount of large names in the financial technology space - including a few really big names (like Mastercard, Visa, Paypal, eBay, Spotify and Uber - most of which have by now left the project).

Back during its original announcement, I wrote an internal post at work discussing a couple points about Libra/Diem which I believed to be sorely missing from the discussion we were having. Almost two years later, I still haven't seen much discussion about three of any currency's cardinal pillars, which are in short:

• Diem's monetary economics (how it fits in the larger monetary system),
• Diem's distribution channels (how will it reach its primary users?),
• Diem as a payment tool (i.e. how do you spend and hold it).

So I decided to pick up the subject once again, and take a look at what - if anything - has changed; and how Libra/Diem fares on those key metrics.

Diem's monetary economics

Most of the current analysis around Diem was focused on the main whitepaper, which mostly covers its mission and functionalities, in a surprisingly high-level way. Companion papers have also been released, with the one concerning the Diem Reserve being by far the most informative.

The goals which this policy paper outlines are superficially in line with those of most monetary authorities around the world. Diem is positioned as a 'Stablecoin' - which is what economists commonly call a pegged, fully backed or fully convertible currency.

In a nutshell, to ensure consumer trust (widespread adoption) and protect it from inflationary or deflationary pressures (value preservation), the Diem currency will is backed by a Diem Reserve. This Reserve is a basket of financial assets, spread geographically and held in their most liquid form.

In layman terms, for each unit of Diem a customer or investor whishes to purchase, the customer needs to hand over some local fiat currency to authorized resellers. These resellers would then transfer this money to the Diem association, which would use it to purchase low-risk assets and currencies. Should the customer want its local currency back in exchange for Diem , for instance to spend it at the local mom and pop shop, the reverse flow would happen. This mirrors the current monetary system, where local banks are the authorized resellers - converting 'credit card money' into local currency - and the central bank fulfills the role of the Diem association.

There's two big economic advantages the paper is trying to peddle here. First of all, unlike existing financial systems, the Diem framework would always hold a 1:1 ratio of Diem to other currencies - something which prompted even reputable news sources to throw the term narrow banking around. Secondly, these currencies and assets would be highly distributed and inherit monetary policy from the underlying central banks.

But both are untrue.

The narrow banking claim, which contrasts the Diem resellers and the Reserve with regional banking systems and their central banks, is superficial and misleading. It is true that the current banking system uses a fractional reserve banking model, in which banks are allowed to use deposit money to finance speculative activities, and are not required to hold reserves covering the total amount of deposits from customers.

However, that does not make Diem's model a narrow banking model. In most regulated markets, banks are not only strongly regulated (for instance under Basel II and III in Europe) and regularly stress tested by external authorities, but are also mandated to reinsure deposit money (what Facebook would call 'low risk') up to a certain amount.

Diem and the Diem Association are under none of these obligations. The 1:1 reserve claim only covers the relationship of Diem to underlying currencies: it offers no guarantee on what Facebook and the Diem Association subsequently do with funds denominated in Diem. Whether it's peer-to-peer lending, local financing schemes, cash-in-advance models, small business loans, derivatives, or even a Diem PE Fund, the reality is: you wouldn't know.

Once the money is denominated in Diem it escapes regulation and oversight, and enters a new dimension where the bank is the money. That is not narrow banking - in fact, it's the wildest form of grey market capitalism: and what Facebook calls a "commitment to strong consumer protection" is a call to regulation that only covers the exit nodes - the "endpoints", which would traditionally be seen as currency exchanges.

Facebook wants these exchanges to be regulated - but not its currency; and that hasn't changed with the rebranding. For all other intent and purposes, the Diem ecosystem is an unregulated distributed monetary authority - the furthest you could be from a narrow bank.

As for the inheritance of monetary policy, you could buy this argument for large nations with strong regulatory power, large technical departments and huge currency reserves. But for smaller players - think about the central bank of a developing country - this whole project feels like a play from Facebook to have additional leverage: a concern that, to my surprise, I have failed to see anywhere in the current analysis of Libra/Diem.

Diem's original focus on banking the unbanked clearly betrays a focus on developing economies - which is where the need for liquid, safe, and stable money is the biggest. But that's a double-edged sword: imagine Diem becoming a successful product, in, say, Myanmar. People would get paid for their services in the local currency, the Kyat. Due to its superior stability and ease of cross-border transfer, the Diem would be a better solution to hold savings. But as citizens exchange Kyats to get Diem, the Reserve would slowly fill up with Myanmar's currency.

The mandate of the Diem Association, in that case, would be to re-balance the Reserve's currency basket. But for developing countries such as Myanmar, the amount of foreign reserves held is usually low (for Myanmar, a few billion of dollars). Re-balancing the basket from the Reserve would mean flooding the market with Kyat for a value similar or superior to what the Burmese central bank can exchange would cause runaway inflation and cripple the government in its ability to function.

Giving this type of power to companies such as the Diem Founding Members is something that deeply worries me. 'Banking the unbanked' is a development project that should not be taken lightly: financial ecosystems are difficult to work with, even more so in fragile, developing markets; and Diem's monetary paper fails to address any of the concerns that would arise in the minds of any reasonable economist.

For the reasons stated above, I would rate the claims about the 1:1 backing of Diem-to-currencies making the Diem association a fully regulated player that is subject to external monetary authorities as misleading. At the time of announcement I would have expected monetary and financial authorities around the world to do the same - and that has largely been the case.

Diem as development vehicle

One of the major selling points Facebook is presenting to the world for Diem is that it will 'bank the unbanked'.

The story goes like this: around 30% of the world has no access to financial services, but they all have mobile phones and internet. So why would you force these poor souls to carry wads of cash along some dusty road in the middle of nowhere to get their groceries, when they could just hit that Like button on their iPhone and have them delivered at their doorstep like we do in the US?

It's a compelling story - especially because it's one we, the rich world, desperately want to believe. But it fails to take into account the reason why the 'Unbanked' are cut out of the global financial system.

You see, people in developing economies have money - usually more than you would expect - and they would probably like to buy goods and services online. The major issue they have is not in fact their lack of access to the global financial system. It is lack of access to the local interfaces. People in developing countries have a very limited array of options to move their Paper money into the Internet dimension. To use a metaphor, the problem is not that they can't travel by plane: it's there's no landing strip. Building yet another plane - or another wallet, in this case - will not help at all.

Diem has been compared in some circles to M-Pesa, the phone-based wallet active in some Subsaharan countries. So how does M-pesa solve this local access problems? Lo and behold, here's the local bank I used on the daily back when I was living in Africa:

Which one is the bank you ask? Well, all of them: the shop with the 'Wakala' sign (literally, 'agency') is the one carrying official mandates from the financial network to act as an ATM. But almost every other brightly colored door houses at least one financial endpoint - commonly called agents. In fact, even the guy riding the motorcycle on the right can act, in some cases, as an ATM on wheels.

Financial endpoints like the one in the picture have unclear availability of financial services, open and close at seemingly random hours, and have incredibly steep conversion fees (to the tune of 5-10% of transaction value) when bridging the gap between the digital and the tangible world. Which is the problem at hand: all the financial optimization, fancy Blockchain and beautiful UX will not help one bit if the interface between Internet Money and Real Money is this shoddy.

Facebook and the Diem Association have been unable to provide a clear answer on how they plan to actually reach financially underserved regions. I have no doubts they can be more successful in the digital domain than any other digital wallet in the space - which is where the fight with their venture investors is played. But the other battle - the one that really matters, the one to bank the unbanked - plays out on a different battlefield.

Which is why at the time I was unable to buy the idea of Diem as a legitimate bridge between the Unbanked and the digital world. Two years on, the Diem Association has not managed to crack the puzzle of how to roll out a gigantic capillary network of local agents in the developing world - a strategy which in any case was incompatible with their goal of low fees, money liquidity and strong regulation.

Paying with Diem

A final point worth considering is the one about Diem's main purpose: as a payment method.

In my day-to-day job I get to see a lot of the machinery being built to allow people to pay everywhere, no matter what. A Taiwanese tourist going through a London Metro turnstile with a single swipe of its Visa card might not make headlines - but it is an incredible technical achievement when you consider the amount of machinery that is present just to process a few pennies.

Diem was clearly inspired by two incredible innovations in the Payment space: the rise of Aggregator Apps, and that of P2P payments.

Aggregator apps (also called super-apps) are something that the average Western consumer would not be familiar with. They are incredibly popular in many markets where the whole e-commerce ecosystem was sorely lacking: Aggregator Apps changed that.

The whole idea behind an AA is that the app itself serves as a sort of 'embedded app-store', which allows you to do many things at once, without having to install any additional software. Customers get ease of use, a single interface style, and a bunch of interconnected applications with shared accounts and a single wallet.

Indeed, most of these apps (AliPay, WeChat, Meituan Dianping, Go-Jek, Grab, Rappi) started as or include at least rudimentary wallet functionality. But beware of comparing them to Paypal: they are a completely different beast. On one of these Aggregator Apps you could find a date, find the best restaurant, book a table for two, have a friend rate your looks, order a cab and plan the whole night without pressing the 'home' button once.

Aggregator Apps are something that is really hard to understand from our cultural point of view, where information, goods and service are readily available. For emerging economies, they are a revolution.

I'm sure Facebook was looking very closely at different success models in other markets. By partnering with some of their potential competitors in the Diem association, they were definitely looking to be the Super App of the West.

P2P payments have been around forever (Western Union anyone?), but thanks to the rise of borderless shopping, travel, and personal finance they have now reached a whole new dimension. There's basically two ways of making money transfer work financially: you either create economies of scale and networks large enough that the money basically never needs to leave your system (Venmo, Swish, CashApp, Paypal.me), or you work very closely with existing entities to bring down fees by negotiating partnerships (Visa Direct, Mastercard Moneysend).

The problem with either approaches is obviously that the more parties are involved in the whole transfer chain, the higher the fees to make the process financially viable.

At the time, I fully expected Facebook to aim for the first type of P2P wallet: one that is fully integrated in the Facebook ecosystem, but more importantly - one in which your money never exited the Diem system. And I would have expected the model to expand to include companies as the second Peer, effectively cutting out the middleman in C2B payments.

That is largely what happened - which of course created an interesting tension in the Diem Founding Charter: half of the companies represented were net recipients of revenue generated by global payments, and the other half were the ones that need to cough up the money. At the time it felt like the entities that bought a seat at the table have wildly different motives to do so - and, as I wrote, "it remains to be seen how that will impact the project going forward".

Sure enough, Visa, Mastercard, Paypal, Stripe and the other potential peers ended up leaving the Diem association after under a year. But that hasn't stopped Facebook's ambition to become the Western World's Aggregator App: they launched dating services, communities, scaled up their marketplace offering, and most likely still plan to offer access to money and services from a single hub, therefore owning their customers across all channels.

Diem is still very much part of this play.

Final thoughts

I think the interest towards Libra (now Diem) is still justified, but for all the wrong reasons. Two years on, most of the commentary still focuses on its Cryptocurrency aspect - and yet I've managed to cover most of what there is to say about Diem from both a payments and an economics perspective without mentioning 'Crypto' once.

On the other hand, the payments and monetary perspectives are the ones that will determine Diem's fate in the market. Under the current regulatory environment, I would not expect Facebook to be able to become the West's first Aggregator App; let alone the first supra-national currency.

But even if they fail, there will be others. Libra's original anthem pleads for a currency that is "safe, accessible, no matter who you are, or where you're from". That is an admirable goal, and one the industry should most definitely stand behind. A world where money works for everyone is exactly what we need - I'm just not sure that money will be Diem.