Libra Cryptocurrency
A cryptocurrency created by Meta (former Facebook)
What is the Libra Cryptocurrency?
Diem (former Libra) is a cryptocurrency created by Meta (former Facebook). The main goal of cryptocurrency is to be a simple, low-fee medium of exchange. It is backed by a basket of major currencies and government debt instruments.
This cryptocurrency would be digital money on your phone, which you can use to pay for any purchase where the proper payment method is supported. So, the intent is to be a stablecoin.
It was initially called Libra. Then in December 2020, Libra and Libra Association (responsible for the Libra project) rebranded as Diem and Diem Association, respectively.
The Diem Association included such members as payment, technology, online marketplaces, telecommunication, venture capital, and nonprofit organizations.
Unfortunately, regulators canceled the project in January 2022. The reason for that was the backlash from the US, EU, and other regulators. The main concerns were monetary sovereignty, privacy, financial stability, and antitrust.
Libra Cryptocurrency History
"So, how did it all start? Could you tell me about the currency's history?"
Sure. Back in 2017, Morgan Beller was the only person who started working on cryptocurrency and blockchain at Meta. Then in May 2018, the vice president of Meta David Marcus transitioned from Facebook Messenger to a blockchain division.
Marcus was in charge of the project for several days from transitioning. Finally, after nine months, Meta included 50 engineers in the project. The first announcement about the plan was in May 2019, and it was known as the "Global Coin" or "Facebook Coin."
The coin was announced on June 18, 2019, as "Libra." The currency's creators are Morgan Beller, Kevin Weil (Novi's Vice President of Product), and David Marcus.
Then one month later, Facebook declared that the project would be on hold until regulators approved the project as authorized.
Then in October 2019, several firms left Libra Association. The firms that left the Association were:
- PayPal (October 4)
- eBay, Stripe, Mastercard, Mercado Pago, and Visa (October 11)
- Booking Holdings (October 14)
In November 2020, the Financial Times reported that the currency would be renamed "Diem" and backed only by the US dollar rather than a basket of currencies. As of December 2020, The Association rebranded the currency's name and renamed it "Diem Association."
Then, in January 2022, the Association was dissolved and reported $200 million worth of assets. The US Department of Treasury and the Federal Reserve were against issuing the token in the US.
How was Libra Supposed to Work?
The currency could be compatible with different wallet applications. You could buy, sell, or hold this token in your wallet. In exchange for this token, you are giving dollars. So you could use it anywhere where the currency is accepted as payment.
Another project developed by Meta was Novi (former Calibra).
It is a digital wallet to hold the currency. So, individuals can exchange their local currencies for this token using a Novi wallet. Also, Meta planned to integrate the wallet into Whatsapp and Messenger apps.
The not-for-profit organization Diem Association (former Libra Association) monitors and tracks the tokens. Its primary objective is to ensure the significant currencies and debt securities back the cryptocurrency. This basket helps to stabilize the price of the money.
The Association planned to regulate the token. The Association included 28 founding partners:
- Payments: PayU, Checkout.com
- Technology and marketplaces: Facebook's subsidiary Novi Financial, Farfetch, Spotify, Uber, Lyft, Shopify
- Telecommunications: Iliad SA
- Blockchain: Coinbase, Bison Trails, Anchorage, Xapo
- Venture capital: Andreessen Horowitz, Union Square Ventures, Breakthrough Initiatives, Temasek Holdings, Ribbit Capital, Thrive Capital, Slow Ventures.
- Nonprofit and multilateral organizations and academic institutions: Heifer International, Mercy Corps, Creative Destruction Lab, Women's World Banking, Kiva
Each partner (including Meta) had only one vote. Although the currency is built on blockchain technology, it is not entirely decentralized. So, we cannot say that Libra was a blockchain currency.
Also, only Diem Association members had access to the ledger of transactions.
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What is the Purpose of Libra?
The token is planned to be a simple global medium of exchange. It is also intended to be a stablecoin backed by a basket of international currencies. So, it promoted the effectiveness of the coin that we can use in our daily lives.
Suppose you look closely at a project's white paper. In that case, you will find one significant aspect—the project aimed to address the issue of high transaction costs for people from developing countries.
Every year, money-sending services in emerging markets charge $50 billion from customers.
The other issue is the risk of robbery. You may lose nearly everything if you store the money in cash in these countries. Also, about 1.7 billion people don't have access to a traditional bank account. But, all of these people have access to their mobile phones.
So, the project's goal was to address this issue by offering mainstream digital currency. The project planned to provide cheaper, better, and more open access to financial services for all people. To implement that, the Association presented:
- Much more reasonable fees compared with traditional money-sending services
- Utilization of blockchain technology
- The stable value of the token via the basket of reserve currencies
How was Libra/Diem Different from other Cryptocurrencies?
The differentiator of the token compared with other crypto tokens is the basket of reserve currencies and government bonds (tangible assets). Unfortunately, most crypto assets don't have such backing.
That is why they lack stability and guaranteed intrinsic value.
"Ok, what about other competitors?"
Sure, there are some competing currencies backed by tangible assets. But they have one problem. Most of them are supported only by single money, USD or EUR. Unlike others, Libra is supported by several significant currencies and government bonds. See the difference?
The other factor of the project is the support side. Libra Association strongly supported the project and included leading companies such as Mastercard, Visa, eBay, and PayPal.
In addition, the Association was the only authority in charge of creating or eliminating Libra Reserves.
The low fees charged by Diem and the low volatility based on the actual asset-backed reserve made it more likely to succeed in real-world applications compared with other cryptocurrencies.
One of the well-known tokens and the main competitor Bitcoin wanted to fulfill the goal of facilitating transactions. But, it became an asset to store the value rather than using it as a medium of exchange.
How was Facebook to Profit from Libra?
Meta and other members planned to cover the project's costs and profit via earned interests from assets being held. Therefore, the more popular the currency is, the more reserve assets (reserve currencies and government bonds) will be in circulation.
The other way to generate income is through advertisement. Meta might motivate businesses to support cryptocurrency. In exchange for that, it might offer advertising in:
- and other platforms
Issues Faced by Libra/Diem
Libra was planned to be open to everyone. So, other players could build their projects/apps on top of that blockchain technology. The open-access setup has advantages and drawbacks that every individual company must consider.
On the one hand, openness encourages innovation and competition, thus decreasing the barriers to entry. But on the other hand, disreputable app makers could easily access the users' digital currency. That is the significant risk of the open-access setup.
Another point is that the currency could be decentralized. In a white paper, the Association stated that it would decentralize the cryptocurrency.
The other issue is related to privacy. Meta planned that Novi Financial would manage Libra for Facebook users. The executives said that Novi would not share any purchase information with Facebook without authorization. But, the system had a friend-finder search feature.
Using that function will allow Novi to collect all the purchase history data from the Facebook account. However, due to privacy issues, many regulators canceled the project launch.
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