Diem, Facebook’s digital payments initiative, unveiled plans to launch a US stablecoin on Wednesday, a move that seems to be a step back from the company’s global cryptocurrency aspirations.
The Diem Association has declared that it would transfer its core activities from Switzerland to the United States and that it would withdraw its application for a payment system license from the Swiss Financial Markets Authority, claiming that the license was unnecessary given its current business model.
Stablecoins are cryptocurrencies whose value is tied to more stable properties, such as government-issued money. Silvergate Bank, headquartered in California, will issue the USD stablecoin and control the Diem USD balance.
Diem, formerly known as Libra, has received no attention since the organization’s public launch in mid-2019. Partners have dropped out, facts have changed, and lawmakers have slammed the proposals. Despite this, Facebook has stated that it will continue to work on the initiative, which has had its goals scaled down over time.
The Financial Times announced in December that the project could debut as early as January in a more limited form than its current proposal. At the period, the newspaper indicated that the blockchain will more definitely be backed one-to-one by the US dollar, rather than several single-currency stablecoins backed by major currencies.
Here’s what you need to hear about it.
Why is Facebook interested in a cryptocurrency?
This isn’t the cryptocurrency created by Facebook. It’s a collaboration of the Diem Association, which was formerly known as the Libra Association and was co-founded by Facebook. The association, which would act as the cryptocurrency’s monetary regulator, claims that its goal is to “empower billions of individuals,” noting the 1.7 billion adults without bank accounts who could benefit from the currency.
However, Facebook has a long-standing presence in digital currency that predates Diem. For around four years, Facebook used a virtual currency called Credits to allow users to pay for games they played on the platform. Facebook’s CEO, Mark Zuckerberg, has said that transferring money over the internet should be as easy as sending pictures. Diem is intended to make online money transfers faster and cheaper for people, which could draw more users to the social network. However, Zuckerberg admitted that encouraging users to use bitcoin would actually favor Facebook by making Facebook ads more attractive and thus more expensive.
Facebook may still have some cryptocurrency proposals. A separate subsidiary will manage a wallet that will be used to store and use the digital currency. The wallet, which was formerly known as Calibra, was renamed Novi in May with the aim of “helping people all over the world access accessible financial services.” Games and trade are expected to be among those utilities, according to RBC Capital Markets analysts.
Would Diem be under Facebook’s direct control?
No, it’s not true. Facebook is a member of the Diem Association, a nonprofit that will act as the currency’s de facto monetary authority. (Facebook membership is administered by Novi.) The group expects to reach 100 founders, the majority of whom will contribute $10 million.
The group plans to expand to 100 people, the majority of whom will contribute $10 million to get the initiative off the ground. Since any member of the group has the same vote, Facebook will have no more influence on the organization’s decisions than any other member.
However, Facebook played a significant part in the project’s early stages. According to Facebook, the social network’s function and duties will be the same as every other founder partner until the network is launched.
Why have some founders of the association left?
Any of the more powerful founding members claim to have changed their minds. Before the association’s inaugural meeting in Geneva, seven of the original 28 founding members — or a fifth of them — bowed out. PayPal, eBay, Stripe, and financial technology giants Visa and Mastercard were among the companies who left. Since those participants brought experience in payments and transfers technologies, their withdrawals are significant loses. Mercado Pago, Argentina’s Mercado Libre marketplace’s online payments portal, and Booking Holdings, an online travel firm that owns Priceline, Kayak, and OpenTable, are the other dropouts.
There are actually 26 members of the organization.
What distinguishes Diem from other cryptocurrencies?
Let’s begin by looking at how it compares to other cryptocurrencies like bitcoin and ether. Diem, like them, is a fully digital entity. A physical note or coin would not be available. Diem transactions, like those of other cryptocurrencies, are registered on a software ledger known as blockchain, which verifies each move. In the early stages, the Diem blockchain will be run by the founder members, although it is expected to develop into a completely open framework in the future.
Diem will be pegged to real-world properties in a stablecoin configuration. This is in contrast to bitcoin, ether, and other cryptocurrencies, which have little backing and fluctuate wildly in reaction to uncertainty.
Initially, a basket of properties was intended to serve as an anchor for the cryptocurrency’s valuation. The association did not specify the money, but said they would be denominated in large global currencies such as the dollar and the euro, which do not fluctuate significantly day to day. When people want more Diem, the association will purchase more of the underlying assets to make, or “mint,” new Diem. The group will sell those properties as citizens cash out, and “burn them”
It’s nothing new to back a currency with a commodity. It used to be very popular. Until 1971, the US dollar was backed by gold. The Hong Kong dollar’s value is fixed against the US dollar and is governed by a currency board, which will only issue new notes if it has sufficient reserves.
What is the value of cryptocurrency in comparison to the dollar?
The US dollar is a tried and tested currency that is widely known around the world. Any nations prefer the dollar over their own currency and use it instead. Dollars also collect interest, but at today’s prices, it won’t amount to much.
The dollar, of course, has flaws. Since banks take a cut when converting dollars into local currency, using dollars, particularly across borders, can be costly. If you pay in dollars on a debit card, the credit card provider would almost certainly charge the retailer a fee. Inflation could result if the US government prints too many dollars.
Cryptocurrencies aren’t commonly used yet, hence the publicity. Try getting a cup of ether coffee. (Yes, it’s likely, but it’s not common.) Cryptocurrency prices are highly unpredictable, often rising or dropping by more than 5% every day, rendering it impossible to gauge the asset’s long-term value.
Cryptocurrencies make it simple to give money to another person. Bitcoin transfers aren’t completely untraceable, but they are notoriously difficult to track. Similarly, bitcoin use isn’t fully private. It’s pseudonymous, which means that your bitcoin address is registered but not your real name.
Other cryptocurrencies, such as bitcoin, provide a limit to the amount of coins that can be created, which means that current coin holders don’t have to think about new coins being created arbitrarily, but this may lead to some problems throughout the future.
Is this all a ruse to get my financial information so Facebook can give me more targeted ads?
We are aware of your concerns. Facebook has a bad record when it comes to data rights.
Don’t worry, says the social network — not that you wanted anything else. When the plans were first announced, Facebook was quick to find out that its wallet was stored in a Facebook subsidiary. The agreement was made so that the wallet business could be supervised by authorities and money laundering and other financial offences could be avoided. Financial data will be kept separate from Facebook’s social data, according to the company.