Should You Invest In Facebook's New Crypto Coin?

Facebook's cryptocurrency, Libra Diem, is expected to launch before the end of 2021. The project was first announced in June 2019 and was originally titled after the Roman unit of measurement used to mint coins. However, in late 2020, the name was changed to Diem, the Latin word for day. Diem is a stablecoin, initially backed one-for-one by the US dollar, and Facebook intends to trade it on exchanges. If Diem launches, Facebook's vast reach means it could become a new global currency overnight, on par with the dollar and the euro. However, it is unclear whether Facebook can overcome the challenges it faces, including regulatory approval from governments and the potential for misinformation and harmful content to be spread on its platform.

Facebook's Libra coin is a stablecoin pegged to the US dollar

Facebook's Libra coin, now known as Diem, is a stablecoin pegged to the US dollar. Diem is a blockchain-based stablecoin payment system proposed by Facebook. The project was first announced in June 2019 as a single global currency backed by a reserve of assets. However, after international regulatory scrutiny, Diem was revised to include a basket of single-currency fiat-pegged stablecoins in addition to its multicurrency coin, XDM.

Diem is expected to launch before the end of 2021 and will operate using the Diem Blockchain, a new blockchain designed to be highly scalable, secure and flexible. The Diem Blockchain will rely on Move, a newly created smart contract language designed to prevent digital assets from being cloned.

Diem will have no fixed token supply. Its single-currency stablecoins will be minted and burned by Diem as needed in response to market demand, and each token will be backed by a reserve of liquid assets. According to the association, at least 80% of the reserve will consist of "very short-term" government securities, while the remaining 20% will consist of cash.

The Diem Association, which includes Facebook, payments processors, crypto and blockchain firms, and venture capital firms, will oversee the currency. The association receives funding in the form of contributions from its members, with each founding member required to pay a $10 million membership fee.

While Diem has not yet launched, it is expected that its tokens will be listed on major cryptocurrency exchanges upon launch.

Libra is aimed at people without bank accounts

Facebook's cryptocurrency Libra (now Diem) is aimed at "enabling a simple global currency and financial infrastructure that empowers billions of people". According to the World Bank's Global Findex Database 2017, 1.7 billion people worldwide don't have access to financial institutions, and Facebook claims that Libra will help give these people access to a cheaper system of money transfers. However, there is scepticism about how helpful Libra will be for this target audience.

Firstly, it is unclear how many people have Facebook accounts but no bank accounts. Facebook is banned in China, and it has been temporarily banned in several other countries, including Pakistan, Indonesia, and Bangladesh, which may limit the effectiveness of any money tied to the app. In addition, many of the countries where a large proportion of unbanked people live have laws around cryptocurrency, with India, Pakistan, Bangladesh, and China all having explicit or implicit bans.

Secondly, Libra does not address the main reasons people lack bank accounts. According to World Bank data, almost two-thirds of people without bank accounts say it is because they don't have enough money to open one, and a third say they don't need one. A quarter of respondents cited high and unexpected bank fees as a reason, and 20% said the distance to a bank was a barrier. However, to use Libra, you have to buy it with real money, which doesn't help those who lack the funds to open a bank account. In addition, people without bank accounts often have cash, and there is no information about how Libra will lower fees to convert cash into Libra.

Thirdly, the uptake of mobile banking has been patchy. While M-Pesa has been successful in Kenya, in Nigeria, people still prefer cash because they worry that if their phones are stolen, they will lose their money too. This is a problem of social norms, not engineering.

Finally, Libra may be more about getting people into the Facebook network and exploiting its users' privacy. Libra is not just tied to Facebook but also requires Messenger or WhatsApp, or a dedicated Libra app. It also requires a smartphone and a digital means of payment to buy Libra coins. Therefore, it is not clear how it will help those without bank accounts, especially as it will be challenging for Libra to gain local support in the countries where it matters most.

The Libra Association is a consortium of 28 companies and foundations

Facebook's Libra cryptocurrency project has undergone several changes since its initial announcement in June 2019. The project was initially described as a futuristic global money that could serve as the foundation for a new kind of financial system. However, due to regulatory scrutiny and criticism, Facebook and its partners scaled back the project.

The Libra Association, a Swiss-based group created by Facebook to oversee the project, included 27 members as of December 2020. These members represented various industries, including payments, technology, telecommunications, online marketplaces, and venture capital. The association was later renamed the Diem Association as part of the rebranding from Libra to Diem.

The Diem Association is an independent, not-for-profit membership organization headquartered in Geneva, Switzerland. It aims to empower people worldwide by creating a simple global currency. The association works to evolve and scale the network and reserve and leads a social impact grant-making program to support financial inclusion efforts. They collaborate with the global community and partner with policymakers to further the Libra mission.

The original plan for the Libra token was to back it with financial assets such as a basket of currencies, including the US dollar, Euro, Japanese yen, Pound sterling, and Singapore dollar. However, due to regulatory concerns and criticism, the project shifted to focus on creating a more traditional payment network with coins tied to local currencies.

While the Libra project faced significant opposition and challenges, it is important to note that Facebook has a vast reach, and its cryptocurrency could become a new global currency overnight if widely adopted.

Libra transactions will be pseudonymous

Facebook's new cryptocurrency, Libra, will allow its billions of users to make financial transactions online. Libra is a "global currency and financial infrastructure" and is a digital asset built by Facebook and powered by a new Facebook-created version of blockchain, the encrypted technology used by bitcoin and other cryptocurrencies.

Facebook has stated that it will not store or share personal financial information. In a letter to the Senate Banking Committee, David Marcus, co-creator of the Libra stablecoin, wrote that "transactions that take place directly on the Libra Blockchain are 'pseudonymous', meaning that the user's identity is not publicly visible". He added that the blockchain addresses in a transaction, a timestamp, and the transaction amount will be public, but any know-your-customer (KYC) or anti-money-laundering (AML) information would have to be stored by the wallet providers.

Facebook has also stated that it will keep financial data from transactions on Libra separate from user ad profiles. The blockchain is "pseudonymous", and, like many crypto networks, will allow users to hold one or more addresses not linked to their real-life identities. "Calibra customers' account information and financial data will not be used to improve ad targeting on the Facebook, Inc family of products," the company said.

Facebook's subsidiary, Calibra, will be a regulated entity that will safeguard consumer financial data and will not use or share this data for ad targeting purposes. However, as a custodial wallet, Calibra will maintain some consumer financial data. For example, in limited cases, Calibra will share account information or financial data with Facebook or any third party with customer consent. This includes data shared with law enforcement agencies or regulators for anti-money laundering or counter-financing of terrorism purposes, as well as in accordance with sanctions law.

To satisfy regulators, Libra may have to stop supporting pseudonymity and re-link users' personal information to the Libras they transfer. This also means that Libra won't be able to provide open access. The members of the Libra Network are well-known firms that can be punished for evading money-laundering rules.

Overall, while Libra transactions will be pseudonymous, there may be some limited cases where account information or financial data is shared with Facebook or third parties with customer consent or as required by law.

Libra will be cheaper to use than many other money transfer services

Facebook's cryptocurrency, Libra, has been the subject of much discussion and speculation since its announcement in 2019. Originally scheduled for launch in 2020, Libra (now Diem) is expected to debut before the end of 2021. One of the key features of Libra is its potential to reduce fees for money transfer services, particularly for cross-border transactions.

Libra is designed to be a stablecoin, backed by "real" government-issued currencies from central banks, giving it less volatility than other cryptocurrencies. This stability, combined with its wide accessibility, could make it a cheaper alternative to traditional money transfer services. Facebook intends to make transferring money as easy as sending a text message, with lower fees and instantaneous transfers worldwide.

The high fees associated with traditional money transfer services, particularly international remittances, are a significant burden for many people, especially those sending money to family members in other countries. In 2018, the total amount sent through these remittance services was US$689 billion, with $529 billion going to people in low- and middle-income nations. The fees for these services amount to $25 billion a year, or 3.5% of the total amount sent.

Facebook's vast user base, including 2.4 billion Facebook users and 1.5 billion WhatsApp users, many of whom reside in developing countries, provides a huge market opportunity for Libra. By leveraging its technological capabilities and partnerships with financial and technology giants, Facebook could make Libra a more efficient and cost-effective option for money transfers, particularly in regions with unstable currencies and high inflation.

Additionally, Libra's integration with popular messaging platforms like Facebook Messenger and WhatsApp will enable users to send money as easily as sending a text message. This level of convenience and accessibility could further contribute to its potential for reducing the costs of money transfer services.

However, it is important to note that there are concerns and challenges regarding Libra's implementation, including regulatory hurdles, privacy issues, and the potential for money laundering and financial crimes. Facebook will need to address these issues to realize the full potential of Libra as a cheaper and more accessible money transfer service.

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