Libra was a cryptocurrency created by Facebook, renamed into Diem at the end of December 2020 and wound down in January 2022. The Libra cryptocurrency was intended to be used as a simple, low-fee global blockchain-based digital currency. It was envisioned to be digital money on your phone, which can be used to pay for any purchase where the cryptocurrency is supported. Libra was one of the first stablecoin projects, meaning that the digital currency was to be backed by a basket of assets, including major currencies and government debt instruments.
Libra was a cryptocurrency created by Facebook, designed to be a simple, low-fee stablecoin to be used around the world. The digital currency was renamed Diem in 2020 and in 2022, was wound down in 2022.
It was a stablecoin, which meant that it would be backed by a basket of assets, which include major currencies and government debt securities, which give the cryptocurrency stability.
The blockchain technology behind Libra (and eventually Diem) was sold to Silvergate Capital Corporation in January 2022.
How was Libra Supposed to Work?
Libra (and subsequently, Diem) would have been purchased, held, and used by cryptocurrency wallet applications. By cashing in dollars, you can receive Libra tokens. The cryptocurrency was meant to be a medium of exchange at any business that supports its use.
Tokens were intended to be monitored and kept track of by the not-for-profit organization Libra Association (renamed the Diem Association). As individuals exchange their local currency for tokens, the association was to ensure that the tokens were backed by a basket of major currencies and securities. The basket allows the cryptocurrency to have a relatively stable price. The stablecoins would have been denominated in single G3 currencies (USD, EUR, GBP) but there were also plans to introduce a multi-currency stablecoin based on a basket of currencies.
Diem Association was to act as a regulatory body for the cryptocurrency and it was not to be run solely by Facebook. Instead, the association was made up of 28 founding partners, which included Mastercard, Visa, eBay, and a number of other companies. Facebook was entitled to one vote, just like the other members of the association.
The Libra cryptocurrency utilized blockchain technology. However, it wasn’t a true blockchain currency since it was not fully decentralized. Only members of the Diem Association were to be able to access the ledger of transactions.
What is the Purpose of Libra?
Libra (Diem) was intended to be used as a simple medium of exchange around the world. Backing the cryptocurrency with a basket of major global currencies was intended to provide price stability. That, in turn, would have promoted the efficacy of the coin as a simple currency that can be used for daily transactions.
In Libra’s white paper, one of the main problems it wanted to address was how much it costs for individuals in developing countries to move money. In these developing countries, money sending services charge steep fees and so economic rents were significant and disproportionately impacting poorer people.
Storing money is not always easy in such countries, and being robbed can mean losing nearly everything. Some 1.7 billion adults globally are unable to access a traditional bank; however, many of those people own a mobile phone.
The cryptocurrency’s goal was to become a mainstream digital currency that can be used by anyone. By charging much cheaper fees than other money sending services, utilizing blockchain technology, and holding the value of the currency stable, the Libra initiative wanted to provide better, cheaper, and more open access to financial services for all.
How was Libra/Diem Different from other Cryptocurrencies?
As mentioned before, one of Libra/Diem’s differentiating factors was that it is backed by real assets. Many cryptocurrencies do not do this, which is why they lack the stability and guaranteed intrinsic value that Libra/Diem offered.
Although other stablecoins have since emerged that are backed by real assets but most lacked the strength of the backing group that Libra/Diem had. The Association included companies such as Visa, Mastercard, PayPal, and eBay. The Association was to manage the Libra Reserve and was intended to be the only one that could create or destroy tokens.
Libra’s low fees and real asset-backed reserve would have resulted in low volatility, making it a more realistic mainstream medium of exchange as compared to many other cryptocurrencies. For example, Bitcoin, the most well-known cryptocurrency nowadays, tried to fulfill the role of facilitating transactions. However, it became more of an asset to be held as a store of value.
How was Facebook to Profit from Libra?
Facebook, as well as the members of the Libra Association, would have made money and covered their costs based on the interest earned on assets being held. The more mainstream the currency became and the more assets being held in the reserve, the more the members, including Facebook, would have made in interest income.
Facebook would have also indirectly profited from the wide usage of the Libra by turning businesses that are willing to support the cryptocurrency into advertisement buyers on its website.
Issues Faced by Libra/Diem
The Libra blockchain would have been open to everyone, meaning anyone could have built products and created apps on top of it. The open-access setup came with benefits and drawbacks. The good thing was low barriers to entry, encouraging competition and driving innovation. The risk, however, was higher chances of disreputable app makers accessing a user’s digital currency.
The cryptocurrency was also NOT decentralized even though the white paper highlighted a plan to become decentralized. Issues surrounding privacy practices from regulators ultimately hindered Libra from becoming a mainstream currency.
Ironically, the failure of Libra/Diem also stemmed from the involvement of Facebook and other large regulated organizations. This actually gave governments, both US and foreign, and regulators an identifiable target to express concerns about money laundering, consumer privacy, capital control circumvention and other financial risks.
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