Insights

From Libra to Diem: the story of Facebook’s cryptocurrency

Aoife Loy
Aoife Loy
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

What’s this all about?

As the first quarter of 2021 came to an end, the cryptocurrency which began life as Libra and is now known as Diem failed to make an appearance. In the following article, we explore the story of Facebook’s cryptocurrency to understand how the details of the project have changed, what the updated version might look like and, ultimately, whether the changes make up for one invariant at the heart of regulatory and lawmakers’ concerns: the true extent of the impact of a cryptocurrency backed by a social media giant.

Read on if you:

  • Want to know everything we know so far about Diem
  • Are keen to hear the details of what’s different
  • Have an eye on the future of financial services

In recent months, news publications have been reporting that Facebook’s Diem has finally cleared key regulatory hurdles and is close to launching. Headlines suggested that we could expect it in Q1 of 2021, as early as January according to the FT. As we leave this timeframe behind, neither the cryptocurrency nor the digital wallet has made an appearance. However, with the currency undergoing massive testing, it is thought that both will be ready soon.

Last year, we at LEVERIS took a detour in our report on big tech’s incursion into banking to explore what Facebook is doing with its cryptocurrency, given the potential of the project to subvert the financial status quo. Facebook’s ambitions in the payments space have been bubbling to the surface since around 2014 when it hired David Marcus, then President of PayPal, as its VP of Messenger Products. A year later, it launched a Messenger feature in the US and has also been trying to launch WhatsApp Pay in Brazil and India.

However, perhaps its most ambitious financial project, Facebook’s vision for Libra promised such disruption, it could have affected the role of central banks. While the company hopes to launch a scaled-down version of its initial plans, Diem nonetheless looks likely to have ripple effects across financial services.

What we know so far

It’s thought that Facebook turned its attention to the creation of a cryptocurrency sometime in 2017 with things officially kicking off in early 2018. To oversee the currency, the company founded the Libra Association, a non-profit consortium headquartered in Geneva, Switzerland.

Original members included industry big-hitters such as Mastercard, PayPal, Stripe and eBay. Each partner is said to have contributed $10 million to the project. In June 2019, the Libra Association released a whitepaper outlining plans for a multi-part project to develop a blockchain-based payment system. The focal point was to be the Libra token, a global stablecoin pegged to a pool of assets including existing currencies from around the world. The currency was intended to be first launched on a permissioned blockchain, then later, a permissionless version would be launched. There would also be a Calibra wallet so people could send each other Libra.

Attached to the ambitious vision for Libra was the goal that it would bring financial services to the unbanked of which there are thought to be close to 2 billion worldwide. Furthermore, in targeting developing countries, it would also offer cheaper remittances for those dependent on such income.

Members of the Diem Association
Current members of the Diem Association

Why the rebrand and what’s different

The announcement regarding Facebook and the Libra Association’s intentions to launch what was essentially an unregulated currency was met with great unease followed by intense regulatory pressure, which culminated in a change in tack.

Plans to launch were pushed out to 2020 while Facebook and the Libra Association were stonewalled by regulatory and legal concerns, amongst which was whether Libra would compete with fiat currencies. This was compounded by worries around the sheer size of Facebook and what impact a project of this scale could have on the financial system. By the fourth quarter of 2020, Facebook had more than 2.7 billion monthly active users, almost a third of the global population. Fears were accentuated by its reputational baggage and the notoriety it has accrued for its use of personal data. There were also concerns around the ambiguity surrounding issues such as terrorism funding, AML and financial stability.

The scrutiny culminated in Mark Zuckerberg and David Marcus, the Libra project lead, being called before the US House Services Committee. In September 2019, France and Germany agreed to block Libra. A month later, PayPal was the first to exit the Libra Association, which led to an exodus of major players, including all of those financial companies already mentioned. When pushed to explain, Zuckerberg put it down to risk, but there were rumours that US senators and US Treasury were putting pressure on those involved. At Money 2020, David Marcus said he wished they’d spoken about what they’re actually building, which are new payment rails on the internet, “the way it should be”.

From Libra to Diem: A timeline
From Libra to Diem: a brief timeline of Facebook's cryptocurrency

The revisions to the project include moving from a multi-currency to a single-currency stablecoin such as a Diem euro or Diem dollar, which is thought will mitigate currency substitution risk. The coins will be backed one-for-one by high-quality liquid assets. The Diem dollar, the first coin available on the network, will be backed by 90 days or less US Treasuries, according to reports. It will also follow Basel III’s capital requirements and put in place additional buffers to account for potential losses from credit, market, liquidity and operational risks. 

As for the concerns around financial crime, the new design also excludes un-hosted or self-hosted wallets, which are not provided by a financial institution or crypto service and, as such, have not gone through KYC or AML checks. The Diem Association has also reportedly abandoned the idea of transitioning to a permissionless network.

The renaming of the coin and wallet are undoubtedly intended to put some distance between the old and revised components of the project. First, the digital wallet, Calibra, was renamed Novi, then Libra was renamed Diem. The Libra Association also became the Diem Association in an attempt to distance itself from Facebook, where, meanwhile, all payment-related initiatives have been folded into a new group, Facebook Financial or F2, headed up by David Marcus.

The Diem Association still has the involvement of some high-profile technology partners such as Spotify, Shopify and Uber, but the project has an altogether different flavour compared with when it was backed by some of the biggest names in financial services.

While the company hopes to launch a scaled-down version of its initial plans, Diem nonetheless looks likely to have ripple effects across financial services.

Will it ever launch?

For the moment, Diem is awaiting final regulatory approval from FINMA, the Swiss Financial Market Supervisory Authority. Switzerland is considered crypto-friendly and last year passed a set of laws on blockchain and distributed ledger technology. It’s thought that these laws, which are due to come into effect soon, make it likely that Diem will be approved.

Meanwhile, reports from December 2020 suggest that Spotify is staffing up its payments division in anticipation of the launch. Indeed, one payments company, First Digital Assets Group, seems to be hedging its bets on Diem.

It looks like Facebook and the Diem Association have addressed the most pressing regulatory issues but one key challenge remains: the sheer size of Facebook, a private company and its user base and thus, the potential impact on the global payments system. For this reason, it is perhaps no surprise that FINMA is taking its time with this decision.

First Digital Assets Group seems to be hedging its bets on Diem.

What does it mean for the future of finance?

If Diem does come into fruition, it seems logical that crypto exchange company Coinbase, a member of the Diem Association which also recently listed on the Nasdaq, would list Diem. However, this has not been announced publicly.

As well as the potential to change the payments space, Diem’s influence will be felt in other ways. In response to Libra, central banks globally sped up their plans to launch CBDCs.

In fact, it has been argued by commentators for some time now that stablecoins are the next evolution of money rather than the major crypto networks like Bitcoin, Ethereum and NFTs. Indeed, Britain’s financial services minister has said that the UK will focus its cryptocurrency rules on stablecoins rather than the broader market. Speaking at a City & Financial conference, John Glen had some revealing comments to make: “We need to manage risks to competition,” he said. “There is the potential for some firms to swiftly achieve dominance and crowd out other players, due to their ability to scale and plug into existing online services. We believe the case for intervention in the wider cryptocurrency markets is less immediately pressing.”

Ultimately, the true effect of Diem’s impact on the public and blockchain depends on its final form and, for the time being, we can only wait and see.

Aoife Loy
Aoife Loy
Aoife is Lead Content Marketer at LEVERIS. She writes about our mission and approach to technological innovation.
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

The all-in-one core banking platform.

A fully-integrated banking platform for better banking and smarter lending.

Never miss an article

Insights on technology and how it is changing and banking landscape, straight to your inbox.

You might also be interested in...

Some more articles on how technology is driving the digitisation of financial services and what that means for banks now and in the future.

05

May

LEVERIS has announced its partnership with Marqeta, the global card issuing platform, to integrate its modern card capabilities within the LEVERIS digital banking platform.

28

Apr

As we leave Q1 of 2021 behind, Facebook's cryptocurrency has yet to make an appearance. We explore the story of how Libra became Diem to understand whether it'll ever emerge.

21

Apr

Kateřina Pařízková, UX Designer at LEVERIS, explains the concept of design thinking and shares insights on the core stages of the process and tools used by the LEVERIS UXD team when developing new functionalities and redesigning existing complex ones.

14

Apr

Charlie Delingpole, CEO of ComplyAdvantage, gives us the lowdown on the biggest financial crime threats to the financial services industry and tells us why AML-related stories should always be front-page news.

01

Apr

Wealth management is no longer just for the wealthy. In a new report, we look at the forces which have changed the landscape to make wealth services more accessible and how FIs are tapping into this market.

24

Mar

In the third instalment for a new series, we dive into the finance world on YouTube to see what we can learn about how information is communicated.