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Facebook Libra – The Birth of a Stablecoin

Posted: Friday, December 4th, 2020

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One of the projects in the digital payments sphere that caught the attention of both population and regulators is Facebook Libra. In the middle of 2019, Facebook announced its intention of launching a global stablecoin – a combination between a global electronic payment framework and a private stablecoin.

Naturally, it has drawn the attention of regulators around the world. Facebook has billions of active users, and a coin circulating within such a circle would pose a threat to the system as we know it. Moreover, without proper regulation, it would pose all kinds of threats.

For example, by introducing Facebook Libra as a global stablecoin, the adoption among Facebook users may happen very fast. If Facebook would use the network to sell new financial services to its customer base, concerns about cross-border supervision are raised.

Therefore, faced with a wave of criticism from regulators and hurdles, Facebook stepped back and re-designed its efforts. The new version of its Facebook Libra project, called Libra 2.0, has more chances to be launched sooner rather than later.

Facebook Libra

Facebook Libra 1.0 vs. Libra 2.0

With its initial proposal, Libra 1.0, we may say that Facebook tested the waters. Simply put, it wanted to introduce a global currency based on a financial infrastructure to empower the people. While all sounds revolutionary, there is a reason why the financial system is regulated and supervised.

Remember that this was back in 2019 – not even two years ago. The idea was that Facebook Libra 1.0 version would be governed by the Libra Association. Moreover, it would reference a basket of fiat currencies – the British Pound, the Euro, the U.S. dollar, the Japanese Yen, and the Singapore dollar). Furthermore, the companies part of the Libra Association would operate notes in the network. Finally,  the assets would be held into (wait for it) Libra Reserve.

After intense scrutiny, Facebook regrouped and scrapped the initial version of its Libra stablecoin. The new project released in April 2020 and called Libra 2.0 sounds much more likely to be implemented.

Based on the ideas of Libra 1.0, it solves many of the initial problems. For instance, it includes a three-layer design.

First, we talk about two types of stablecoins. On the one hand, the project proposes a global stablecoin, the LBR. On the other and, the LBR is backed by single currency stablecoins in the four currencies mentioned earlier (USD, GBP, EUR, SGD)/

Second, there is also a wholesale payment system. Here, the Libra Blockchain makes stablecoins for payment services providers.

Third, other clients and wallets get access to LBR and the libra-backed stablecoins. All these are closely tied up to an asset-based value guarantee called Libra Reserve.

Libra Association Rebranded as Diem

In the meantime, Libra Association rebranded itself as the Diem Project. Aimed at supporting the Libra efforts, it made some key hires this year.

What is interesting about the Facebook Libra project is the magnitude of it. It represents the one single project that caught the regulator’s attention and, perhaps, the reason why central banks started looking into central banks digital currencies too.

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