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End of the day for Meta's Diem cryptocurrency: What you need to know

Facebook's parent and its partners are getting out of the troubled cryptocurrency project.

Libra Facebook : Illustration
Alas, poor Diem!
Getty Images

It's the end of the day for Diem, Meta's troubled cryptocurrency

Facebook parent Meta and its partners in the Diem Association pulled the plug on the yet-to-launch cryptocurrency project amid growing resistance from regulators. The Diem Payment Network's intellectual property and other assets will be sold to Silvergate Capital Corp.

Bloomberg had earlier reported that the association, which oversees the digital currency, was considering a sale of the project in order to return capital to its members. Meta owns about a third of the project, according to Bloomberg, with the remainder in the hands of a variety of investors, including Uber, Shopify and Union Square Ventures.

The sale is hardly unexpected. Diem has been scaled back since it was first pitched as Libra in 2019 by Facebook as a global stablecoin. Like Facebook, the cryptocurrency rebranded, adopting the Diem name in December 2020 as concerns mounted. The project faced more trouble when David Marcus, one of the executives behind Meta's push into cryptocurrencies, said last year that he would leave the company to pursue entrepreneurial projects.

Diem hasn't gotten much love in its brief history. Partners have bolted from the projectdetails have shifted, and legislators have criticized the plans. Meta's launch of a cryptocurrency wallet called Novi prompted a backlash, with a group of five Democratic senators urging Meta CEO Mark Zuckerberg to stop the Diem project. 

Here's what you need to know about Facebook's ill-starred project. 

Why did Facebook want a cryptocurrency? 

Diem wasn't actually Facebook's cryptocurrency. It was a project of the Diem Association, which Facebook originally co-founded as the Libra Association. The association would've served as its monetary authority. The project was designed to "empower billions of people," and organizers cited 1.7 billion adults without bank accounts who would've been able to use the currency.

Of course, Facebook had its own interest in digital cash, which predates Diem. The social network ran a virtual currency, called Credits, for about four years as a way to make payments on games played within Facebook. 

Zuckerberg has said sending money online should be as simple as sending photos. Diem was designed to make it easier and cheaper for people to transfer money online, which might also attract new users to the social network. Zuckerberg has acknowledged that having people use cryptocurrency would likely benefit Facebook by making advertising on the social network more desirable and, therefore, more expensive.

Meta's Novi subsidiary ran a wallet for holding and using the digital currency.

Would Facebook/Meta have had direct control over Diem?

No. Meta was one of the members of the Diem Association. (Meta's membership is through Novi.) The association had hoped to grow to 100 members, most of which would pony up $10 million. Each member had the same vote in the association, so Meta didn't technically have any more say over the association's decisions than any other member.

That said, Meta played an outsize role in the initial phases of the project. 

Why did association members drop out?

Some of the bigger founding members appeared to get cold feet. A quarter of the 28 founding members dropped out before the association's inaugural meeting in Geneva. Those exiting included PayPaleBay, Stripe and financial services giants Visa and Mastercard. The departures were big losses because those members brought expertise in payments and transfers technology. 

How would Diem have been different from other cryptocurrencies?

Let's start with how it looked like other cryptocurrencies, such as bitcoin and ether. Like them, Diem, would've existed entirely in digital form. No physical notes or coins. And like other cryptocurrencies, Diem transactions were to be recorded in a software ledger, known as blockchain.

What the Calibra wallet is expected to look like on a phone.

Here's what a wallet would look like on a phone.

Facebook

Diem was to be pegged to the US dollar, a format widely known as a stablecoin. That contrasts with bitcoin, ether and some other cryptocurrencies that aren't backed by anything and swing wildly in response to speculation.

Initially, the plan was to use a basket of assets to anchor the cryptocurrency's value. The association didn't say what those assets would've been but indicated they'd be denominated in major global currencies, like the dollar and the euro, which don't fluctuate intensely day to day. The association would've bought more of the underlying assets to create, or "mint," new Diem when people wanted more of the cryptocurrency. When people cashed out, the association would've sold those assets and "burned" Diem. 

Backing a currency with an asset isn't anything new. In fact, it used to be common. The US dollar was backed by gold until 1971. The value of the Hong Kong dollar is pegged to the US dollar and managed by a currency board, which can issue new notes only if it has enough in reserves.

How do cryptocurrencies compare to the dollar?

The US dollar is tried and true and pretty much accepted anywhere in the world. Some countries like the dollar so much that they use it instead of their own money. Dollars earn interest, though at current rates that won't add up to very much.

Of course, the dollar has weaknesses. Using dollars, particularly across borders, can be expensive because banks take a cut to convert them into local currencies. If you're using dollars on a prepaid card, the credit card company is probably charging the merchant a portion of your purchase. If the US government prints too many dollars, inflation could follow.

Despite the hype, cryptocurrencies aren't widely used yet. Try buying a cup of coffee with ether. (Yes, it's possible, but not practical.) The value of cryptocurrencies is volatile, often rising or falling more than 5% a day, making it difficult to get a sense of the long-term worth of the asset.

Cryptocurrencies can make it easy to send money directly to someone. Bitcoin transactions aren't actually untraceable, though they can be very difficult to trace. Similarly, bitcoin use isn't absolutely anonymous. It's pseudonymous, meaning that your bitcoin address is recorded even though your identity isn't. 

Some cryptocurrencies, notably bitcoin, have a cap on the number of coins that can be minted, meaning that owners of existing coins don't have to worry about the arbitrary creation of new ones, though that could create other issues in the future.

Was Diem just a ploy so Meta could get my financial data and send more targeted ads?

We hear you. Meta and its Facebook social network don't have great reputations for privacy protection.

The social network said not to worry. What else would you expect? When the plans were first unveiled, Meta took pains to point out its wallet was housed in a subsidiary of the social network. The arrangement was designed to allow the wallet company to be regulated by authorities and prevent money laundering and other financial crimes. The company also said it would keep financial data separate from Facebook's social data.