Instead of issuing its own stablecoin (Diem) on its own blockchain (the Diem network), the company is partnering with Paxos and Coinbase to let users send and receive USDP, with Coinbase managing crypto custody. But this is just an intermediate step as Facebook still plans to replace USDP with Diem at some point.
Facebook originally had big plans for its crypto project. The company created a consortium of companies called the Libra Association. Together, they were supposed to launch the Libra cryptocurrency, a brand new currency tied to a basket of fiat currencies and securities. Originally, it wouldn’t be based on a single real world currency, but on a mix of multiple currencies.
But Facebook faced strong opposition from many central banks — they feared that Libra would become a quasi-sovereign currency in some countries. Last year, the association announced that it would reduce its ambitions by focusing on single-currency stablecoins.
A stablecoin is a crypto asset with a fixed value that doesn’t fluctuate over time. For instance, the Libra Association wanted to launch the LibraUSD. One LibraUSD would always be worth one USD.
A few months later, the Libra Association announced some changes once again. The project was rebranded to the Diem association. Similarly, Facebook’s wallet project was rebranded from Calibra to Novi. But neither Diem nor Novi were ready for prime time.
And now, Facebook is going to start testing Novi with some real users. The company is focusing on remittance between the U.S. and Guatemala. Novi users who want to send money can download the Novi app, create an account and add money using a payment method, such as a debit card.
Whenever you add USD, your money is converted to USDP without any fees. USDP is a stablecoin tied to USD created by Paxos. It used to be called the Pax Dollar (PAX), but Paxos recently rebranded it to USDP.
Behind the scenes, USDP is backed by cash and cash equivalents to ensure its value. User funds are managed by Coinbase Custody, meaning that Coinbase stores USDP funds for Novi users.
Novi users can then send USDP to other Novi users. Once again, there are no fees involved with money transfers. But chances are you can’t use Novi to pay in store or pay your rent. That’s why users can withdraw their Novi balance at a cash location, or transfer their balance to a bank account.
But Novi doesn’t say if there are fees involved when you convert your USDP to Guatemalan quetzal. So we’re back to square one as Novi has to pick an exchange rate, which involves spread, liquidity and other variables. Novi also has to create fiat-to-crypto on-ramps and off-ramps across all markets where it wants to operate.
Facebook says that this is just the beginning for Novi. First, it is only available as a pilot for some users in Guatemala and the U.S. (except Alaska, Nevada, New York and the U.S. Virgin Islands). Second, Facebook and the Diem Association haven’t shelved plans to launch their own cryptocurrency at some point.
“I do want to be clear that our support for Diem hasn’t changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live. We care about interoperability and we want to do it right,” Novi project lead David Marcus said on Twitter.
Facebook unveiled the Libra cryptocurrency in June 2019. The crypto ecosystem has changed drastically since then. In particular, some stablecoins have become incredibly popular — Tether and USD Coin have a combined circulating supply of more than $100 billion right now. So it’s going to be interesting to see if Diem can catch up with existing stablecoins and unlock some new use cases.