How The Fed Put a Hit on Facebook’s Libra

As a seasoned observer of the tech industry, I find myself constantly drawn to stories that encapsulate the dynamic interplay between innovation, regulation, and public perception. The tale of Libra/Diem, as presented here, is one such captivating narrative that resonates deeply with me, given my professional background.

The tale of Libra, previously known as Diem but ultimately failed, showcases the intricate dance between innovation, regulations, and public confidence. Recently, David Marcus laid it all out bluntly about its fate using platform X.

A Bold Vision, Backed by Big Names

The Libra initiative was conceived as a type of digital currency, called a stablecoin, that’s tied to a combination of global currencies. This setup is intended to reduce fluctuations in value. Its main goal was to offer financial services to people without traditional bank accounts by means of a digital wallet compatible with Facebook’s platforms. This project garnered substantial support, pulling in big names in finance such as Visa, Mastercard, and PayPal.

The idea was simple but transformative: imagine sending money across borders as quickly and easily as sending a text message. The initiative promised to reduce transaction fees, accelerate global commerce, and democratize access to financial systems.

The Regulatory Backlash

Despite its noble ambitions, Libra faced instant and strong opposition from governments and regulatory bodies across the globe. Critics contended that the project could potentially threaten monetary independence, financial security, and consumer safety. The idea of Facebook, a company known for data privacy issues, managing a global financial infrastructure raised concerns among regulators.

David Marcus appeared before the U.S. Congress not long after the initiative’s unveiling, encountering skepticism from both political parties. Lawmakers challenged Facebook’s credibility in handling a currency and voiced worries about its ability to disrupt conventional banking structures and potentially destabilize traditional currencies.

The global response was just as intense. Among the harshest critics were European regulatory bodies, with the French Finance Minister, Bruno Le Maire, asserting that Libra should not be permitted to function as a standalone currency.

The Facebook Factor

The partnership between Libra and Facebook proved to be a double-edged sword. On one hand, Facebook’s extensive global network and advanced technical capabilities significantly contributed to the project’s development. However, the negative public perception towards Facebook, especially after the Cambridge Analytica incident, has cast a lingering darkness over the project.

Trust in Facebook’s public and political sphere was at its lowest point, and the idea of a tech titan controlling a new global currency was off-putting to many. This lack of trust caused major partners like Visa, Mastercard, and PayPal to abandon the project towards the end of 2019, expressing concerns about regulatory complications and potential damage to their reputation.

A Rebrand That Couldn’t Save the Project

To avoid the controversy, Libra was renamed Diem in December 2020. Additionally, the project moved its operations to the United States to satisfy U.S. regulatory requirements and is now focusing on introducing a stablecoin that’s pegged to the US dollar.

Regardless of these alterations, Diem persistently encountered formidable regulatory hurdles. U.S. legislators stayed skeptical, and reports suggest that the Federal Reserve was reluctant to endorse the project. In the early months of 2022, the Diem Association, the organization responsible for managing the initiative, sold its assets, signaling the demise of this ambitious undertaking.

Why Did Libra/Diem Fail?

David Marcus has openly discussed the reasons behind the project’s collapse, referring to it as a “political assassination.” He contends that Libra was unfairly evaluated and suppressed by regulators due to concerns about disrupting existing financial infrastructures. In his opinion, the project’s demise was not primarily caused by technical or operational issues but rather by the political and regulatory opposition it encountered.

In the realm of my ongoing research today, I find myself reflecting upon a fascinating chapter – the demise of Libra, a project that I had the privilege to work on at Meta. Before this, it was a groundbreaking, high-caliber blockchain system designed for seamless payments, accompanied by a stablecoin, which had the potential to revolutionize global transactions.

By spring of 2021 (they prolonged the process at each stage), we had resolved every potential regulatory issue related to financial crimes, money laundering, consumer protection, reserve management, buffers, and many other aspects, and we were fully prepared for the launch.

Initially, we were gradually implementing a small-scale trial of a project that some Federal Reserve Board members endorsed. Eventually, Chair Jay Powell decided it was appropriate to proceed cautiously. According to what I’ve been told, during one of their biweekly meetings, Treasury Secretary Janet Yellen warned Jay Powell that advancing this project could be politically damaging and she wouldn’t support him if it went ahead. Although I wasn’t present for the conversation, it seems that this interaction effectively led to the termination of the Libra project.

A short while later, the Federal Reserve held conferences with all the involved banks. The Fed’s legal advisor then read a prepared statement to each bank, stating: “You have our permission to proceed and launch, but we express our discomfort with your decision.” And in an instant, the matter was resolved.

One essential point is worth making here. There was no legal or regulatory angle left for the government or regulators to kill the project. It was 100% a political kill—one that was executed through intimidation of captive banking institutions.”

Lessons Learned

Lessons from the journey of Libra/Diem in the realm of blockchain-based financial innovation are invaluable for the future. Primarily, it emphasizes the significance of earning trust from regulators and the public, a crucial factor for tech giants with questionable pasts. Secondly, it underscores the importance for both startups and established players to tread carefully through political and regulatory terrain, fostering cooperation along the way.

Although Libra didn’t succeed in realizing its ambition, it ignited worldwide discussions about the future of digital currencies and their impact on transforming the financial system. For Facebook’s Marcus, the concept of money designed for the internet might have been postponed, but the issues it brought up regarding accessibility, efficiency, and control are still just as important as they were before.

Furthermore, in his writing on X, he stated, “Despite the challenges, there was a silver lining – valuable lessons from this rollercoaster journey. After completing the project, we found ourselves making numerous compromises to secure approval, transforming our original vision of the network into something resembling Frankenstein’s monster. We also realized the most crucial lesson: if you aim to construct a global money grid – one handling trillions daily and intended to last for a century – it must be founded on the most impartial, decentralized, invincible platform, and that undeniably is Bitcoin.

2024-12-02 07:56