Facebook (now Meta) was one of the first major companies to try to create their own cryptocurrency project. First, it was called Libra, and then Diem. The stablecoin lasted almost three years and was supposed to launch any day. Still, recently the project has been closed, and the assets have been sold. We decided to recall what Libra (aka Diem) was supposed to be and why Facebook (aka Meta) didn’t work out in the end. Let’s get started!
How It All Began
The Libra project appeared in the summer of 2019 and was positioned by Facebook as a global digital currency that would allow businesses and people to make money transactions around the world easily. The predecessor of Libra can be considered the digital currency Credits, which could be used as means of payment for games available on Facebook.
The first rumors that Mark Zuckerberg’s company is working on a crypto project circulated back in 2018.
In February 2019, the New York Times reported that Facebook was working on a cryptocurrency that would allow transactions to be made on WhatsApp, which the company also owns.
In May, the media reported that this was not just a currency that could be used on WhatsApp but a stablecoin with a price pegged to fiat currency. Then it became known that the project is called Libra, and Facebook is trying to negotiate Libra support from Visa and Mastercard. It was, in particular, about financial support — Facebook wanted to receive a billion dollars from the companies.
How Libra Was Announced
Finally, on June 18, 2019, the Libra project was officially announced. Facebook promised that the coin would allow you to buy goods and send money to other people with virtually no commission. At the same time, the price of Libra had to be pegged to several currencies at once.
Zuckerberg’s company immediately made a reservation that Facebook would not own the project solely. The project was supposed to be controlled by the so-called Libra Association, which included, for example, Uber, Lyft, Spotify, and venture capital fund Andreessen Horowitz. Each of the 27 participants invested about $10 million in the project. The former head of the US Treasury, Stuart Levy, became the CEO of the Libra Association.
Especially for Libra, an electronic wallet, integrated with WhatsApp and Facebook, was to be created. The wallet, in turn, was developed by Calibra, a division of Facebook specially created for this purpose.
It was supposed that the Libra Association, registered in Switzerland, would promote an open-source project so that as many companies as possible would integrate the stablecoin into their products. The participants had to earn on interest from the money in the reserve, created specifically to maintain the stablecoin’s stability.
If the project were successful, Facebook would benefit from attracting even more users to the social network, which means that advertising on the platform could become more expensive.
For Facebook, the obvious benefit was also that, if the project was successful, the social network could attract even more users, which means that advertising on the platform could become more expensive.
In many ways, Facebook wanted to create its own version of PayPal, but modern, convenient, accessible, and more secure one, existing outside the traditional financial system. In particular, the company noted that Libra could help 1.7 billion people in the world who do not have a bank account.
PayPal was one of the companies that invested in Libra but left the Libra Association in October 2019.
Initially, Libra was supposed to go live in the first half of 2020.
The First Problems
On the same day that Facebook announced the Libra launch, the US House of Representatives asked the company to pause work on the project until the authorities hold hearings on the cryptocurrency. This is how the congresswoman, Maxine Waters, commented on this issue:
We need to go beyond the rumors and speculations and provide a forum to assess this project and its potential unprecedented impact on the financial system.
The fears of the American authorities are easy to explain — almost three billion people around the world use Facebook. If at least a third of them started to use Libra actively, then the consequences for the financial system could really be revolutionary.
In the days and weeks that followed, more and more US officials started to say that the development of Libra should be paused until the authorities understood what the project was all about.
So, the then Head of the US Treasury, Steven Mnuchin, said that the Facebook currency could be used for money laundering and terrorist financing. He described the company’s project as a national security issue. The authorities were also worried that Facebook had already been involved in several scandals with the leakage of users’ personal information by that time. In addition, officials were not very confident when Facebook tried to explain that the new project would not be concentrated in the hands of one single company.
As a result, Facebook’s then vice president of products, David Marcus, spoke before Congress at the hearing, urging congress members that the company would not launch Libra without the authorities’ approval. Mark Zuckerberg said at the end of July 2019 that Facebook would wait ‘as long as it wants’ to convince regulators of the safety of Libra and launch the project.
Further, regulators from other countries joined the verification of the crypto project. So, the European Commission launched its antitrust investigation against the Libra Association.
In September 2019, Yves Mersch, Member of the Executive Board of the ECB, said that Libra could ‘violate’ EU monetary policy and affect the ECB’s control of the euro.
Libra was also opposed by the then head of the German Finance Ministry and now the country’s chancellor, Olaf Scholz. Following PayPal, several other companies left the Libra Association before the end of 2019, including Visa and Mastercard.
From Libra to Diem
In the months following the announcement, nothing significant happened to Libra. Members left the Libra Association, and new ones took their place. During this time, not a single world regulator had given permission to launch the cryptocurrency. The main concern is that officials do not understand how the launch of Libra could affect the global economy.
Still, in May 2020, the Calibra electronic wallet was renamed Novi. Supposedly, this was done to show that the Libra project did not belong solely to Facebook and was an independent unit.
In November 2020, the Financial Times (FT) newspaper stated that Libra would be launched in January 2021.
A few months earlier, the company had announced that it would be issuing not just one stablecoin pegged to multiple assets but several stablecoins, each backed by a different asset. It was assumed that such a scheme would calm the world governments, and they would still agree to approve the project.
In December 2020, Libra announced a name change to Diem and the Libra Association to Diem Association. The purpose of the rebranding was to distance the project from its original version (one cryptocurrency pegged to several fiat currencies).
Still, January 2021 had passed, but Diem had not appeared in any form. In April of that year, it became known that the stablecoin was still planned to be launched ‘sometime in 2021.’
Partnership with Silvergate
In May 2021, the American Silvergate Bank appeared for the first time in the history of Libra/Diem. Silvergate specializes in innovative fintech and cryptocurrency businesses. It is noteworthy that, six months later, all the assets of the Facebook crypto project would be sold to this bank.
Silvergate wanted to act as the issuer of the stablecoin and manager of Diem’s dollar reserves. Along with the partnership, the move of the Diem Association’s operations from Switzerland to the United States was announced.
The announcement of the partnership stated that this was an important step before the pilot launch of the cryptocurrency. This is how Alan Lane, CEO of Silvergate, commented on this issue:
We believe in the future of US dollar-backed stablecoins and their potential to transform existing payment systems. We’re inspired by Diem’s technology and commitment to building a regulatory compliant payment system that offers a safe and secure way to move money. We’re excited to be at a place in the process where we can announce this product with confidence and look forward to continuing our work with Diem to bring this to market.
At that time, Diem was still awaiting a license from the Swiss Financial Market Supervisory Authority (FINMA). According to Silvergate’s press release, after moving operations from Switzerland to the US, the company did not need a license from the Swiss regulator. Still, Diem decided that it would be good for business.
One can assume that the company hoped to use the FINMA license as a trump card in negotiations with US regulators.
In October, Facebook renamed the parent company to Meta, and several key personnel left Diem. So, in November 2021, David Markus left the project, who had been involved in it from the very beginning.
Nevertheless, even in December, the company continued to keep the project alive. For example, at the end of December, it was announced that the Novi wallet would be tested in a pilot mode. True, it should have been tested using the USDP stablecoin, not Diem.
Still, at the end of January, Bloomberg reported that the Diem project was planned to be closed, and later the information was officially confirmed. Silvergate bought all intellectual property of the Diem Association. The latter paid $132 million in shares and another $50 million in cash.
Announcing the deal, Stuart Levy, Diem Association CEO, explained that the project could not be developed further despite fruitful cooperation with regulators worldwide and positive feedback from them.
Levy noted that the Diem Association would soon be disbanded, but the members hoped that Diem’s ideas would live on. Silvergate announced its plans to develop the project further.
Why Did Diem End in Failure?
Well, one can find many reasons for the failure of Diem. In particular, the project was initially too ambitious. Meta wanted to reshape the entire financial payments system with its own cryptocurrency when most states are wary of digital money and still do not really understand how to regulate this sector.
The problem is also that Diem was launched by Facebook, a company that has long been dissatisfied with the authorities, and not only American ones. Officials have long believed that too many resources are already concentrated in the hands of huge IT corporations, and now one of them wants to launch its own payment system. Facebook has failed to convince the authorities that Diem is not solely their project.
Still, for example, Parmy Olson, Bloomberg columnist, believes that Facebook is bad at developing products from scratch and can only buy them for a lot of money, as was the case with Instagram. Olson believes that the failure of Diem calls into question the entire project of the metaverse, which Meta is now actively working on.
According to the Washington Post, conflicts between Zuckerberg and Markus, who had different visions for the project’s further development, also led to its closure. The newspaper reports that Markus was the driver of the project, and he was the one who came up with the idea of Libra cryptocurrency in 2017.
Still, some believe that the failure of Diem will benefit the cryptocurrency industry. As Politico edition reports that the ambition of the Meta project made politicians worldwide pay attention to the crypto sector and start regulating it so that it can develop further. Thus, the edition notes:
Meta’s payment project may have needed to die so that crypto can live.
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