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NEW YORK (Project Syndicate)—In June 2019, Facebook made a daring announcement: within a year, it would launch a new global currency, the Libra. The idea was to offer an alternative to national currencies in cross-border transactions, and to provide a payment network for billions of unbanked people. A strictly digital token, the Libra was to be issued by an association in Switzerland and backed by a basket of national currencies, implying that its creators sought independence from sovereign powers.
But Facebook
FB,
soon lowered its sights. Libra has since been renamed Diem, and the issuing entity has moved from Switzerland to the United States, where it has formed a partnership with Silvergate Bank to issue a token that complies with U.S. banking regulations. A project that began by taking its name from a Roman currency and wrapping itself in the image of Caesar Augustus has ended as part of an online financial-services platform based in a corporate office park in La Jolla, Calif.
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The story of Facebook’s failed effort to launch a global digital currency and payment system is reminiscent of the historic struggle between secular and religious authorities. One clear lesson for other monetary aspirants is that it is risky business to reach for the crown jewel of state sovereignty.
”
Premature challenge to powers that be
Libra’s quick rise and fall is a telltale case of a premature and ill-designed attempt to challenge the powers that be. Among other things, its fate highlights the critical importance of building coalitions that are willing and able to play both offense and defense against challengers.
Facebook and the Libra Association did not invent the idea of digital currencies, which had been around for a decade. Nor were they breaking new ground in payment systems. Companies such as PayPal
PYPL,
have been building alternative systems in the shadow of (and often by piggybacking on) existing banking infrastructure for more than two decades. This low profile was both a strength and a weakness: it allowed new platforms to expand without raising the ire of regulators; but it also left them dependent on legacy institutions and easy to copy.
As a latecomer to the game, Facebook hoped to use its comparative advantage as a digital platform with more than 2.3 billion users to take digital currency mainstream. Building on the “stable coin” fad, Libra was to be tethered to a basket of currencies issued by countries with a reputation for stability, and with reliable backstopping from central banks. Its value would track a weighted average of the British pound
GBPUSD,
the U.S. dollar
BUXX,
the euro
EURUSD,
the Singapore dollar
SGDUSD,
and the Japanese yen
USDJPY,
even though it would be issued by an entity outside any of those countries’ jurisdictions.
The regulatory backlash was swift and fierce.
Within weeks, hearings were organized in both houses of the Congress, and politicians around the world voiced their disapproval. National authorities quickly formed a united front and pledged to scrutinize every aspect of what they perceived as a threat to their monetary sovereignty. The Financial Stability Board, which counts the G-20 among its members, launched a review of the existing regulatory frameworks and began coordinating the response to Libra and other aspiring global stable coins.
From the archives: Facebook’s Libra could be more dangerous than 9/11, congressman says
Nothing unites disparate interests such as a common enemy. Libra’s ambition was more than the world’s leading economic powers could take. No matter how much Facebook CEO Mark Zuckerberg pleaded for leniency or fearmongered about China’s efforts to develop a global digital payment system, he could not sway the powers that be.
Forced to retreat
Facebook was forced to retreat. First, the Libra Association started losing key members. When Visa
V,
Mastercard
MA,
and PayPal left, the writing was on the wall, even though the overall number of members continued to increase. To alleviate market and political concerns, Facebook had to renounce its own engagement with the association.
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When Henry’s allies wavered, he had no choice but to submit himself on both knees to the pope.
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Then came the ill-fated renaming from Libra (balance) to Diem (day), which has been tainted by copyright issues.
When the Diem Association finally announced its relocation from Switzerland to the U.S. this month, it was hard not to be reminded of Henry IV’s infamous trek to Canossa in 1077. Though Henry was emperor of the Holy Roman Empire, he was forced to humiliate himself by crossing the Alps in winter to beg for leniency from Pope Gregory VII, whose authority he had openly challenged by appointing bishops in contravention of a papal decree.
Henry’s challenge to papal authority succeeded as long as he had the German kings behind him. But the pope responded by excommunicating Henry, denouncing the other kings’ pledge of allegiance, and lobbying them to deny Henry their support unless he agreed to atone. When Henry’s allies wavered, he had no choice but to submit himself on both knees to the pope.
Katharina Pistor, professor of comparative law at Columbia Law School, is the author of “The Code of Capital: How the Law Creates Wealth and Inequality.”
This commentary was published with permission of Project Syndicate—How Not to Launch a Digital Currency
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