Why trust and timing were key in Libra’s downfall
The following article is an excerpt from the book Everything Transaction.
Facebook caused quite a stir back in 2019 when it announced plans to launch a global cryptocurrency called Libra. But gradually everything went quiet and it now seems that the project has been scrapped completely. What went wrong?
On 18 June 2019, Facebook along with 27 other founding members of the Libra Association announced their intention to introduce Libra: a simple global currency and financial infrastructure to empower billions of people. The announcement certainly caused a stir; within seven days Libra had made it onto the agenda of the G7, another week later several US congressmen sent a letter to Facebook urging it to stop Libra, and within a month Facebook had been called to a congressional hearing about Libra – and all based on the mere intention to introduce such a concept.
The hearing did little to mitigate the politicians’ and regulators’ distrust and Libra suffered a severe political backlash. In the autumn of 2019, a number of founding members including PayPal, Visa, Mastercard and Stripe pulled out. The whole idea of Libra was overshadowed by the strongly perceived Facebook signature. After all, Facebook was taking the initiative. The effort to build trust failed, mainly because the very basic governance was questioned by public authorities and politicians – and their support was essential, because Libra would be a regulated activity.
From then onwards the effort was focused on finding ways to make at least something work, strongly diluting the original plan. For instance, the name was changed from Libra to Diem at the end of 2020, and it was decided to limit the currency to USD instead of a basket of global currencies. The next scaling back happened when the Swiss head office was closed down and all operations were moved back to the USA. Diem entered into partnership with Silvergate, a bank that had all the necessary licences and experience for issuing stablecoins, but even that was not enough to secure the Federal Reserve Board’s approval for the first pilot. The whole project was eventually dismantled in late 2021.
Failed manifestation of the transactional internet
Libra was a serious attempt to take the transactional internet to the next level. However, the initiative failed for the following reasons:
- Politicians and policymakers lacked trust in the originator, making the quality of the actual idea irrelevant.
- Governments and central banks around the world did not have a clear and unified view of how the heavy involvement of such a dominant market force (Facebook) would impact on the financial system in the longer term. This prevented them from moving decisively and giving clarity to market parties.
Timing is often crucial, and it seems that Libra was just ahead of its time. Since the announcement of Libra’s intentions, governments and central banks worldwide have stepped up their own efforts to realise Central Bank Digital Currencies (CBDCs), which can be seen as trust-based payment infrastructure with centralised governance. The transactional internet with a scope that extends beyond payments alone is now likely to come from Web3 initiatives.