I haven’t written much about Facebook’s digital currency Diem, as there’s not much to write about. A dead duck from day one, it would never succeed. I said so back when it launched in 2019:
The bottom-line is that Facebook may have developed a stablecoin using blockchain to enable global payments within Messenger, Instagram and Whatsapp … but the day they press that button into production will be the day when the regulators come down hard.
And yes, sometimes I’m wrong, but I knew I wouldn’t be about this one. Facebook launching anything financial was bound to fail. Cambridge Analytica and other data abuses sealed that fate.
So, it was interesting how they tried and tried and tried to make it succeed … and failed. Why did they do it? The Financial Times wrote a nice obituary about Diem née Libra over the weekend. Here are the highlights:
On June 24 2021, Jay Powell and Janet Yellen sat down for their weekly breakfast amid the austere surroundings of the US Treasury building on 1,500 Pennsylvania Avenue. There was only one major question on the agenda: should they give the green light for a global cryptocurrency designed by Facebook? The chair of the Federal Reserve and the Treasury secretary were both DC veterans; Powell had replaced Yellen at the top of the Fed. But neither had had to make such an unusual decision …
After weeks of deliberation, Yellen had made up her mind: she was out. “Yellen told him it was his decision to make, but that she would not protect him from the political fallout if he did so,” says one person briefed on the conversation. “And that was the end of Facebook’s digital currency.”
Diem’s leadership would spend the next six months in a last-ditch drive to rescue the project that began by attempting to woo government regulators, then trying to browbeat them and, in a final folly, exploring working with Zuckerberg’s one-time nemeses. But this January, Diem confirmed that it was winding down for good. The remains of Zuckerberg’s digital money dream would be sold to a little-known Californian bank for $182mn, marking one of the most spectacular, if little-noted, failures of his career …
What they failed to realise was that the very fact Facebook had conceived the idea, doomed it. As one government official involved in the process puts it: “Diem spent years trying to reverse engineer their project to fix all of its faults. But they could never fix being linked to Facebook. It was their original sin.”
The article then meanders into the depths of David Marcus, Mark Zuckerberg and Morgan Beller, and how they developed the original idea. Then they launched it at the San Francisco Mint.
The Old San Francisco Mint is a neoclassical granite slab of a building sitting amid high-rise office blocks and upmarket hotels close to the city’s theatre district. Constructed in the 1860s, the Mint was one of the few buildings that survived the great quake of 1906 and resulting fire. It is a behemoth of permanence that once held one-third of the country’s gold reserves; now it’s a venue for corporate events …
Throwing the launch at the Mint made for terrible politics. American politicians were already worried about a Facebook cryptocurrency encroaching on the power of the US dollar. Seeing it launched in a building that used to make those dollars only exacerbated their concerns. One person who spoke to Zuckerberg about the plans in its earliest days says, “It comes back to Zuckerberg’s inability to understand how the world sees Facebook: ‘From the people who ripped your data off, they can now get into your wallet.’”
And then, amid the tensions, some Libra staffers failed to notice that representatives from one member — PayPal, where Marcus had been president — weren’t there. The next day, PayPal announced it was pulling out, arguing Facebook had not done enough to address regulators’ concerns. The news blindsided Libra’s top management.
So, they tried to turn it around. David Marcus stepped back from the limelight and a new CEO was appointed.
To underscore its independence, Libra turned to Stuart Levey, the former Treasury official in charge of the US government’s efforts to stop terrorism financing. In May 2020, Levey was made the Swiss non-profit’s new chief executive … Libra also tapped Steve Bunnell, former chief of the criminal division at the US attorney’s office and justice department counsel, to become its chief legal officer … There was also a rebranding. Libra was renamed Diem, while Calibra — Facebook’s digital wallet — became Novi.
In Spring 2021, they were ready to start trials and requested approval from the Swiss Financial Market Supervisory Authority (Finma), where Diem was based, to approve Diem’s licence.
It was at this point that the Treasury issued its first devastating “No”. Officials told Finma and Diem that they were requesting a temporary delay of the pilot. The Biden administration was still settling in, they said, and needed time to review the project.
So, Levey relocated the Swiss-based project to the US and began working with US-regulated bank Silvergate to issue Diem currency, an overhaul designed to further placate regulators.
But that still didn’t work.
After Yellen’s intervention, the Fed relayed the message to Silvergate and Diem. In a testy phone call, the Fed’s general counsel Mark Van Der Weide told Levey that the government was uncomfortable condoning any project until it had put a “comprehensive regulatory framework” for stablecoins in place, and he expressed nervousness about a coin with the potential to “massively scale” as Diem might.
Facebook people were not amused.
“It’s kind of like a banana republic,” says one Facebook staffer involved. “Here you have the Federal Reserve that’s supposed to be an independent central bank for the US government, appointed to set terms that span over the course of presidencies to take politics out of money. It is a shame that politics came into play” …
Then came what some insiders deem the final mis-step. Marcus, who had been watching from the sidelines, re-entered the picture when he decided to launch a pilot of Facebook’s Novi digital currency wallet in October. Instead of using Diem, the trial would rely on Paxos Dollar, a rival cryptocurrency.
By the end of 2021, Diem was dead.
To the extent it has one, Diem’s lasting legacy may be that it focused the attention of regulators on digital currency. “It forced regulators and governments to start to educate themselves on the technology and stimulated venture capital investment in other initiatives because there was such a frenzy of focus,” says Lisa Ellis, head payments analyst at investment research group MoffettNathanson.
Something that I said back in 2020:
I guess that Facebook caused many central banks to realise that if they didn’t issue digital currencies then others would. Hence, why most central banks are issuing them.
And then, The Financial Times concludes with:
Facebook is now busy with a new grand project: its plan to build a metaverse where billions of people could one day gather as avatars. Novi staffers have been instructed to focus on what digital currency might look like in this virtual world.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...