How Facebook’s vision for Libra turned into a nightmare

So how, just seven months after Facebook’s cryptocurrency chief David Marcus raised a champagne glass to his employees and declared “we’re going to change the world”, has his dream of a global currency gone so drastically off the rails?

A vision of money without borders

“It must have occurred to them that this is crazy, right?” says Katharina Pistor, a professor at Columbia Law School in New York, who sees the saga as an epic example of Silicon Valley “hubris”. 

“Think about those four decades planning the euro. The euro didn’t go off that well either,” she says. “To say you can do this on a global scale in 18 months is just so audacious that I think they were somewhat detached from reality.”

Perhaps appropriately, Libra was born in the feverish cryptocurrency bubble of 2017, when the value of Bitcoin in US dollars rose by more than 1,500pc before crashing back to around three times its earlier price. Facebook executives believed that the crypto genie was now out of the bottle, and were determined not to be left behind. A then-junior researcher named Morgan Beller wrote a memo that was enthusiastically championed by Marcus.

In the spring of 2019, Facebook began recruiting. Marcus reportedly got major global payments companies such as Mastercard on board by appealing to their fear of missing out on the next tech revolution, while securing the participation of services such as Uber and Spotify by promising lower transaction fees than credit cards.

Payments companies were an uneasy fit, since Libra would compete with them, but they had reason to hedge their bets and Facebook had reason to keep them close.

All along there were signs of trouble. As early as spring 2018, US treasury secretary Steven Mnuchin reportedly told Marcus: “I hate everything about this.” Prior to launch, US regulators were concerned that Facebook was vague on the details.

“The white paper and the documentation were really thin,” says Pistor. “They should have been much more cautious, much more ready, had full commitment from bigger players, and have had [more]... conversations before rolling it out.”

Operation: stop Libra

Nevertheless, Libra emerged into an immediate hailstorm of political and regulatory attacks. Donald Trump, his Democratic opponents and the US federal reserve all weighed in, as did the European Union, France and Germany. 

Libra’s prospective members were spooked by the onslaught, and sought more information from Facebook, but seem to have received little detail with which to placate officials. “They were pressured not to support it,” says Philipp Pieper, chief executive of the blockchain start-up Swarm Fund, citing the huge regulatory exposure that payments companies endure.

PayPal withdrew first, prompting a terse response from Libra spokesman Dante Disparte: “It requires a certain boldness and fortitude to take on an endeavour as ambitious as Libra.”

Then a bombshell letter on October 8 to the bosses of Visa, Mastercard and Stripe from two US senators, Sherrod Brown and Brian Schatz, forced prospective members to pick a side. 

“Your companies should be extremely cautious about moving ahead with [the] project,” the senators wrote, threatening to impose “a high level of scrutiny” not only on Libra members’ business with Facebook but on “all payment activities”. In the coming days, six companies joined PayPal to abandon the project. 

According to Alex Stamos, former head of security at Facebook, the company erred in building and marketing Libra as a cryptocurrency, as opposed to a mere payments system. By comparing it to Bitcoin, he argues that the company automatically associated it with all of Bitcoin’s nefarious usages.

“That was a problem Facebook created for themselves because they wanted to sound sexy,” Stamos says. “The status quo is horrible, and they ended up weirdly tying themselves to the status quo when in fact Libra is better than Bitcoin in almost every way that [politicians] were asking.”

Yet it was the question of national sovereignty, raised first by the government of France and then by US senators Brown and Schatz, which proved most toxic. “Obviously it was a direct attack,” says Gavin Brown, a crypto expert at Manchester Metropolitan University, of the senators’ letter.

“What was previously a learning exercise, with no strategic business risks [for Libra members], became something from which a rational person would then withdraw. I personally was quite shocked by what I thought was a nuclear reaction from the national powers. But that shows you how sensitive it is.”

What Facebook seemed to have missed was the deep danger that nation states would perceive in Libra. Pieper refers to its effect on the world financial system as “disintermediation” – the process by which tech giants supplant traditional middlemen by becoming a faster, more efficient and more unified intermediary between sellers and buyers.

If Libra becomes easier to use than the US dollar, it could become just such an intermediary between the greenback and its non-American users, later tweaking the terms to its advantage. In other words, Libra could do to the dollar what Facebook did to advertising agencies and newspapers.

“Our monetary sovereignty is really somewhat at stake,” says Pistor, arguing that there is no guarantee that Libra will stay pegged to real-world currencies, as is currently promised. Once it is widely used, with enough confidence, the Association could theoretically detach it from other currencies altogether, making it a fiat coin and creating something without modern precedent: a corporate entity capable of issuing its own money and undertaking bailouts.

No wonder that one fintech boss, who asked not to be named for fear of regulatory reprisal, describes the US reaction to Libra as a coordinated if panicked campaign by the financial “blob” – traditional banking firms, central banks, politicians and financial regulators – to preserve the status quo through strong-arm tactics. That way of thinking is shared by many in Silicon Valley, and perhaps even some inside Facebook.

Why Libra could still win

So while the knives are out for Libra, its story is not over. It retains its non-profit backers, who see it as a potential boon to unbanked people in the developing world. A person familiar with their thinking says that they were concerned but not deterred by the corporate exodus, since unlike Visa or Mastercard they had no shareholders to appease. If Libra collapses, they lose very little, but if it succeeds then they have a seat at the table.

Brown says that Libra could easily gain traction in the developing world, where many people do not have bank accounts and mobile payments are thriving, before it launches in tougher Western markets.

Telecoms giant Vodafone, meanwhile, could see benefits for its own mobile payments solution, M-Pesa, which has a foothold in Africa. There are risks, but the upside, Brown says, is equivalent to “being asked to join Opec when oil was first discovered”.

The Libra Association’s immediate task is to find a chief executive. Rumours circulating among its members suggest it has a speculative list of ex-politician: figures similar to Nick Clegg, hired by Facebook last year, who could help it sweet-talk European and American regulators.

Both Facebook and the Association stress that Facebook is not in control of the institution, having just one vote like any other member. A spokesman for Facebook referred all questions to the Libra Association, which did not respond to a request for comment.

Even so, the social media giant is likely to wield considerable influence over the currency, as many Libra members and board members have ties to it.

What kind of game are Marcus and Zuckerberg playing? Do they really want to overturn the global financial system, or just make it easier to buy clothes on Instagram? Zuckerberg does seem to sincerely believe in the idea of decentralising power and usurping traditional gatekeepers – something he claims that Facebook has done.

The problem is, in the eyes of much of the world, Facebook remains not a liberator but simply a new kind of gatekeeper, one less trustworthy than the old.

“Why is it that when you see pictures of Mark Zuckerberg in profile, he always looks like a Roman emperor?” jokes Pistor. “Once you think it, you can’t get away from it.”