Facebook’s digital currency plans: frozen for good or merely on ice?

Worldwide regulatory scrutiny and fierce resistance from civil-society organisations may have dealt a major blow to Facebook’s bid to create its own global payment system. On January 31, the Diem Association – a Facebook-led consortium – announced the sale of the venture’s core technology to Silvergate Capital Corporation, a California-based bank, for a total purchase price of less than USD 200 million. The demise of this project puts an end, at least for now, to the sponsors’ ambitions. But regulators and citizens cannot afford to grow complacent. With thousands of crypto-assets in circulation, and dozens more being launched every day, others may follow where Facebook sought to lead.

When Facebook first presented its new stablecoin project, then known as Libra, in June 2019, the world’s largest social media company seemed to follow, once again, its founder’s original motto: move fast and break things. The proposed launch in 2020 of a new digital means of payment, based on a basket of major global currencies and administered by Facebook and a consortium of other large international companies, might have caught regulators and the general public off guard. This time, however, the response came fast.

Within days of the announcement, governments and central bankers in Europe, the United States and other major global economies came out with unanimous and unequivocal criticism. Finance Watch published its analysis of the project, ‘Ten Reasons Why Facebook’s Libra Is A Bad Idea’, which became the platform of a pan-European civil-society campaign. Spearheaded by Finance Watch, Finanzwende and WeMove.EU, the campaign collected over 83,000 signatures on a petition against Libra. In October 2019, several prospective members of the Libra Association, including the two credit card firms Visa and Mastercard, announced their withdrawal from the project. Right from the beginning, Facebook’s global stablecoin struggled to get out of the starting blocks.

Old risks find a new setting

Faced with skepticism from so many sides, its sponsors were forced to redesign, rebrand and retrench. In April 2020, the concept of a multi-currency stablecoin was dropped in favour of a number of single-currency coins. In December 2020, the project underwent a major rebranding. The name ‘Libra’, perhaps considered as tarnished, was discarded in favour of ‘Diem’, the name of the matching digital wallet changed from ‘Calibra’ to ‘Novi’. The group of companies involved in managing the stablecoin known as the ‘Libra Association’ is now known as the ‘Diem Association’. Finally, in May 2021, the Association announced that it had abandoned its application to obtain a licence for payment services from the Swiss financial market authority, FINMA, and would relocate its operations to the United States.

Shortly after, Finanzwende sent the WeMove.eu petition to European Commission President Von der Leyen and European Central Bank President Lagarde, as a reminder to follow Facebook’s plans with a critical eye. We thank all Finance Watch supporters who added their voice to the campaign and contributed to its success.

It’s not over  – until it is

For those who have been peeking through their fingers at the evolving saga: there’s more… In late 2021, Meta, the company formerly known as Facebook, launched Novi, its digital wallet, in a small-scale pilot deployment in the United States and Guatemala. The wallet is offered in conjunction with the ‘Paxos’ stablecoin (USDP), based on the U.S. Dollar, with Coinbase providing infrastructure and custodial services. USDP, formerly known as the ‘Pax Dollar’ is a third-party product – neither is it managed by the Diem Association nor part of the Diem blockchain. If this pilot seems far removed from the global ambitions of the original announcement, it could also be seen as testament to the degree of regulatory push-back Meta has experienced – even on its home turf.

The announcement yesterday of the sale of Diem’s core technology to Silvergate Capital does not come as a complete surprise, then. Its global ambitions thwarted, the company may have come to the conclusion that it was time to cut its losses and step back from this controversial, and increasingly tarnished project.

Despite all this, it would be unwise to conclude that Diem’s corporate sponsors have altogether abandoned their ambitions. With a global user base of 2.9 billion, many of them in developing countries, the attraction for Meta/Facebook to create a proprietary global payment system – perhaps, in due course, even a private global currency – is understandably huge. Where Meta/Facebook led, others may follow: Diem, or similar projects may return before long, perhaps in a slightly different guise.

Policymakers and civil society must stay alert

For policymakers and civil society, the Libra/Diem saga holds important lessons: excessive concentration of economic power must be avoided, the personal data of users protected, the security of citizens’ money and the stability of the economy safeguarded. When confronted with powerful corporate interests, citizens and regulators need to respond fast and with determination.

Governments and central bankers in the EU, the United States, the United Kingdom, Japan and other major economies must stand firm and resist any attempt to ‘privatise’ their currencies. This is important because smaller countries – those whose national currencies are most at risk of being replaced by Libra – cannot. What Meta/Facebook – and others – have correctly identified is the huge demand for new digital payment channels – faster, more convenient and less expensive. To see off their challenge, governments, central banks and lawmakers responsible for the world’s major currencies must speed up the development of their own digital monies. China is already forging ahead, with the upcoming Peking Winter Olympics as an opportunity to promote its ‘digital yuan’ to a global user base. Eurozone policymakers who have only committed so far to ‘investigate’, by the end of 2023, whether a digital Euro should be developed and what it could look like, would be well advised to up their game. In the meantime, civil society must remain vigilant.

Christian M. Stiefmüller

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