Facebook’s cryptocurrency project, originally known as Libra and later rebranded as Diem, was officially shut down in January 2022 after facing intense regulatory pushback. The ambitious initiative, first unveiled in June 2019, aimed to create a global digital currency and financial infrastructure supported by a basket of real-world assets. However, the project quickly drew heavy scrutiny from financial regulators around the world who expressed concerns about its potential to disrupt monetary policy and enable money laundering. After multiple attempts to win regulatory approval, Facebook finally abandoned Diem as the hurdles proved too great to overcome.
What was the original vision for the Diem cryptocurrency?
When originally announcing Libra in 2019, Facebook promoted it as “a simple global currency and financial infrastructure that empowers billions of people.” The goal was to build a more efficient, accessible, and low-cost payment system that could facilitate cross-border money transfers and financial inclusion, especially for unbanked populations. Technically, Libra was designed as a “stablecoin” backed by bank deposits and short-term government securities for stability. It would be run by the independent Libra Association, a Swiss not-for-profit entity, with Facebook as one of the founding members.
Facebook highlighted several potential benefits of Libra:
- Lower costs and greater access to financial services for the 1.7 billion adults globally without bank accounts
- Near-instant and low-cost money transfers, including cross-border remittances
- More secure payments and reduced fraud compared to cash and cards
- An alternative to unstable local currencies in some countries via a stable global currency
The project reflected Facebook’s ambitions to leverage its massive user base and digital reach to disrupt the global financial system. However, it almost immediately faced opposition on multiple fronts.
Why did financial regulators push back against Diem?
Central banks, financial regulators, and governments in numerous countries quickly sounded alarms about the far-reaching implications and potential risks of Libra. Key concerns raised included:
- Monetary sovereignty: Libra could potentially interfere with the ability of central banks to control monetary policy and ensure financial stability in their jurisdictions.
- Systemic risks: Facebook’s global user base meant Libra could scale rapidly, but its failure could have catastrophic consequences for the global financial system.
- Money laundering: Criminals could exploit Libra’s cross-border reach to launder money and finance terrorism.
- Consumer risks: Users may not understand Libra and could be open to new scams or losses.
- Data privacy: Facebook’s poor track record on protecting user data bred mistrust about how financial data would be handled.
- Undue influence: Facebook could have outsized influence over Libra, raising anti-competitive concerns about a private company controlling a global currency.
In response, the G7 working group warned that no stablecoin project should launch until regulatory concerns were addressed. The US House Financial Services Committee called for Facebook to halt Libra’s development. Central banks in China, France, and Germany quickly voiced opposition. Regulators stressed that stablecoins like Libra require stringent oversight to manage their inherent risks.
How did Facebook try to address regulatory concerns about Diem?
In an effort to assuage regulators, Facebook made several changes to Libra before its launch:
- The Libra Association was established as an independent governing body based in Switzerland.
- The cryptocurrency was rebranded from Libra to Diem in December 2020 to distance it from Facebook.
- The basket of currencies backing Diem was changed from multiple currencies to just the US dollar for greater stability.
- Facebook’s role was downplayed by expanding Association membership beyond the initial 28 corporate founders.
- Plans to offer a consumer-facing digital wallet, Calibra, were shelved in favor of focus on a wholesale payment system.
- Strong protections against money laundering and terrorist financing were highlighted.
However, financial regulators remained cautious. The European Central Bank, Bank of England, and US Federal Reserve warned Diem still posed unacceptable risks. Central banks accelerated research into central bank digital currencies (CBDCs) to counter the threat from crypto stablecoins. In October 2019, Facebook CEO Mark Zuckerberg was grilled by Congress about Libra, facing intense criticism from both Republican and Democrat lawmakers.
What finally prompted Facebook to abandon the Diem project?
Despite Facebook’s efforts to reposition Diem to meet regulatory concerns, approval remained elusive. Key factors that ultimately doomed the project included:
- Regulatory deadlock: The Swiss Financial Market Supervisory Authority imposed stiff capital and oversight requirements but did not formally approve Diem. The US Securities and Exchange Commission also raised doubts.
- Loss of corporate support: Early backers including Visa, Mastercard, PayPal and eBay withdrew from the Libra Association in the face of regulatory pressure, eroding its credibility.
- Competitive threats: JPMorgan and Wells Fargo launched their own stablecoin initiatives. Over 80 countries began exploring CBDCs as an alternative.
- Congressional hostility: Facebook faced ongoing hostility about Diem during Congressional hearings, indicating the political climate in the US remained unfavorable.
- Crypto market turmoil: The crashing prices of digital assets like Bitcoin in 2021 made regulators even warier of permitting a global stablecoin.
In December 2021, the Libra Association sold Diem’s assets to California-based cryptocurrency firm Silvergate Capital. Without its crypto project, Facebook is now focused on gaining regulatory approval for Novi – a digital wallet designed for sending and receiving money.
Conclusion
Facebook likely hoped Diem would allow it to play a leading role in disrupting global finance. But regulators’ concerns about systemic risks from a massive private stablecoin proved impossible to overcome. Diem was an ambitious idea that challenged the traditional financial order – ultimately regulators were unwilling to take the risks it posed in return for its promised benefits. The project showcases how much power central banks and financial authorities wield in controlling the rules of the game for currencies and payments.
Tables Comparing Diem to Other Stablecoins
Diem vs. Tether
| Feature | Diem | Tether (USDT) |
|---|---|---|
| Launch Date | Project Cancelled | October 2014 |
| Issuer | Diem Association | Tether Limited |
| Asset Collateral | Basket of Currencies | US Dollar |
| Main Purpose | Global Digital Currency | Stable Value Trading Pairs |
Diem vs. USD Coin
| Feature | Diem | USD Coin (USDC) |
|---|---|---|
| Launch Date | Project Cancelled | October 2018 |
| Issuer | Diem Association | Circle Consortium |
| Asset Collateral | Basket of Currencies | US Dollar |
| Main Purpose | Global Digital Currency | Digital Dollar Stablecoin |