The Breakdown - The Long Strange Journey of Facebook's Libra Project

Episode Date: December 2, 2021

This episode is sponsored by NYDIG. On today’s episode, NLW does a retrospective of Facebook’s libra project, which was renamed late last year to diem. He argues that, whatever happens with diem specifically, it has a place in the historical record as the starting gun for a new era in stablecoins and central bank digital currencies. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Andrew Harrer/Bloomberg/Getty Images, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, December 1st. Welcome to what is undeniably the best month of the year. Today we are talking about the long, strange journey of Facebook's Libra product. And of course, the context for this is the announcement that David Marcus would be leaving the project. Marcus is, of course, the most recognizable figure associated with the project.

He was the one to be on the hot seat originally in the first hearings before Congress and the Senate. And it's just hard not to see this as something of a closing of a chapter in not only Facebook's history, but in the era of crypto that we've just lived through. Now, I've been following the Libra project since its very inception. I remember the day that it was announced and what a huge deal it was. It was in the midst of a deep, bare market in 2019. It was six months before this podcast started, but still I was live streaming and doing a watch party of the original congressional hearings.

So today, what I want to do is give a little bit of a retrospective on the project, as well as talk about what it meant in the context of this industry and what it might mean for Facebook or meta going forward. So let's go back to the announcement. It was June 18th, 2019, and like I said, we were deep in a bear market. This announcement then hit like a bomb. Here was one of the biggest companies in the world announcing its entrance into something akin or at least related to this cryptocurrency space.

Now, the first pitch from Facebook about Libra was all about banking the unbanked. They talked extensively about the 1.7 billion unbanked people, and the as many, again, folks who were underbanked are underserved by the current system. Right from the beginning, David Marcus was at the helm, but even from the beginning, they were clearly trying to attempt to break away from their association with Facebook. Remember, Libra wasn't a Facebook project, it was a project of the Libra Association, an association that had members such as Visa, Stripe, PayPal, Mercado Pago, eBay, Lyft, Uber, Spotify, and others. Facebook for its part was going to operate the Calibra wallet, not run the Libra Association.

And it was, right from the beginning, extremely controversial. They were proposing a new currency, and there were a couple problems that regulators were about to have with that. The first was that its approach was different than other stable coin projects at the time. It wasn't going to be tied to any one currency. The Libre was instead going to be backed by a basket of currencies that could free float against one another. That was an incredibly novel design, but with pretty big geostrategic implications. The second problem, of course, that regulators had with this was that it was Facebook who was proposing to do it,

a company that was already at that time massively untrusted by so many from multiple different political persuasions for multiple different reasons. almost immediately a hearing was called. But before I get into that hearing, I do want to spend just a moment on this basket of currencies approach. More than one person noted that it was similar to John Maynard Kean's original proposal for a global reserve currency, something that he called the bank or. At the Bretton Woods conference, he said that the global reserve currency should not be tied to any one nation. It should instead be a basket of currency that was backed by the currencies of multiple nations, but was able to float on its own. The U.S., of course, on the verge of winning World War II was having

nothing of that, and the U.S. dollar became the world's reserve currency. If you go back and listen to conversations after Libra was announced, I'm thinking, for example, of Raul Paul on hidden forces with Dimitri Kofinas, it was in fact this basket approach that so many thought was the most brilliant part of the whole thing. It had the potential to untether a global reserve currency from a single political power. That would shift the balance of power in the world in some pretty fundamental ways. Because of that, it was of course unlikely to be a thing accepted by the existing power players, and as we'll see, was one of the first things to go. I mention it, though, because I don't believe that that idea of a basket of currencies-based free-floating global settlement currency has

fully gone away. Remember, Mark Carney, the former Bank of England governor, would go on to proposed something similar that he called a synthetic hegemonic currency. Instead of being produced by Facebook, of course, it would be a coalition of central bankers that made his synthetic hegemonic currency. And of course, he didn't get a ton of traction at the time he proposed it, but it's an idea that's out there and maybe something we see more conversations about in the future. Anyway, like I said, almost immediately a hearing was called. It was slated for July 16th and 17th, but a few days before that, to set off the tone, we got the tweet heard round the world from then President Donald J. Trump. He tweeted, I am not a fan of Bitcoin and other cryptocurrencies, which are

not money, and whose value is highly volatile and based on thin air. Unregulated crypto assets can facilitate unlawful behavior, including drug trade and other illegal activity. Similarly, Facebook Libra's virtual currency will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations, just like other banks, both national and international. We have only one real currency in the U.S., and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the world, and it will always stay that way. It is called the United States dollar. Now, at the time, many thought that this was basically the position of then

Treasury Secretary Stephen Mnuchin, in fact that perhaps he even drafted the thing. But still, it set a pretty clear path for the tone of what was to come. The first day of hearings was at the Senate Banking Committee on the 16th and the second was in the House with the House Financial Services Committee. Frankly, in that first hearing, the big issue wasn't cryptocurrencies or stable coins. Those weren't necessarily terms that people really had a lot of access to yet. Instead, the big issue was Facebook, and Democrats and Republicans both had their issues. Republicans were hot on deep platforming issues, accusing Facebook of banning or minimizing conservative voices. Democrats, well, boy, what didn't the Democrats hate about Facebook? There were diversity issues, data privacy issues, and there was

definitely lingering blame around the election that they saw as being robbed from Hillary Clinton by Russian bots on Facebook. Sherrod Brown said during the hearing, quote, through scandal after scandal, Facebook doesn't deserve our trust. We'd be crazy to give them a chance to let them experiment with people's bank accounts. Senator Martha McSally said, I don't trust you guys. Instead of cleaning up your house, you were launching into a new business model. Adding oomph to these critiques was that just five days earlier on July 12th, the FTC had finalized settlement of a $5 billion find for repeated data privacy violation, so it's not like Facebook had been clear and clean for some time.

NIDIG sponsors this podcast, and they are the go-to Bitcoin Company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash nLW. That's nydig.com slash nLW. There were also those who just truly hated cryptocurrencies getting loud. I'm thinking, for example, of Brad Sherman, who said, this is the biggest thing that the committee will deal with this decade. This is a godsend to drug dealers and tax evaders, and even went so far as to say that it could kill more people than 9-11. At the same time,

there were early indications of some of the folks who would become our strongest allies. Senator Pat Tommy said, to strangle this baby in the crib is wildly premature. I think we should be exploring this and considering the benefits as well as the risks. North Carolina Congressman Patrick McHenry said in what was probably the most notable quote from the entire affair, the world that Satoshi Nakamoto, author of the Bitcoin White Paper, envisioned, is an unstoppable force. We should not attempt to deter this innovation. Those who have tried have already failed. Those first hearings ended with a lot more questions than answers, and pretty soon it became clear that there was going to need to be another hearing, and at this time, the chief himself was

going to come. Over the next couple months, there was a lot of animosity from regulators. Bruno Le Maire, the French finance minister, had said, quote, Libra is asking states to share their monetary sovereignty with private companies. End quote. This was something he couldn't fathom, passing control of such a key economic tool from these democratic governments and central banks to a group like Facebook that had such a clear financial interest. This idea of a threat to monetary sovereignty was repeated over and over again, but of course it was China who responded most aggressively to the introduction of Libra. China had in fact already been working on central bank digital currency efforts,

but Lieber gave context for them to supercharge those efforts. By the time that Mark Zuckerberg showed up in October of that year, gone was the conversation about banking the unbanked, and instead China had become the big batty. The project already was looking a little beleaguered by the time that Mark testified. PayPal, Visa, eBay, MasterCard, they had all pulled out from the Libra Association. During that hearing, there continued to be lots of animosity towards Facebook. There was the new introduction of the argument that Facebook should be,

allowed to do this because China's going to if we don't, and we started to see the beginnings of concessions to political reality. Marcus, during that session, for example, intimated that they might concede the basket of currencies approach, and that was reinforced with Reuters a couple days later, when he said we could definitely approach this with having a multitude of stable coins that represent national currencies in a tokenized digital form. That is one of the options that could be considered. That ultimately is exactly what happened. The SDR model was no more, the basket of currencies model was no more, and all of a sudden, Libra was more of a traditional stablecoin project. So what happened next? Well, in May 2020, Facebook further wanted to distance itself

from the Libra and so changed the name of its wallet division from Calibra, which is obviously very close to Libra, to Novi. In September of 2020, Libra co-founder Morgan Bellar left to become a partner at a VC firm. This was one of the first indications to many that perhaps there was a bit of an exhaustion on Facebook's part with the constant battles. To be fair to Morgan, she had been a VC before joining Facebook, and so it could have been just a personal decision to go back to something that was closer to where she actually found her more enjoyed work. In December of 2020, we got what seemed pretty clearly to be an attempt at a reboot. Libra renamed both its foundation and its currency to DM and hoped to move into 2021 this year with a fresh start.

In May of 21, we got a little bit of a sense of what the new DM project would be trying to go after, and a pretty good summary of where that left us came from Bloomberg's headline at the time, which said Facebook's crypto project reboots with smaller ambitions. In October, we saw what those smaller ambitions might be. The Novi Wallet finally launched, but with no DM, no Libra. They launched a pilot with Paxos for remittances between U.S. and Guatemala, and even that hyper-small version got a ton of lawmaker pushback. And then, of course, at the end of October of this year, we got the big name change. Facebook would become meta.

That, I think, potentially is a part of this story as well, which we'll come back to in just a minute. Finally, at the very end of November, David Marcus, the original showrunner of this whole thing, left the project. Now, I think this is a relevant moment at which to talk about what Libra meant to this industry and to the world at large. Libra was a starting gun. It was a starting gun in the phase of two things that are really part of the same. the huge push of governments all around the world to come up with and implement their own central bank digital currencies, and the radically increased scrutiny, on the other hand, around stable coin projects that already existed. Stablecoins had been a topic of discussion before Libra and central bank digital currencies were also in the ether.

But it was undeniably Facebook, one of the biggest companies in the world, a company that brought with them a built-in user base of more than 2 billion people getting into this game that had everyone start to pay attention. I think that Facebook's Libra project radically accelerated the development of the entire crypto industry as it relates specifically to where it fits in a public policy framework. Those questions are coming to a fore more than ever now. Stable coins come hell or high water are going to find their way into a U.S. regulatory framework over probably the next year.

So I think that one legacy is just hypercharging and starting a conversation which is going to a dramatic impact on the shape of the industry, even though Facebook won't necessarily be a huge part of that conversation going forward, and frankly really hasn't been for a little while. I think on the Facebook side, it's interesting to me to speculate about how meta fits into this whole story. Is part of meta a reaction to just how difficult it's been for Facebook to participate in the physical world when it comes to currency and commerce in this way? is a new virtual world, a new metaverse in which there are no rules or at least big areas of rules to be written, something that better suits Facebook's ambitions than the real world,

which ran into so many barriers instantly when it came to Facebook trying to do a thing that they thought ultimately was pretty simple and just a nice value ad for their users. Ultimately, we don't know, maybe we'll know over time, and certainly there are indications that Mark Zuckerberg was interested in the metaverse long before the Libra Project even began. I'm thinking, for example, of the acquisition of Oculus. Still, it's hard not to see this as part of the same story, with part of Facebook's metaverse efforts being a reaction to what they discovered in the terrestrial world.

What do you think? Like I said, ultimately, this is all speculation. But no matter what we think of them, Facebook is going to have a stake in this conversation going forward. I wish David Markets luck on whatever comes next in his journey. And I appreciate you guys listening. It's been really fun for me to see your Spotify end-of-year list coming out with the breakdown on it. I appreciate all of you guys. If you want to get deeper in the conversation, hit me up on Twitter or even better, join the Discord Breakers. There's a link in my bio. There should

be a link in the show notes. And it's a really great place to go deeper into some of these conversations. Anyways, guys, I appreciate listening. And until tomorrow, be safe and take care of each other. Peace.