The Banking Executive Magazine - May 2021

The Rise and Fall of Libra In June 2019, Facebook made a dar- ing announcement: within a year, it would launch a new global currency, the Libra. The idea was to offer an al- ternative to national currencies in cross-border transactions, and to pro- vide a payment network for billions of unbanked people. A strictly digital token, the Libra was to be issued by an association in Switzerland and backed by a basket of national cur- rencies, implying that its creators sought independence from sovereign powers. But Facebook soon lowered its sights. Libra has since been renamed Diem, and the issuing entity has moved from Switzerland to the United States, where it has formed a partnership with Silvergate Bank to issue a token that complies with US banking regulations. A project that began by taking its name from a Roman currency and wrapping itself in the image of Caesar Augustus has ended as part of an online financial- services platform based in a corpo- rate office park in La Jolla. Libra’s quick rise and fall is a telltale case of a premature and ill-designed attempt to challenge the powers that be. Among other things, its fate high- lights the critical importance of building coalitions that are willing and able to play both offense and de- fense against challengers. Facebook and the Libra Association did not invent the idea of digital cur- rencies, which had been around for a decade. Nor were they breaking new ground in payment systems. Companies like PayPal have been building alternative systems in the shadow of (and often by piggyback- ing on) existing banking infrastruc- ture for more than two decades. This low profile was both a strength and a weakness: it allowed new plat- forms to expand without raising the ire of regulators; but it also left them dependent on legacy institutions and easy to copy. As a latecomer to the game, Face- book hoped to use its comparative advantage as a digital platform with more than 2.3 billion users to take digital currency mainstream. Build- ing on the “stable coin” fad, Libra was to be tethered to a basket of cur- rencies issued by countries with a reputation for stability, and with reli- able backstopping from central banks. Its value would track a weighted average of the British pound, the US dollar, the euro, the Singapore dollar, and the Japanese yen, even though it would be issued by an entity outside any of those countries’ jurisdictions. The regulatory backlash was swift and fierce. Within weeks, hearings were organized in both houses of the US Congress, and politicians around the world voiced their disapproval. National authorities quickly formed a united front and pledged to scruti- nize every aspect of what they per- ceived as a threat to their monetary sovereignty. The Financial Stability Board, which counts the G20 among its members, launched a review of the existing regulatory frameworks and began coordinating the response to Libra and other aspiring global sta- ble coins. Nothing unites disparate interests like a common enemy. Libra’s ambi- ISSUE 149 MAY 2021 the BANKING EXECUTIVE 37