The collapse of Libra
aka Diem aka Novi
Many thanks to all who tuned in to my Twitter Space with Izabella Kaminska. We had a fun and wide-ranging discussion about developments in the global monetary system stemming from the war in Ukraine. Izabella pulled us further into speculative territory than I usually go—commodities, RMB internationalization, global war. Do check out Izabella's new venture, The Blindspot.
This week also marks a happy first birthday for Soon Parted, which began in March 2021 with posts on GameStop, Greensill and Archegos.
There's a lot in motion at the moment. Inflation continues, relentless. So-called liftoff of US policy interest rates from zero is now officially in the past. The war in Ukraine has thrown the spotlight onto the global monetary system in ways that even the pandemic never did. In darker moments, the collapse of the global dollar system has seemed nigh. There is a dissensus, even among the keenest observers: has the global dollar already collapsed, is it teetering at the brink, or has it never been stronger?
In the rush of events, it was easy to pass over a less urgent story from the world of digital assets: the Financial Times ran a nicely reported postmortem of Facebook's failed Libra/Diem/Novi digital money project. The project tried and failed to negotiate the intersection of money, politics and data. Others are trying to negotiate that same intersection, and until someone succeeds they will continue to try. So it seems worthwhile to take a look.
Facebook's monetary overreach
Hannah Murphy and Kiran Stacey of the Financial Times reported in detail the arc of Facebook's cryptocurrency project. The basic plan was to build a digital financial instrument that could be used on a range of tech platforms—Facebook itself, but Uber, Spotify, eBay and Vodafone were also partners. The idea was hatched as Libra, and Facebook was first among a group of platforms and financial institutions (Visa, Mastercard and Stripe) that paid into its development. After disastrous Congressional testimony in summer 2019, it became clear that association with Facebook was a problem for Libra, so the company took a step back and the project changed its name to Diem. In the end, the Treasury withdrew its support, and after attempting to launch a much less ambitious digital wallet called Novi, Facebook gave up.
In financial terms, what they were trying to build was a stablecoin: a balance sheet with negotiable liabilities that could gain credibility as money by funding investments in liquid assets. This is the same financial principle as that of a bank or a money market fund. When such moneylike liabilities are recorded on a distributed ledger, their issuers refer to them not as bank deposits, but rather as "stablecoins." The T accounts below illustrate the financial structure of stablecoins, capturing the underappreciated fact that, in an essential way, each stablecoin exists on only one blockchain. Tether, for example, issues stablecoins on multiple blockchains, including Ethereum and Tron, and though they are often lumped together, each should be regarded as its own digital asset:
Existing payment systems are expensive for users and lucrative for incumbent operators, so whoever figures out how to build and scale a cheaper alternative could scoop up a big payday. The main stablecoin issuers, like Tether, imagine that they might achieve this using public blockchains. Facebook and other platforms thought that they could get a leg up by using the advantages of their existing platforms, and by engaging ready-made user bases numbering in the billions.
It is unsurprising, in light of their successes in other domains, that platform businesses would try to take on the monetary system. It is the same basic insight that motivates digital asset developent more generally. But Facebook badly misjudged the politics. Ironically enough, the company and its collaborators even chose to ask for permission from regulators. But the request came at a time when Facebook was playing poorly at the politics of data more generally, and the request was rejected. If the company hadn't asked, it might instead be in the pack with other stablecoin issuers, who have charged ahead:
More to come
But perhaps their day is coming soon. Last week. the US executive branch took a big, coordinated step on the regulation of digital assets: the Biden administration issued an executive order engaging multiple departments and agencies in gathering information in preparation for crypto regulation. The March 9 order sets the US bureaucracy in motion, requesting the preparation of a broad range of reports on the major dimensions of digital asset regulation. I read it as a sequel to last fall's Stablecoin Report: that document laid out the basic case for regulation, this one begins to follow through. The Fed's recent CBDC paper develops the possibility of a digital asset with regulatory sanction.
There is much more to come on the subject of digital assets. If nothing else, the Libra story shows that top players, plenty of resources and tech expertise were not enough to overcome big political-economic constraints.