The Libra coin, proposed by Facebook in 2019 as a global digital currency, has faced intense scrutiny and opposition from financial regulators around the world. While Facebook and the Libra Association claim that Libra will enable financial inclusion and ease cross-border payments, regulators have raised numerous concerns regarding privacy, Anti-Money Laundering (AML) compliance, monetary policy, and financial stability.
Two years later in 2023, Libra, renamed Diem, has failed to launch and been sold off due to the crushing regulatory pressure. This article will examine the key responses from regulators regarding Libra and the reasons it did not succeed in the face of their opposition.
Regulators’ Key Concerns Regarding Libra
Financial regulators had several major concerns regarding Libra that ultimately led to the project’s failure:
1. Privacy and Data Sharing
Regulators worried Facebook’s past privacy issues could carry over to Libra, allowing extensive data collection on users’ financial information and transactions. There were calls for clarification around what data would be collected and how it would be used.
2. AML and KYC Compliance
Given Facebook’s global reach, including in developing countries, regulators raised concerns over how effective AML and KYC checks could be implemented to prevent the use of Libra for money laundering, terrorism financing, and other illicit activities. The decentralized nature of blockchain technology added additional AML challenges not faced by traditional financial institutions.
3. Threats to Monetary Sovereignty and Policy
A global stablecoin like Libra could undermine sovereign currencies and interfere with the ability of central banks to effectively implement monetary policy to address economic conditions. Regulators feared widespread adoption of Libra could reduce demand for domestic currencies.
4. Risks to Global Financial Stability
Due to the potential scale of Libra’s network backed by a reserve of assets, regulators warned it could have unintended macroeconomic consequences and pose systemic risks to financial stability if mismanaged. Bank runs could also occur if confidence in Libra was lost. There were concerns less developed economies could be most exposed to these risks.
Key Regulator Responses
Facing this regulatory pushback, Facebook and the Libra Association failed to successfully launch Libra. Here were some of the key responses from regulators that contributed to this failure:
1. Congressional Scrutiny
Facebook’s Mark Zuckerberg testified before the US Congress in 2019 regarding Libra amidst concerns of data privacy and AML controls. US lawmakers made it clear strong regulatory oversight and changes would be demanded before any approval for Libra is granted.
2. G7 Working Group
At the 2019 G7 meeting of major advanced economies, a working group was established to investigate regulatory issues posed specifically by global stablecoins like Libra. This working group later issued a report outlining various recommendations to mitigate the risks.
3. Switzerland Regulatory Approval Delay
Switzerland’s FINMA financial regulator was initially open to approving Libra but ended up delaying any decisions pending clearer international regulatory standards, especially around AML and data management, that could alleviate concerns.
4. India Bans Cryptocurrencies
India announced a complete ban on cryptocurrencies in 2023 that did not provide any exceptions for stablecoins like Libra, denying Facebook a major potential user base for its coin.
5. UK Parliamentary Committee Warning
A UK parliamentary committee published a report warning global stablecoins like Libra risk becoming “systemically important” without proper regulatory oversight before launch. They urged regulators deny approval until major changes were made.
These negative responses from world governments ultimately led the Libra Association to alter its plans again and again. While Libra was originally conceived as a global consumer payments network, regulatory pressure resulted in the project being rebranded as Diem and scope reduced to only launching a USD-backed stablecoin for commercial transactions.
Diem Fails and is Sold Off
However, by 2022 it became clear to the Diem Association that their regulatory hurdles remained virtually insurmountable. As a result, they sold off the Diem payment technology to California-based Silvergate bank and ceased operations. Silvergate incorporated some portions of the Diem stablecoin initiative into its own USDC-based payments network.
A major factor behind Diem’s demise was regulators’ demand that its reserve be held at central banks rather than commercial banks to mitigate financial stability risks. But negotiations with the US Federal Reserve and Swiss National Bank broke down over reserve composition requirements and ongoing regulatory approval power over Diem’s operations.
Unable to successfully launch either Libra or Diem coins for consumer or business payments due to unrelenting regulatory scrutiny and barriers, Facebook finally abandoned its global cryptocurrency ambitions after spending over $1 billion on the failed project according to insider reports.
Analyst Views on Regulators vs Libra
Financial analysts have viewed the intense regulator response as a key reason why Libra failed to get off the ground:
1. Unresolved Regulatory Issues
Analysts note Diem could not sufficiently resolve fundamental regulatory concerns around volatility, AML, and reserve holdings in a way acceptable to top regulators despite extensive lobbying efforts. Approval globally was ultimately an impossibility without compromising core design principles.
2. Too Big to Fail Risks
Some analysts argue the systemic risks posed by Libra and Diem’s potential global scale and adoption were simply too big for regulators to comfortably permit the project to launch, as any failure could be catastrophic without proper oversight controls in place first. Regulators opted to kill rather than risk an uncontrolled launch.
3. Technical vs Practical Hurdles
While the Libra blockchain and payment token technology generally worked as designed, analysts observe the bigger hurdles were the practical regulatory and adoption barriers put in front of it, rather than any purely technical challenges in implementing the system. Regulator gatekeeping doomed its real-world application.
4. Regulatory Standards Lacking
Other analysts note the rapid emergence of new crypto assets and payment systems like Libra have outpaced regulation in many jurisdictions unprepared to develop appropriate stablecoin oversight guardrails, contributing to barriers in getting approved. Regulatory standards are still lacking today for global stablecoins.
Could Libra Have Succeeded With Different Approach?
If Facebook and the Libra Association had taken a different approach, some analysts argue the project may have had a better chance of getting regulatory approval:
1. Work With Instead of Around Regulators
Trying to launch an unprecedented global payment system with limited initial regulatory consultation was bound to generate opposition. Libra failed to adequately achieve buy-in from regulatory stakeholders early on at concept stage. A more collaborative and patient approach could have eased concerns.
2. Start Small, Local First
Prioritizing demonstrative small-scale launches focused initially on Facebook’s largest existing user base markets like the United States may have given regulators more comfort. Going for a massive instantly global rollout was too ambitious given regulatory uncertainties outstanding.
3. Open Governance and Design
Providing external oversight of Libra’s governance, network architecture, and associated fund reserve custodianship could have established greater trust in the system and transparency over time. The closed approach taken fed into regulators’ worries over risks posed.
4. Non-Profit vs For-Profit Approach
Regulators likely perceived Facebook primarily seeking profits from Libra when broader social or financial inclusion aims could have taken priority. A non-profit model aligned to public policy interests ahead of returns could have eased skepticism and opposition to the coin’s approval.
Evolution of Libra in Response to Regulatory Concerns
In response to the regulatory scrutiny, the Libra Association has made several changes to its proposed design, including:
- Renaming Libra to Diem: In an effort to distance itself from its association with Facebook, the Libra Association rebranded the stablecoin to Diem in December 2020.
- Narrowing the Scope: The Libra Association has narrowed the scope of its project, focusing on the development of a single-currency stablecoin pegged to the US dollar. This shift is seen as an attempt to address concerns about the potential impact of Libra on monetary stability.
- Increased Regulatory Engagement: The Libra Association has engaged more closely with regulators worldwide, seeking to address their concerns and demonstrate its commitment to regulatory compliance.
Future of Libra and Regulatory Oversight
Despite the regulatory hurdles, the Libra Association remains committed to launching Diem. The association is continuing to engage with regulators and address their concerns, aiming to launch Diem in 2024.
The future of Libra and other stablecoins will depend on the ongoing regulatory scrutiny and the ability of these projects to meet the regulatory requirements set by authorities worldwide. Regulators will need to strike a balance between fostering innovation and safeguarding financial stability, ensuring that these new forms of digital currency operate in a safe, sound, and responsible manner.
The utter failure of Facebook’s Libra/Diem cryptocurrency project despite years of development work and over $1 billion invested offers a cautionary example of how financial regulators today will not tolerate perceived risks to financial stability or sovereignty posed by new private payment systems. Regulators effectively blocked Libra using a variety of direct and indirect levers available to them rather than approve something they felt could not be controlled.
The rapid coordinated response from global regulatory bodies ultimately choked off Libra’s oxygen supply before it could seriously take off. While this demonstrates regulators’ commitment to protecting existing systems, it also shows the barriers digital currency innovation faces. Whether easier stablecoin compromise or standards arise in future remains to be seen as the technology continues advancing. But for now, regulators appear firmly in charge determining what projects can progress. Their scrutiny and risk mitigation requirements continue keeping many concepts like Libra stuck as theoretical ideas rather than practical implementations changing how money works.
Frequently Asked Questions (FAQ)
What is Libra?
Libra was proposed in 2019 by Facebook as a new global cryptocurrency intended to enable fast, low-cost digital transactions and financial inclusion. It was to be overseen by the independent Libra Association and backed by a basket of currencies and assets held in the Libra Reserve.
Why were regulators concerned about Libra?
Regulators had several major concerns about Libra, including risks related to money laundering, consumer privacy, monetary sovereignty, and financial stability. Specifically, they worried that Libra’s global scale could interfere with monetary policy, reduce demand for domestic currencies, and pose systemic risks.
How did financial regulators initially respond to Libra plans?
Regulators pushed back forcefully against Libra from the start. Responses included Congressional hearings, establishment of a G7 cryptocurrency working group, delays of regulatory approval decisions, and outright bans on cryptocurrencies by some countries. This regulatory pressure ultimately led Libra to rebrand as “Diem” and scale back plans.
What further regulatory scrutiny did Diem face?
Regulators demanded Diem’s reserve be held exclusively in central bank deposits and that Diem’s network obtain formal approval to operate on an ongoing basis. But negotiations foundered over these regulatory requirements, ultimately leading Diem Association to sell its technology and cease operations in 2022 without ever launching.
Why do analysts think Libra failed due to regulation?
Analysts observe that Libra and Diem faced practical regulatory barriers more so than technical challenges. Unresolved concerns around volatility, money laundering, and reserve custody made approval essentially impossible no matter how much the project lobbied regulators. Regulators were uncompromising regarding potential financial stability risks.
Could different approaches have led to Libra getting approved?
Some analysts argue working more collaboratively with regulators from the start with a phased, localized launch and open governance model could have eased concerns. Additionally, prioritizing social good over profits via a non-profit could have established greater trust with skeptical regulators.
What is the key takeaway from Libra’s failure?
Libra demonstrates global regulators’ resolve to block perceived threats to financial stability and their existing oversight powers. It also shows the difficulties even large, well-funded initiatives face getting innovative digital currency models approved for launch and mass adoption in the current stringent regulatory climate.