A popular mantra in Silicon Valley is “fail fast.” It took Facebook less than three years to fail in its high-profile cryptocurrency project.
The company has had previous failures and product shutdowns, most notably an effort to build a smartphone a decade ago. But the decision to fold the project called Diem is the first that appears to relate directly to regulatory pushback, suggesting that bringing future products to market in heavily regulated spaces will be an uphill battle, the people said. That could complicate Facebook’s plans for its virtual reality metaverse.
“All of this scrutiny has an effect,” said Luther Lowe, senior vice president of public policy at Yelp and a longtime proponent of tougher antitrust policing of the biggest tech companies. “That’s a really important thing to keep an eye on right now because we’re on the verge of a new paradigm.”
Diem was effectively doomed from the start, the people familiar with the effort said. It was announced in 2019 with great fanfare under the name Libra. Foreign governments, members of Congress and regulators expressed fears about the project immediately, saying Facebook wasn’t prepared to address concerns about money laundering, consumer protection and other potential financial risks. Two years later, after a rebranding to Diem and an overhaul of the project’s design so that it would be pegged to the U.S. dollar to create more stability, it faced even greater resistance from regulators, who said the company acted arrogantly, according to one of the people.
The failure comes as crypto becomes more mainstream, despite a recent drop in prices. According to Pew Research, 16 percent of Americans have invested in or traded cryptocurrencies, and apps like Coinbase and Robinhood see billions of dollars in cryptocurrencies transact on their platforms every month. Some of Facebook’s Big Tech competitors are dipping their toes in the space too, with Google hiring a team of engineers to work on blockchain technology, which underpins cryptocurrency.
In recent months, Diem’s leaders have left the company, including project co-founder Kevin Weil and David Marcus.
Teams that worked on the project were notified of the shutdown just over a week ago, and a skeleton crew of roughly 50 people remains to help run a pilot on Facebook’s cryptowallet overseas, one of the people said.
The company will now sell Diem’s assets to the California bank Silvergate Capital, which serves bitcoin and blockchain firms, for about $200 million, according to two of the people. The Wall Street Journal and Bloomberg News previously reported the sale.
“Their reputational and trust issues kind of doomed it from the start,” said Brian Boland, a former Facebook vice president who resigned last year over concerns that the company’s social media service was accelerating societal polarization.
Facebook did not respond to numerous phone calls and emails.
Internal troubles also helped scuttle the project, including clashes of vision between its leader and chief backer, former Facebook vice president Marcus, and CEO Mark Zuckerberg, one of the people said. Marcus, a well-liked executive who was formerly president of PayPal, announced his resignation in November — just two months after he had traveled to Washington to pitch the recently rebranded project to journalists and regulators.
After publication, Marcus said, “Mark was always supportive of the project.” He declined to comment further for the story.
Since the 2016 American election, when Facebook’s platform was exploited by Russian operatives, and then in 2018, after the company enabled political consulting firm Cambridge Analytica to misuse millions of Facebook users’ personal data, the company has faced a barrage of scrutiny from regulators all over the world. Privacy advocates say the firm collects too much data, and antitrust experts are concerned it holds too much power. Facebook groups harbored anti-vaccine activists for years, and its algorithms enabled their ideas to spread in a way that has contributed to vaccine hesitancy during the global pandemic. And the company failed to broadly police election misinformation and violent comments ahead of the Jan. 6 Capitol attack.
Facebook has been trying to escape its baggage by pushing into emerging technologies, including virtual reality hardware, smart glasses and a smartwatch that could be used for health tracking. It changed its name to Meta last year — one week after a whistleblower had come forward with thousands of internal documents showing its role in promoting societal polarization and harming teens’ mental health.
Lowe likens the emergence of crypto and other blockchain-based technology to the moment when the current tech giants were just beginning to grow 20 years ago. Google was able to build up a business because Microsoft was under intense scrutiny from regulators, Lowe said.
“Imagine U.S. v. Microsoft is never brought; Microsoft would have eventually realized that search was the next paradigm and crushed Google like a bug,” Lowe said, referring to the government’s landmark antitrust lawsuit against the company.
Now, Facebook is in the hot seat, limiting its ability to charge ahead and claim new markets.
When Facebook announced the project in 2019 with a consortium of 27 partners including PayPal and Visa, it was called the Libra Association. The goal of the association was to establish a global network of instantaneous payments enabled through smartphones and available to people without access to formal banks.
The association, though organized by Facebook, was technically independent from it, and Facebook served as a board member and investor. Facebook would separately build its own cryptocurrency, called Calibra, that could participate in the Libra network. Backers at the time, including the venture capital firm Union Square Ventures, said Facebook’s scale alone would help bring cryptocurrency into the mainstream “financial infrastructure.”
Libra was Marcus’s baby. He told The Washington Post at the time that he conceived of it while he was on a beach vacation in the Dominican Republic in 2017, when he was the head of Facebook Messenger. He then pitched it to his boss, Zuckerberg, who signed off.
After Zuckerberg gave the green light, Marcus set up a stealthy division within Facebook and traveled to 20 countries to brief regulators about the idea. But on the first day Facebook announced its plans, the project was criticized by the French finance minister, Bruno Le Maire, who called on central bank governors around the world to scrutinize the project. Regulators came away from an initial meeting with Facebook stunned that the company wasn’t more prepared to address concerns about money laundering, consumer protection and other potential financial risks, The Post reported at the time. What followed was a cascade of criticism from lawmakers, followed by congressional hearings.
Marcus and his colleagues went back to the drawing board. Last year, the Libra Association rebranded itself Diem, using the Latin for “day” to signify a new day. Facebook rebranded its wallet Novi, Latin for “new.” Digital wallets are online programs that let users store electric forms of currency, be they a cryptocurrency or bank deposit. Diem also staffed up, hiring a director who was a former treasury undersecretary for terrorism and financial intelligence under Presidents George W. Bush and Barack Obama. It changed its headquarters from Switzerland to the United States. A spokesperson for the U.S. Treasury Department declined to comment.
Facebook also redesigned the effort around “stablecoins,” a suite of emerging products that use cryptocurrency’s underlying blockchain technology but are pegged to a major currency, such as the U.S. dollar. Diem and other stablecoins aim to establish a system for seamless financial transactions, by creating a token — or “coin” — that can be traded digitally anywhere in the world. Unlike cryptocurrencies such as bitcoin, the value of which is not tied to anything external, stablecoins are pegged to major currencies already in circulation, which is why proponents say they are more stable.
But those renewed efforts fell flat. Regulators continue to worry about how such a large player getting into crypto could undermine the stability of the financial system, and Facebook failed to make the case for why its product was necessary, The Post previously reported. By the time Facebook canceled Diem, the project was “nowhere near” regulatory approval, one of the people familiar with it said.
At the same time, Marcus and Zuckerberg continued to clash over a vision for the project. Zuckerberg hoped to fold the Novi wallet into the company’s existing payment products, known as Facebook Pay, which is likely to be rebranded to align with Meta, one of the people said. Facebook Pay, which does not run on a blockchain or use crypto, is available in much of the world and lets people send money and pay for goods and services on Facebook and its other apps. But Marcus wanted the project to stay more independent.
The determination to wind it down was made before Marcus’s departure, one of the people said. People who know Zuckerberg say that his interests lie in hardware, gaming and the metaverse rebranding — not in cryptocurrency. One person speculated that it could have been more of a headache to Zuckerberg than it was worth.
Silvergate’s relationship with Diem goes back to at least May 2021, when it struck a deal with the association to issue a U.S.-dollar-backed stablecoin that would be used on the Diem system. That tied the two companies closely together. The stablecoin hasn’t been launched, and Silvergate hasn’t given a timeline for when it would be.
Conor Patrick Shea, a spokesman for Silvergate, declined to comment on the deal or the company’s relationship with Diem and Facebook.
Proponents of Diem hope that Silvergate can give it new life and dissociate the effort from Facebook’s tarnished brand, even if it changes form significantly, said one of the people.
Even without all the scrutiny on Facebook itself, launching a bank-backed stablecoin in the current regulatory environment is a tall order, said Darrell Duffie, an economics professor at Stanford University who has researched stablecoins. Governments are highly skeptical of digital currencies, and the United States is still debating how to legislate them.
“It was reported that the Fed said that they didn’t feel all that comfortable, which apparently meant to Diem’s owners that it would be risky to go ahead with the plan,” Duffie said.
Either way, Diem’s retreat will have a broader impact on the conversation over stablecoins, said Nic Carter, founding partner of crypto-focused venture capital firm Castle Island Ventures. He said strong private-sector efforts like the one from Facebook are key to balancing the power of governments that are considering making their own state-backed stablecoins.
“I see this as the most pivotal battle in the crypto space over the next few years, stablecoins versus central bank-created digital currencies,” he said. “This is just another front in that war.”
Jeff Stein contributed to this report.
