Why Facebook’s Libra hangs in limbo—and what’s next in the digital currency race

The state of incompletion is not for want of funds. Despite scandals, Facebook continues to post record profits—$6.1 billion in the most recent quarter. Rather, the inchoate quality intentionally reflects the design philosophy of Mark Zuckerberg, the company’s founder and autarch. Zuckerberg likes to say that Facebook is only ever 1% finished. So the space appears under perpetual construction.

The stripped-down look feels particularly appropriate in Building No. 52. These are the offices that incubated Libra, Facebook’s audacious digital payments proposal. Here, the incompleteness creates the impression that the company isn’t certain whether to continue construction or just close up shop. And after the brutal reception that greeted Libra’s rollout over the summer and fall, you could hardly blame Facebook if it opted to not only shut but also raze the place. Nonetheless, the company remains committed to launching Libra—and so a team of engineers continues to toil here.

Facebook and the partners it has recruited aim to create a new kind of money, backed by a basket of international currencies—such as the U.S. dollar, the euro, and the Japanese yen—and based on blockchain technology. The currency backing would make Libra a “stablecoin,” a digital cur­rency that maintains a relatively stable value, unlike Bitcoin and other cryptocurrency forebears, and which can be used as a planet-wide medium of exchange. After coming up with the idea, Facebook corralled more than 20 other firms into the (technically independent) Libra Association. The pitch: They could own a stake in a supranational currency that could extend financial services to the world’s 1.7 ­billion “unbanked” people, knock down obstacles to e-commerce, and generally make it easier and cheaper for money to fly around the globe. Or they could miss out.

Libra’s critics see far more threat than opportunity. The project is unique for having touched off an international firestorm before coming anywhere close to launching. At this point, Libra “is probably the best-known startup without a product that ever existed,” says Patrick Ellis, general counsel of payment processor PayU and a Libra Association board member.

Trouble signs appeared early. Last spring, well before the project’s official debut, David Marcus, the former PayPal president who now heads Facebook’s Libra efforts, pitched his vision to Treasury Secretary ­Steven Mnuchin. As Marcus detailed the early designs, Mnuchin delivered his verdict. “I hate everything about this,” he said, according to a person familiar with the conversation.

When the Libra project was announced in June, the pile-on continued publicly. Federal Reserve Chair Jerome Powell said he had “serious concerns regarding privacy, money laundering, consumer protection, and financial stability.” President Trump tweeted that Libra “will have little standing or dependability.” India’s top economic official dismissed its viability. Bruno Le Maire, France’s economic minister, called Libra “a threat to national sovereignty”—and spearheaded its prohibition in the European Union. By mid-October, seven of the Libra Association’s biggest prospective participants—including payment titans Visa, Mastercard, PayPal, and Stripe—had backed out amid fears of hostile regulatory scrutiny. 

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Regulators’ concerns were hardly unfounded, and Facebook aggravated matters by being underprepared to address many of them. One prime sticking point: How would Libra comply with know-your-customer and anti–money laundering laws to prevent misuse? Facebook had already demonstrated a reluctance and inability to police its media platforms—so how could it be trusted to police a new form of money? While security experts tell Fortune it should be possible to track the flow of assets through Libra, given the network’s design, skeptics aren’t convinced. “There are people who go to a western, and they root for the bad guy,” says Rep. Brad Sherman (D-Calif.), who heads a House subcommittee on capital markets. “Libra may very well succeed—in facilitating terrorism, drug dealers, human traffickers, and especially tax evasion.” 

Critics also saw Libra as a threat to global financial stability. Deployed to Facebook’s 2.8 billion users, a Libra coin might attain a scale that diminished the standing of the U.S. dollar and other fiat currencies and the sovereignty of the world’s central banks. ­Especially galling to many was that the association would empower a council of ­private-company representatives to tweak the composition of the currency basket by which Libra would be backed. “I back off at the concept of a global consortium potentially having so much power,” says David Andolfatto, an economist at the Federal Reserve Bank of St. Louis. “Unless you elect Jesus to run it, you’re putting a lot of faith in mankind.”

A censorious Congress raked Zuckerberg himself over the coals during a House financial services committee meeting on Oct. 23. “I don’t actually know if Libra’s gonna work,” he admitted. 

And yet, for all that, Facebook and its allies are plowing ahead. The Libra Association still counts 21 corporations, startups, venture capital firms, and NGOs as members. Uber, Lyft, Spotify, telecom multinational Vodafone, and cryptocurrency broker Coinbase are among those still on board. And the association says it still hopes to launch Libra in 2020.

In an interview just two days after Zuckerberg’s House testimony, Marcus—who heads Calibra, Facebook’s Libra-focused digital wallet subsidiary—exuded sanguinity. “I’m a ‘glass half-full’ kind of guy,” he says, draping an arm over the back of his chair in one of several Calibra conference rooms named after Bill Murray flicks. (This is the What About Bob? room.) “Everyone is now talking about digital currencies around the world—everyone. And if it hadn’t come from us, that timeline—to make progress in having the right framework for digital currencies—would have taken much longer.” 

Indeed, the race for a global e-currency has only grown more heated since Facebook’s face-plant. Banks, other tech companies, and national governments—most notably, China’s—are readying digital currency pilots of their own; Libra’s stumbles might ease the path for those that come later, or at least force regulators to clarify what they’ll allow. Libra itself, meanwhile, promises to course-correct based on the (often scorching) feedback it has received. 

How will Libra, or any new currency, satisfy global regulators? What will it look like in its final form? Will Libra be the first globally viable, price-stable e‑cash? Or will someone else beat the association to it? To explore those questions and others, Fortune canvassed the financial and digital worlds for this account. 

 1. Why Facebook needs Libra  

In the technology sector, there’s a concept called “platform risk,” the danger that another company, or a newer, trendier technological innovation, could kneecap your business by wooing or coercing your users away.

If you want to understand what Zuckerberg might see in Libra, consider Facebook’s $2 billion 2014 acquisition of Oculus, says Hunter Horsley, a former Facebook product manager who runs Bitwise, a cryptocurrency investing startup. At the time, neither Oculus nor VR was anywhere near mainstream (they still aren’t). But the possibility that they could take off posed an existential threat to Facebook; if the world started chatting and “liking” via VR, Facebook’s dominance would evaporate. Why not own the leader of a platform that could become the Next Big Thing? “Companies historically always die by not adapting to new paradigms quickly enough,” Horsley says. 

For Facebook’s executive team, cryptocurrencies and blockchains­—the database innovation upon which those currencies are based­—became unignorable in 2017, when the prices of Bitcoin and other currencies began an improbable, months-long climb. The company’s leaders realized that cryptocurrency, or something like it, could help it break into financial services, an area in which it has struggled to gain traction. Everyone at Facebook had seen how China’s digital upstarts—Tencent’s ­WeChat Pay and Alibaba spinout Alipay—had bypassed the traditional banking system and become behemoths, weaving themselves tightly into people’s daily lives. (In 2018, Chinese mobile payments hit $38 trillion in transactions.) Maybe by tapping into the crypto-zeitgeist, Facebook could achieve something similar. 

Through 2017, Morgan Beller, then a junior corporate-development employee at Facebook, researched and met with blockchain startups. She penned a memo that helped persuade higher-ups that Facebook had a unique opportunity to take a leading position in the industry­—and that if they slept on it, they could be disrupted. Beller ultimately won over Marcus, one of Zuckerberg’s top deputies and one of Bitcoin’s earliest acolytes in Silicon Valley. 

Zuckerberg and Marcus sat down to chat in depth about cryptocurrency around the year-end holidays in 2017. Marcus says they shared frustrations about the incumbent financial system: International payments are an expensive hassle. Settlements can take days to clear. Different systems don’t interoperate. And the poorer you are, the more you pay. 

A blockchain-inspired approach might allow Facebook to cut out pesky middlemen, avoiding the fees associated with payment card–issuing banks and money transmitters by routing around them. Facebook could succeed where PayPal, Marcus’s old employer, had capitulated: realizing the libertarian dream of a pure, borderless Internet money, rather than a market-by-market approach in which costs and delays persisted. 

By May 2018, Marcus was leading a blockchain team full-time. Zuckerberg, in turn, committed to studying privacy, decentralized systems, and cryptography—foundational principles of blockchain tech and cryptocurrencies—as his 2018 New Year’s resolution. A little over a year later, in March 2019, Zuckerberg published a privacy-themed manifesto in which he described his decision to adopt strong encryption across many of Facebook’s services, including WhatsApp, Messenger, and Instagram. 

Public reaction to the manifesto focused on the implications for consumers. But blockchain experts saw something else: One of tech’s most powerful leaders was gravitating toward their platform. Jeremy Allaire, CEO of Circle, a crypto­currency startup, says that Zuckerberg was recognizing that blockchain tech “is not just this digital currency thing. It’s this building-block infrastructure for how information is exchanged.” It was, in other words, a platform where Facebook couldn’t afford not to play.

2. The revenue plan  

Libra is a revenue-generating opportunity for Facebook, though not in the ways observers might expect.

Given that virtually all of its revenue comes from advertising, it’s tempting to see Libra as a conduit through which Facebook could sell ads against people’s financial data. Joseph Lubin, a cofounder of the cryptocurrency Ethereum and a Facebook critic, says, “It’d be a big surprise if they didn’t find a way to link [Libra] information to everything they already know” about their users. But Facebook has been adamant that the systems underpinning its digital wallet, Calibra, will be firewalled off from the company’s broader data-hoovering operation. A ­Libra user’s purchase history, in other words, would not feed Facebook’s marketing engine, at least by default. (If you grant permission, however, your data is as good as theirs.)

Facebook also doesn’t envision making money from fees. In a digital-currency context, the costs exacted by payment providers will effectively drop to zero, Marcus says—like the price of email or texting.  

So how does Facebook plan to convert Libra into moolah? For starters, members of the Libra Association plan to collect interest on its reserves, in the form of a dividend. If the reserve pot grew big enough, that could spin off big bucks over time. 

Another way Facebook could profit would be by making its marketplaces even more valuable to its advertisers. In theory, in a Libra world, paying for things through Facebook’s apps will become seamless. That dress you liked on Instagram? Click “buy with Libra,” and avoid the dreaded “enter your credit card information” page. Fewer abandoned transactions means boosted “conversion” rates, or the frequency with which ads directly generate sales, says Avivah Litan, a Gartner analyst. And that, in turn, should persuade marketers to spend more bidding on ads. 

By offering easy money transmission through Facebook apps, Libra could also entwine itself and Facebook in the lives of people all over the world. Want to transact abroad without worrying about steep fees? Use Libra. Want to accept instant payments through any (participating) digital wallet? Libra. Want to stream Spotify tunes or hail Uber and Lyft rides for a discount? Again, Libra.

The biggest potential impact lies in up-and-coming economies. Matthew Davie, a Libra board member and chief strategy officer for Kiva, a nonprofit microloan provider in emerging markets, notes, “This isn’t about trying to make your Blue Bottle coffee a little cheaper.” In Davie’s vision, anyone with access to a mobile phone—that is, increasingly, everyone—can join the global financial system. And this would widen another business opportunity: Facebook’s Calibra unit could one day offer loans, a major profit engine in financial services.

3. Lessons in Hindsight  

There was no avoiding it: Facebook had to tell the public about Libra before figuring everything out. “The main criticism that we get around the rollout has been, ‘Shouldn’t you have kept this under wraps for much longer until you had more answers to all of the questions?’ ” Marcus says.

The way Marcus explains it, his hand was forced. His team had started meeting with potential partners—payment processors, tech firms, banks, and regulators—and news of the project began to leak “profusely” in the press. Since Facebook was already seeking input, he figured it would be wise to make the news public—and perhaps regain control of the narrative. 

Instead, the narrative spun out of control; privacy scandals, data breaches, and disinformation at Facebook had turned public sentiment against it. Marcus says he has just one regret. “If I had to do it all over again, I would probably just focus on what this thing really is, which is a new payment system,” he says, rather than framing it as a new currency. “That created more emotions than were actually warranted.”

Reframing Libra as a payment system might help the project recover—especially given that the departure of payment processors from the Libra Association was what brought the project to its nadir. PayPal bailed out on Oct. 4, in what was, in part, a reaction to regulatory pressure. On Oct. 8, two senators sent letters to some of the biggest companies involved in Libra—Visa, Mastercard, and Stripe—asking them to reconsider their participation until everyone got clearer answers from Facebook. Those companies had rooms booked at the hotel in Geneva where the founding association meeting was to take place on Oct. 14, according to someone familiar with the bookings. But they dropped out of the group on Oct. 11, also citing the ugly regulatory climate. 

“Given the crazy amount of pressure they were under, it was the right trade-off for their shareholders and stakeholders,” Marcus says. If Libra were to get a regulatory thumbs-up, however, nothing is stopping those processors, or other dropouts like eBay, travel-site owner Booking Holdings, and Argentine fintech Mercado Libre, from adding the payment option across their networks or from rejoining the association. The quitters have “all the option value, none of the heat,” Marcus says. As PayPal CEO Dan Schulman recently told Fortune, “Maybe later, there are ways we can work together.” 

4. Before Libra, Calibra  

Plenty of hurdles remain for Libra (more on those in a moment). But while Facebook and its partners work out the kinks in the Libra currency, Facebook can still build digital-­payment businesses around its Calibra unit. “It’s foolish to think Facebook will not proceed with this,” says Meltem Demirors, chief investment officer for CoinShares, a digital asset management firm. “The opportunity is too big for them not to do anything.” 

Bitwise’s Horsley thinks Calibra could start by integrating with traditional payment providers like PayPal, Visa, or Stripe, enabling the company to fly a “mission accomplished” flag. And the majority of cryptocurrency experts and ­entrepreneurs Fortune interviewed said they expect Calibra to add integrations with existing digital stablecoins. 

One partnership may be close to launching: Facebook has had quiet talks with Coinbase and Circle about joining Centre, an industry consortium that mints USD Coin, a U.S. dollar-pegged digital currency, Fortune has learned. Calibra could also work with stablecoins issued by startups such as Gemini, Paxos, and TrustToken. 

Right now, stablecoins are used almost exclusively in cryptocurrency trading, where investors deploy them as a cash equivalent. But blockchain advocates say their stability makes them promising candidates for future use in digital payments. And because they’re pegged to just one currency, says Bill Barhydt, CEO of cryptocurrency wallet startup Abra, they offer “a very clear path from a compliance perspective.” He adds that Facebook “probably should have done that out of the gate … it would have basically eliminated a lot of those sovereignty ­questions.”

5. What’s next in the currency race?  

To get a green light to launch as a currency, Libra needs to satisfy regulators that it isn’t a coup by the private sector to usurp authority over money—and that it will be stable enough to avoid precipitating a worldwide financial crisis. One way the Libra Association aims to prove itself is by promising a “fully backed” reserve. Every Libra coin in circulation would be backed by low-risk assets of equal value, made up of various currencies, as well as short-term government Treasury bills. (Members of the Libra Association would put up the initial ­assets, at a minimum buy-in of $10 million.)

A fully backed reserve would theoretically make Libra less vulnerable to a panic. Marcus notes that much of the “money” people use today—checks, credit cards, loyalty points—is backed by far fewer real reserves. “There’s more money creation in a Baskin-Robbins gift card than in Libra,” he says. 

Regulators outside the U.S. will soon weigh in on Libra’s merits. The Libra Association says it will apply soon for a license as a payment system with FINMA, a financial regulator in Switzerland. Crucially, in April, a task force assembled by the Financial Stability Board, an international body in Basel, Switzerland, will offer a preliminary version of a paper on the risk to financial stability posed by “global stablecoins” like Libra. The Treasury Department and the EU have similar reviews underway.

A thumbs-down from any of these bodies might be fatal. But if Libra gets approvals, expect smaller rollouts in specific countries rather than a grand, world-conquering unveiling. The association will likely look to friendly locales for pilot tests, with Switzerland, Singapore, and emerging economies in Southeast Asia and Africa as candidates. 

In the U.S., Congress will get a say—and there, some critics, skeptical of Big Tech in general, will likely stay implacable. Asked whether the Libra partners could do anything to assuage his concerns, Rep. Sherman erupts into uproarious laughter, then retorts: “What could Beelzebub do? Put on a new suit of clothes and get into heaven?” But others are more open to experimentation. Rep. Patrick McHenry (R-N.C.), Sherman’s colleague on the House financial services committee, describes the sovereignty fears of his peers as “hyperventilation.” He believes Libra is “likely to launch.” And he adds: “We should not be directly legislating a business into or out of existence.”

While it waits, the association is searching for a managing director and is aiming to bring its membership ranks up to 100 organizations. Marcus hopes for a 2020 rollout, but acknowledges, “The ball is not really in our court.”

If Libra remains stymied, it’s likely someone else will quickly step up in its place. PayPal, a Libra deserter, is eyeing digital currency partnerships, according to someone familiar with its plans. Financial services startups like Square, Robin­hood, and SoFi have thrown their weight behind more decentralized crypto­currencies, like Bitcoin. Banks such as JPMorgan Chase and Wells Fargo are testing versions of dollar-pegged digital currencies. And many observers believe it’s only a matter of time before Google, Amazon, Microsoft, and other tech giants advance digital currency proposals of their own, though they have been mostly quiet about their interests to date. 

While the private sector may be waiting to see how Libra shakes out, central bankers have been shocked awake. Plans by the People’s Bank of China to issue a digital renminbi were imminent at press time. The Bank of France plans to run a blockchain-based digital currency pilot in the first quarter of 2020. Task forces assembled by the European Central Bank, Canada’s central bank, and others are accelerating their research and development timelines. And over the summer, Mark Carney, the Bank of England’s outgoing governor, called for a “synthetic hegemonic currency” backed by a basket of international currencies—like Libra, but run by central banks.

One thing is certain: All the interested parties, private and public, have had a fire lit under them. “What Libra indicates is how quickly things are moving now,” says Gabriel Söderberg, a senior economist at Sweden’s Riksbank, which has been exploring the feasibility of an e-Krona since 2017. “It really shows central banks that time isn’t waiting for anyone.” And time, as any business leader knows, is money. 

Plus: China on a Blockchain

When Mark Zuckerberg appeared in October to defend Libra before a House committee, he warned, “The rest of the world isn’t waiting.” Indeed, at press time, the U.S.’s leading economic rival was poised to become the first major country to implement a national electronic currency.

The People’s Bank of China (PBOC), China’s central bank, plans to put a digitized version of the renminbi—dubbed the Digital Currency Electronic Payment (DCEP)—into people’s hands before the end of 2019, according to Caijing, a Chinese financial magazine. The central bank is reportedly working with state-owned banks and telecom companies on a smallscale pilot that will start in the cities of Shenzhen and Suzhou. (The PBOC did not reply to Fortune’s request for comment.)

The digital yuan will be partly based on blockchain technology, which underpins cryptocurrencies. The virtual banknotes are expected to be compatible with China’s wildly popular WeChat Pay and Alipay payment apps. People will be able to use the DCEP to pay for goods and services related to transportation, education, medical treatment, and retail, allowing the government to see which scenarios gain the most traction, according to Caijing.

The PBOC has been actively investigating the digital currency idea since 2014, but it kicked the effort into high gear after the Libra project was announced in June. Why the enthusiasm? Digital currency could help China keep closer tabs on its money supply, clamp down on capital outflows, and expand its influence in emerging markets where demand for digital payments is high. Ultimately, it’s about supervision and control.

In his House testimony, Zuckerberg intimated that Libra could be the democratic counterbalance to China’s authoritarian aims. But skeptics have pushed back against that as a rationale for rallying behind Libra. “Private power can be just as scary as excessive government power,” says Saule Omarova, a Cornell Law School professor who specializes in
financial regulation.

A version of this article appears in the January 2020 issue of Fortune with the headline “Facebook and Libra: The Race Has Just Begun.”

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