The Rise and Fall of the Diem Cryptocurrency Dream

Authors: Hannah Murphy, Kiran Stacey

Compiled by: Hu Tao, Lin Qi

Meta (formerly Facebook) officially launched its cryptocurrency project Diem (formerly Libra) in 2019, but after several setbacks, it ultimately chose to sell in January this year, marking the end of its cryptocurrency dream.

Recently, the Financial Times spoke with about 30 people connected to the joint venture, including executives, developers, lobbyists, and the regulators and politicians who ultimately killed it, delving deeply into the birth, development, and demise of the Diem project. This reflects the complex game between Meta and U.S. regulators, as well as the various difficulties faced by cryptocurrency innovation.

"Diem spent years trying to reverse-engineer their project to fix all its flaws. But they could never fix the link to Facebook. That was their original sin."

On June 24, 2021, Jay Powell and Janet Yellen sat down to enjoy their weekly breakfast in the austere environment of the U.S. Treasury building. There was only one main question on the agenda: should they greenlight the global cryptocurrency designed by Facebook?

Both the Federal Reserve Chair and the Treasury Secretary were veterans of Washington, with Powell succeeding Yellen as Fed Chair. But neither had to make such an unusual decision. A tech company alliance led by Facebook proposed launching a product that hoped to profoundly change the world. The executives did not insist on the social media giant's former slogan of "move fast and break things," but instead came to Washington seeking permission first.

Powell articulated his position with his usual precision. As Fed Chair, he told Yellen he was willing to approve Facebook and its partners to trial Diem, a digital currency then referred to as dollar-backed.

He knew the Treasury had concerns, particularly about the potential for this currency to become a tool for money laundering or to become so popular that it threatened global monetary stability. But overall, his staff believed that Diem's design was careful enough to avoid such outcomes and could bring additional benefits for setting industry standards.

After a series of controversies surrounding data privacy, misinformation, and alleged censorship, the reputation of the social media company was damaged in Washington.

During the previous year's presidential campaign, Biden said he had "never been a fan of Facebook founder Mark Zuckerberg," calling him "a real problem." Prominent Democrats and Republicans had publicly opposed Diem. As a cautious operator, Powell hoped to gain Yellen's support, who had a close relationship with the president and was popular among progressives.

After weeks of consideration, Yellen made up her mind: she was out. "Yellen told him it was his decision, but if he did so, she would not protect him from political fallout." A person briefed on the conversation said, "That was the end of Facebook's digital currency."

Diem's management would spend the next six months trying to save the joint venture, which initially tried to attract regulatory authorities and then attempted to intimidate them.

The last foolish move was exploring a partnership with Zuckerberg's former arch-rival. However, in January this year, Diem confirmed it was shutting down completely. The remnants of Zuckerberg's digital currency dream would be sold to a little-known California bank for $182 million, marking one of the most spectacular yet obscure failures of his career.

In recent months, the Financial Times has spoken with about 30 people connected to the joint venture, including executives, developers, lobbyists, and the regulators and politicians who ultimately killed it. (Many of them spoke on the condition of anonymity because Facebook required employees and associates to sign non-disclosure agreements.)

Silicon Valley executives believed that as long as they could overcome technical and regulatory barriers, they could enter the financial sector and make billions. What they did not realize was that it was Facebook's proposal that doomed it to failure.

As one government official involved in the process said: "Diem spent years trying to reverse-engineer their project to fix all its flaws. But they could never fix the link to Facebook. That was their original sin."

Meta, renamed from Facebook, is now one of the few tech companies facing stricter scrutiny and even threats of breakup from U.S. politicians and regulators, who have begun to see Meta as a malign force in American business and democracy. The divide between Silicon Valley and Capitol Hill was most starkly exposed in Diem's painful downfall.

David Marcus was enjoying the Caribbean sun. It was the winter of 2017, and the dapper, French-born executive was vacationing in the Dominican Republic. Now 48, Marcus was head of Facebook Messenger and a close friend of Zuckerberg. His silver hair and sharp suit set him apart from his younger, scruffier colleagues. Colleagues jokingly referred to him as "Silicon Valley's George Clooney," and he was seen as a power player within the company.

Marcus lay on the beach, lost in thought. What if he could find a way to create a global digital currency and integrate it into Facebook? Marcus was no stranger to startups and digital payments. He sold his first company at 27.

In 2011, a mobile payments startup he founded was acquired by PayPal for $240 million. Less than nine months later, he became PayPal's president. In 2014, Zuckerberg hired him to run Messenger, where he would help grow it to over 1.3 billion users. But three years had passed, and he was restless.

Meanwhile, blockchain technology and cryptocurrencies had become useful tools for dark web criminals and a lofty obsession for programmers and utopian tech enthusiasts. But they had yet to be adopted by any major company. Marcus believed that for Facebook's more than 2 billion user base, crypto could provide a convenient and cheap way to transfer money around the world.

For the social media company itself, it could provide a treasure trove of data on where people were spending their money. Marcus interrupted his vacation abroad to text Zuckerberg, outlining his musings.

The CEO was intrigued and expressed a willingness to explore the idea further. Marcus began methodically designing a tool beloved by Silicon Valley entrepreneurs: a memo outlining the new project's goals, defining success, and quantifying how to achieve those goals.

Morgan Beller was a whirlwind at 24. Before joining Facebook's corporate development team in 2017, she was a partner at venture capital firm a16z, articulate and full of energy.

She was also a fierce blockchain advocate, spending the latter half of that year trying to pitch the technology to any Facebook executive: why shouldn't the company embrace decentralized, user-facing open protocols? Could it get into Bitcoin mining? Should Facebook be able to issue its own digital token?

"This is a very large company, and it's very difficult to take on very large risks," she told the Financial Times, "To give Facebook credit, the leadership was very willing and very open. I didn't let anyone say no, at least in meetings and brainstorming sessions."

In early 2018, Marcus and Beller teamed up. Initially, they worked in a small, empty room at Facebook's headquarters in Menlo Park, decorated with whiteboards.

Soon, they moved to a larger, more secluded building on the outskirts of the company headquarters. Only employees with specific passes—crypto experts, engineers, and economists they brought in—could enter the facility. Their top-secret project was codenamed Libra. Beller said the team "was concerned about leaks" and that "it felt like a covert SWAT operation."

This would be the first of several iterations, each designed to meet the challenges and requirements of launching a digital currency from within Facebook. Initially, the dream for Libra was to be a currency built on open-source technology that belonged to no one, like Bitcoin. This would allow individuals to store, spend, and transfer money across borders with near-zero transaction fees.

Unlike Bitcoin, it would be backed by real assets: low-risk reserves including bank deposits in various currencies and U.S. Treasury bonds. This cryptocurrency was to be called a stablecoin. Facebook declined to comment. Marcus also declined to be interviewed, writing in a statement: "Libra aims to establish a currency protocol on the internet that allows people and businesses currently left behind by the existing system to access reliable digital currency and cheap payments."

Before the project could be fully decentralized, leadership was needed to develop the technology. Marcus and Beller realized that Facebook itself should not be seen as guiding this work.

So they created a nonprofit association, also called Libra, of which Facebook would be one member. To avoid appearing U.S.-centric, it was technically headquartered in Switzerland, a more neutral financial center and an emerging crypto hub at the time. (Marcus and Beller continued to work primarily in California.)

It turned out this setup was convincing. By mid-2019, Marcus and Beller's pitch had attracted about 28 companies and nonprofits to join, including founding members like Uber, Vodafone, Spotify, Visa, and Mastercard.

Everyone would have equal voting rights and pay $10 million into the reserve. Each would guide the project's development and ultimately integrate Libra into their services, bringing digital currency to global consumers.

In addition to becoming equal founding members, Facebook would build its own digital wallet for the token. Marcus would sit on the board of Libra but also run Facebook's new subsidiary, Calibra, for the digital wallet.

The potential billions in business opportunities for Facebook were clear: user transaction data, more engagement, more e-commerce, a share of transaction fees. "This has always been their advantage," said one regulatory official. "This would create huge opportunities and a lot of money for them. But if Facebook becomes the reason it is very successful, they will also become the reason it fails."

The old San Francisco Mint is a neoclassical granite building nestled between high-rise office buildings and upscale hotels near the city's theater district. Built in the 1860s, the mint was one of the few structures to survive the 1906 earthquake and fire. It was a permanent monument that once held a third of the nation's gold reserves. Now it serves as a venue for corporate events.

It was here that Marcus chose to host the press conference for his new project in mid-June 2019. During this time, Facebook had transformed from relatively unscathed to the pariah of Silicon Valley due to a series of scandals, including the Cambridge Analytica revelations, which raised concerns about user data privacy.

In light of this, Marcus and Beller believed it was wiser to seek permission and publicly share their plans. A staff member involved in the investigation said: "We learned some lessons from other jurisdictions and said we would do this because we thought regulators would want a company like Facebook to do so."

After touring the vault, reporters were called into a cavernous, high-ceilinged room where Marcus delivered his typical smooth slide presentation, fully disclosing the plan. He explained that Libra in astrology symbolizes the scales of justice. Libre is free in French. "Freedom, justice, money, that's everything," he said.

Holding the press conference at the mint brought terrible political repercussions. U.S. politicians were already concerned that Facebook's cryptocurrency would erode the dollar's power. Launching it in a building that once made that money would only heighten their fears.

A person who had discussed these plans with Zuckerberg in Facebook's early days said: "This goes back to Zuckerberg's inability to understand how the world views Facebook: 'From the people who steal your data, they can now get into your wallet.'"

In a bruising week in July 2019, the extent of the political backlash became clear. First came the terrible Potus tweet. On July 11, U.S. President Trump wrote: "I am not a fan of Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air." Four days later, Treasury Secretary Steven Mnuchin reiterated this message at a press conference, warning: "(Libra) and other cryptocurrencies have a lot of work to do before we feel comfortable."

The next day, Marcus spoke for the first time at a congressional hearing. His testimony before the Senate Banking Committee was a reset opportunity to show lawmakers he was listening to their concerns and that Facebook was willing to make changes to accommodate them.

Marcus had just sat down in his seat—let alone spoken—when the attacks began. Hoarse-voiced Ohio Democratic Senator Sherrod Brown set the tone. "(Facebook) is like a toddler with a box of matches," he said.

"Facebook has burned down the house time and again, claiming each arson is a learning experience." Republican senators were equally hostile. "I don't trust you," Republican Senator Martha McSally said, "You're not cleaning up your house; you're entering a new business model."

Amid rounds of criticism, Marcus slowly blinked behind his frameless glasses. If he thought he was watching his passionate project crumble before his eyes, he showed almost no signs of it. But many observers believed that was exactly what was happening.

David Gerard, author of "Libra Shrugged: How Facebook Tried to Take Over Money," said: "These attacks were absolutely bipartisan because both sides agreed: you can't mess with money. This is what happens when the dreams of the Bitcoin bros meet reality."

By late summer 2019, supporters of Libra felt that something needed to change. When the Wall Street Journal reported that Visa, Mastercard, and other companies were beginning to backtrack, Marcus felt it necessary to counter the narrative of discord among members. On October 2, he tweeted: "I don't know if specific organizations have plans not to act; the commitment to the mission is more important than anything else."

The next day, executives from member companies of the consortium met at the National Press Club in Washington, D.C. According to several sources, some members had begun to feel spooked by the political backlash. They believed Facebook underestimated the scrutiny Libra would face and overhyped member participation. Meanwhile, Facebook wanted members to be more vocal in their support.

This meeting was particularly urgent because Libra supporters would sign a so-called member statement to show they continued to support Libra. In the tense atmosphere, some Libra staff did not notice that a representative from PayPal—where Marcus had served as president—was absent. The next day, PayPal announced its withdrawal, arguing that Facebook had not done enough to address regulators' concerns. This news caught Libra's top management off guard.

Things would get worse. Days later, Brown and his Democratic Senate colleague Brian Schatz wrote to the remaining payment members of Libra (Visa, Mastercard, and Stripe) warning them that if they continued to participate in the project, they might face stricter scrutiny from Congress. A Libra insider said: "This is the closest thing to a mob threat you've ever read."

In just a few days, Libra lost 25% of its members, including Visa, Mastercard, Stripe, and eBay. Back in Silicon Valley, Marcus was hurt. He realized that to give his dream a chance, he would have to make significant concessions.

In the following 18 months, Marcus did just that. First, he moved himself out of the spotlight. His charm offensive in Washington only further tied Libra to Facebook. Even Zuckerberg acknowledged this issue.

In 2019, he told U.S. lawmakers: "I know we are not the ideal messenger right now, and I believe people would prefer anyone other than Facebook to propose this idea. But we care about this for a reason. Facebook's mission is to empower people."

To emphasize its independence, Libra turned to former Treasury official Stuart Levey, who had led U.S. government efforts to combat terrorist financing. In May 2020, Levey was appointed as the new CEO of the Swiss nonprofit. At 58, he was appointed by George W. Bush but stayed on under Obama, making him one of the few political appointees to serve both Democratic and Republican presidents.

Peers described Levey as both a statesman and lively, having led HSBC's legal team during his years there, making him well-versed in financial regulation. Libra also appointed former head of the criminal division of the U.S. Attorney's Office and Justice Department legal advisor Steve Bunnell as chief counsel.

These two hires were a coup. Ari Redbord, a senior advisor to the Deputy Secretary of the Treasury and head of terrorism and financial intelligence, said: "These people are really impressive, some are outstanding. They basically formed a team that regulators would want to hear from when considering how to build a compliant project."

Additionally, the company underwent a rebranding. Libra was renamed Diem, and Facebook's digital wallet Calibra was renamed Novi. Marcus stepped back to a secondary role in the Diem Association, focusing on building Novi. Beller left Facebook to join a venture capital firm.

Under Levey's guidance, Diem shrank. To appease European and U.S. regulators, the project's scope was narrowed to creating a digital currency backed one-to-one by the dollar, rather than a basket of currencies and other low-risk assets, which some feared could challenge the dollar's dominance.

A team of crypto engineers spanning Europe and Silicon Valley worked feverishly to build a system to monitor transactions for signs of money laundering or sanctions violations. They also devised ways to prohibit anonymous transactions and reviewed institutions that could support Diem's currency services.

By now, the entire world was under the control of the pandemic. Casual chats turned into Zoom calls. Diem's future was being discussed over video calls, with regulators bombarding the project's leadership with detailed inquiries.

Some congressional staff found there were too many officials, often unaware of which agencies were present. Even by government standards, this could be a tedious job. Redbord recalled that extended calls "went line by line through the very technical compliance plan they had built to respond to the Treasury's requests."

By spring 2021, all of this seemed to be worth it. By then, Levey and other senior team members, including Marcus, felt confident enough to test the issuance of a small amount of Diem currency and trial a version of the Novi digital wallet. According to several insiders at the time, this test was only open to a small number of users, but the team was excited about the prospect.

Reaching this significant milestone required approval from the Swiss Financial Market Supervisory Authority for Diem's license. The application was on the regulator's desk, and Finma convened a team of over 20 regulators from around the world to guide it through the process. It just needed the final green light from the U.S. Treasury.

It was at this point that the Treasury issued its first devastating "no." Officials told Finma and Diem that they requested a temporary delay in the launch. They said the Biden administration was still adjusting and needed time to review the project. Levey was furious, convinced that these were not substantive concerns. Libra policy chief Dante Disparte resigned in frustration.

Levey was not done yet; he felt he could still address any lingering concerns from the Treasury. So Diem transformed again. Levey moved the Switzerland-based project to the U.S. and began working with the U.S.-regulated bank Silvergate to issue Diem currency, a complete overhaul aimed at further appeasing regulators.

Now, if the U.S. government wanted to intervene, it could do so thanks to its regulatory relationship with Silvergate. For Levey, and even some within the Fed, this seemed to be the last missing piece. Diem executives notified the Fed and Treasury that another launch was scheduled for June 29, 2021.

But that was not to be. After Yellen intervened, the Fed communicated to Silvergate and Diem. Fed General Counsel Mark Van Der Weide told Levey in a heated phone call that the government was unwilling to indulge any project before establishing a "comprehensive regulatory framework" for stablecoins. He also expressed concern about a token that could potentially "scale" like Diem.

According to Diem staff, Van Der Weide's demeanor on the call seemed off. He was stiff, almost robotic. When they compared notes with colleagues at Silvergate, they found that a call they received from Van Der Weide played out in a suspiciously similar way.

They concluded that the official was clearly reading from a script, and both groups felt slighted. The Fed and Treasury declined to comment. A person involved said: "This was an action to block at the last minute, the night before the planned launch date." The Diem team was left in the dark, "screwed."

Bruised and disheartened, Levey retaliated in a way that only has appeal in Washington: a strongly worded letter. This letter, dated July 6, 2021, was addressed to Yellen and Powell and had not been reported before; the Financial Times saw the letter.

In the report, Levey chastised regulators for blocking the project, outlining all the measures it had taken to appease them. He wrote that a previous request to meet with Yellen and Deputy Treasury Secretary Wally Adeyemo was "denied without any explanation." Now, he requested to meet with both to have a chance to voice his opinions.

Levey continued: "While Diem continues to welcome participation and scrutiny, we should also receive fair and equal treatment." "Blocking a limited, legally permissible pilot project while other stable projects grow unchecked is neither fair nor equal." He added that the current state of affairs would mark the "death knell" for the project.

The requested meetings never materialized. In a closed-door setting, some involved in the project argued that this incident was not just unfair. They believed that neutral regulators had been dragging their feet, then were influenced by political and big bank interests.

"This is a bit like a banana republic," said one Facebook employee involved. "The Federal Reserve should be an independent central bank of the U.S. government, but it is appointed to set terms during the president's term, letting politics interfere with money. "Unfortunately, politics played a role."

Even some regulators expressed sympathy for Diem's plight. A senior official said: "For years, we treated Facebook like pulling wings off a fly while doing nothing to other companies." He cited dozens of other stable projects that made up this $127 billion market. "Not allowing Diem to proceed is worse than crime; it's a mistake."

Within the U.S. government, Levey's letter did not receive a warm response. The link to Facebook remained the primary concern. The Treasury would not bend to Diem's timeline, whether the demand came from the genuinely visionary Marcus or the seasoned pragmatist Levey.

Cameron Winkelvoss and his twin brother Tyler Winkelvoss were Olympic rowers who met Zuckerberg at Harvard in the early 2000s. The 2010 film "The Social Network" dramatized their disputes over the Facebook idea and the related litigation process.

In 2008, the lawsuit was settled for $65 million. Meanwhile, the Winkelvoss brothers founded the cryptocurrency exchange Gemini and became Bitcoin billionaires.

After the humiliation of being rejected by the Fed in June last year (and withdrawing from Silvergate), Diem executives had one last contingency: find another state-regulated stablecoin issuer. New York has its own cryptocurrency regulatory framework overseen by the New York Department of Financial Services.

Regarding Gemini, Diem had a long history with this crypto company. When Marcus and Beller initially approached potential partners, they had discussions with Gemini about how to participate in the project.

For example, launching Diem tokens on its exchange. But now, according to multiple insiders, Diem's leadership was exploring a partnership with Gemini to issue actual currency. The then-DFS team in New York, especially its head Linda Lacewell, welcomed this collaboration. No details had been previously reported.

Zuckerberg's company might have hoped the Winklevii would act as white knights, which was somewhat ironic for the staff. A government official involved said: "The power you give up by bringing in Gemini shows how desperate they are." But when New York Governor Andrew Cuomo, who had been battling sexual harassment allegations for weeks, resigned, Lacewell also stepped down. Thus, the mysterious Gemini plan fell through.

Then came what some insiders considered the final blunder. Last October, the ever-watchful Marcus decided to launch a pilot for Facebook's Novi digital wallet, which brought him back into the market. This pilot did not use Diem but opted for its competitor, Paxos Dollar. This move aimed to relieve pressure on Diem but sparked fierce political backlash from Congress, which still viewed the two initiatives as inseparable.

"All hope was lost," said one member. In November last year, the U.S. Treasury issued a report on stablecoin issuers, "restricting ties to commercial entities," to "address additional concerns about systemic risk and economic power concentration." Within the industry, this was interpreted as a direct message to Facebook.

Diem's investors had grown weary of the process. According to acquaintances of Zuckerberg, when he wanted to focus on shaping the company into an innovative one, he gradually became frustrated with the negative news cycle.

Sometimes, he wanted to hold back and wait for the right moment. But ultimately, he and Marcus had to concede. "Zuckerberg is a smart businessman, but the money he can put in is limited." said a former senior Meta executive.

By the end of the month, Diem began considering seeking to be "taken over." Libra burst onto the public scene with a bang, while Diem whined as it fell: when Levey conveyed this news during a Zoom meeting in mid-December 2021, over thirty attendees fell silent. Marcus had already resigned from Facebook weeks earlier.

Those close to him said he was desperate at that time. A former senior Facebook employee who worked with him said, "If walls keep mysteriously appearing when you don't know, the number of times you can walk the same path will be limited."

Several U.S. banks, including Silvergate, extended olive branches to Diem. Silvergate acquired its remaining assets on January 31 to pursue its own stablecoin plan. To some extent, Diem did achieve a digital currency, but its lasting legacy may be to have drawn regulators' attention to digital currencies.

Lisa Ellis, chief payments analyst at investment research group MoffettNathanson, said: "This forced regulators and governments to start self-educating about the technology and stimulated VC investments in other projects because the attention on this technology was so fervent."

Levey declined to comment but provided a statement that included: "Diem demonstrates that it is possible to build an efficient blockchain-based payment system that explicitly prohibits anonymous transactions and includes strong controls to protect consumers and combat crime."

But Marcus still did not achieve his original intention. In a statement to the Financial Times, Marcus wrote: "The mission to build a better system drove the team to overcome all difficulties to challenge the unacceptable status quo. It remains as meaningful today as it was on the first day of that journey."

In a tweet, he said he welcomed "another chapter of vision forward being written by perhaps a more 'acceptable' proponent"—a concession to Facebook's undermining of its vision. A person who had worked with David Marcus said, "When talking about Marcus, I felt a bit of, 'We will be able to survive on the pure goodwill we brought to this project.' I think they believed faith was everything."

Facebook is now busy with a new grand project: it plans to build a metaverse where billions of people can one day gather through avatar identities. Novi employees have been instructed to focus on the status of digital currency in this virtual world. "What should we do?" a former Facebook employee lamented about Diem, "Just sit back and hit 'like'? The company should grow; we are accountable to shareholders. That is the spirit of Silicon Valley."