Li Wei, Chen Jian/Wen

By the end of 2025, the global market value of stablecoins will have exceeded 300 billion US dollars, and their applications in cross-border payments, digital asset trading, and emerging markets will continue to expand.

But six years ago, when Facebook (predecessor of Meta) announced that it would issue a global digital currency supported by a basket of fiat currencies, it quickly evolved into a controversial focus of global financial governance. On the one hand, central banks of various countries are strengthening their supervision of stablecoins, and on the other hand, accelerating the research on Central Bank Digital Currency (CBDC).

Libra ultimately failed, but the stablecoin market has experienced rapid growth. What are the reasons behind this? We cannot help but ask: Is it suitable for tech giants to take on the role of financial infrastructure for Libra, from its birth, transformation to its exit from the stage? How should financial innovation strike a balance between efficiency and risk in the digital age?

The Birth of Libra

In June 2019, at a press conference in Silicon Valley, Facebook launched a digital currency called Libra. This product launch event is more like a declaration: this social networking giant, which connects over 2 billion people worldwide, is trying to create a borderless financial system that allows global users to transfer funds as easily as sending messages. For Mark Zuckerberg and his team, Libra is not just a revolution in payment tools, but also an attempt to redefine currency.

Facebook executives believe that the next stage of social networking is not just about connecting people to each other, but about connecting people to value. Billions of people worldwide still lack access to basic banking services, and Facebook sees an opportunity to promote inclusive finance with its vast user base.

Libra was initially envisioned as a cryptocurrency, more precisely a stablecoin, whose value is backed by a basket of highly liquid assets such as bank deposits and short-term government bonds as reserves. The original intention of the design is to combine the technological advantages of cryptocurrency with the stability of traditional currencies to create a cross-border, low-cost, and trustworthy payment method. Its official wallet Cali bra (later renamed Novi) will be directly embedded into WhatsApp and Messenger, allowing users to transfer money like sending a message.

To ensure transparency and governance independence, Facebook has established the non-profit Libra Association in Geneva, Switzerland. The initial founding members included 28 partners such as Visa, Mastercard, Uber, Spotify, Vodafone, etc., each investing at least $10 million to launch the project and jointly participate in decision-making.

Later, several members withdrew due to concerns about not being able to meet regulatory requirements. Therefore, when the Libra Association was officially established in October 2019, it only included 21 founding members. In theory, Facebook does not directly control Libra, but rather serves as one of the many members to jointly maintain currency reserves and the operational rules of the blockchain network.

The release of Libra has caused a sensation worldwide. Supporters called it a "revolutionary attempt in global payments" and hoped it would become the "world version of PayPal," but the regulatory response was immediate and intense.

Federal Reserve Chairman Powell expressed "serious concerns," while the US Congress called for Facebook to attend a hearing questioning whether the company, which was previously under scrutiny for data privacy breaches, is qualified to oversee global financial infrastructure. Central banks and financial regulatory agencies around the world have also warned that if Libra really circulates among Facebook's global user base, it may weaken national currency sovereignty, disrupt financial stability, and even threaten anti money laundering mechanisms.

Critics have pointed out that Libra is essentially a 'private central bank'. The so-called decentralization is just a facade, and the real power behind it is still concentrated in the hands of Facebook and its partners. If social data is combined with financial data, it may create unprecedented privacy data access rights. Even fundamentalists in the cryptocurrency industry have expressed disgust, believing that Li bra deviates from the spirit of Bitcoin's "decentralization and freedom".

Faced with global regulatory pressure, Facebook has had to adjust its project direction multiple times. However, this did not quell external doubts. Core members such as Visa, Mastercard, PayPal, and Stripe have successively withdrawn. Without the support of payment giants, the prospects of Libra are becoming increasingly bleak. At the end of 2020, the Libra project announced a renaming to Diem, attempting to shake off the negative impression associated with the Facebook name in response to global regulatory pressure and reshape the brand image. At the beginning of 2022, under regulatory pressure in the United States, Diem Association announced the sale of its technology and assets to Silvergate Bank for only $182 million. This once highly anticipated 'global currency dream' has come to an end.

Detailed explanation of Libra

Technically, the Libra blockchain is designed as a high-performance, permissioned blockchain, utilizing three major technological innovations: the self-developed Move programming language, specifically designed for asset security and smart contracts, to prevent asset "copying" or illegal generation; Byzantine fault-tolerant consensus mechanism (Libra BFT): allows high throughput and low latency, can tolerate up to one-third of node failures, and ensures the reliability and stability of transactions; Merkle tree data structure: ensures that transactions are tamper proof and supports historical data verification.

Unlike decentralized cryptocurrencies such as Bitcoin, Libra's permissioned blockchain architecture means that only approved nodes (i.e. association members) can run the system, verify transactions, and participate in governance. This design has its advantages in efficiency and compliance: it can support thousands of transactions per second with extremely low energy consumption, while being more controllable in the eyes of regulatory authorities.

The first white paper released in 2019 depicts a grand blueprint: LibraCoin will be supported by a basket of major legal currencies (such as the U.S. dollar, the euro, the British pound, and the Japanese yen) and short-term treasury bond as reserves to maintain a stable value. Users can use Libra to achieve free payments worldwide.

The design of the "multi currency basket" is similar to the Special Drawing Rights (SDR) of the International Monetary Fund, but its executing entity is not the government or central bank, but the Li bra Association. The association is responsible for maintaining the blockchain network, managing reserve assets, and overseeing the operation and governance of projects.

Although Libra is designed as a "public infrastructure" managed by non-profit organizations, its economic mechanism still provides a sustainable source of revenue for member companies and investors. When users purchase Li bra, they exchange an equivalent amount of Libra tokens in US dollars, euros, or other fiat currencies, and these funds are then deposited into the Libra Reserve and invested in low-risk, interest bearing assets. The interest income generated by the reserve pool constitutes the main source of profit for the Libra ecosystem. These interests will not be distributed to users, but will be managed by the Libra Association to cover the operational costs and technological development of the network, establish capital buffers and risk reserves, and pay moderate dividends or returns to early investors and association members.

But faced with regulatory pressure, the Libra Association released the second version of its white paper in 2020, which made deep adjustments to the project architecture. The biggest change is that Libra is no longer a single "global currency", but a system composed of multiple stablecoins. For example, Libra USD is anchored to the US dollar; Libra EUR is anchored to the Euro; Libra GBP is anchored to the pound and other currencies, while the original multi currency Libra Coin has been redefined as a "weighted combination" of these stablecoins.

In addition, version 2.0 strengthens regulatory and compliance mechanisms, such as clearly establishing anti money laundering (AML) and counter-terrorism financing (CFT) frameworks; Divide trading entities into regulated service providers, authentication service providers, and self custodial wallet users; Require traders to comply with the Financial Action Task Force (FATF) standards and financial regulatory requirements of various countries. The Libra Association promises to undergo independent audits and regularly disclose the composition and risk situation of its reserves.

Just two weeks after the announcement of the Libra project, project leader David Marcus was summoned to the US Congress. During two consecutive days of hearings in the Senate Banking Committee and the House Financial Services Committee, he faced a flood of questioning from lawmakers. Although Federal Reserve Chairman Powell did not attend the hearing in person, his previously expressed "serious concerns about privacy, money laundering, consumer protection, and financial stability" seem to have set the tone for the hearing. Former US President Trump bluntly stated on Twitter that Libra "has almost no foothold and lacks reliability".

The opposition on the other side of the Atlantic is equally strong. Shortly after the announcement of Libra, French Economy Minister Bruno Le Maire bluntly pointed out that Libra "poses a threat to national sovereignty". He issued a joint statement with German Finance Minister Olaf Scholz, emphasizing that "no private entity should claim the monetary power inherent in national sovereignty". Scholz used a vivid metaphor to depict Libra as a 'wolf in sheep's clothing'.

The tough stance of France and Germany quickly transformed into joint action at the EU level. In December 2019, the Council of the European Union and the European Commission issued a joint statement clarifying that no global stablecoin arrangement shall operate in the EU until legal, regulatory, and supervisory challenges and risks are fully identified and addressed. This statement paved the way for the later development of the European Union's Crypto Asset Market Regulation Act (MiCA). MiCA aims to establish a comprehensive and strict regulatory framework for encrypted assets, especially global stablecoins, and its core spirit is to respond to the challenges brought by Libra.

At the same time, the international regulatory coordination mechanism is rapidly operating, and the G7 has established a stablecoin working group. In its report released in October 2019, the working group systematically listed a series of challenges and risks faced by stablecoins, including legal certainty, sound governance, anti money laundering/counter-terrorism financing, payment system security, market integrity, consumer protection, and potential financial stability impacts.

The report points out that these public policy risks must be fully addressed before the launch of global stablecoin projects. This position quickly gained endorsement from the G20. International standard setting bodies such as the Financial Stability Board (FSB) and FATF have also taken swift action to evaluate existing regulatory frameworks and issue regulatory recommendations for global stablecoins, forming a global regulatory network to contain Libra.

Why did it fail

The concerns of regulators are not groundless, but rooted in the risk prediction that Libra may overturn the existing financial order. These risks can be summarized into the following key dimensions.

One is the erosion of monetary sovereignty and financial stability. Libra's ambition is to become a global currency, which directly touches on national sovereignty.

The European Central Bank believes that a multi currency stablecoin of the same scale as Libra, if widely used as a pricing currency, will weaken the ability of the eurozone's monetary policy to influence the domestic economy through exchange rate channels, making the price system more vulnerable to the impact of other countries' monetary policies or external exchange rate fluctuations. Facebook has 2.41 billion monthly active users (as of June 30, 2019), and if Libra relies on this large user base to create economies of scale, it may become a de facto hard currency in high inflation countries, leading to currency substitution and thus undermining the interest rate and exchange rate control capabilities of local central banks. From a macro perspective, Libra, managed by private associations and backed by a basket of sovereign currencies, essentially exercises a type of central bank function without being bound by any country's Central Bank Law, and may become an uncontrolled source of volatility in the global financial system.

The second is to trigger systemic financial risks, and the design of Libra cannot avoid the classic risks in traditional finance. Firstly, there is the risk of a bank run. Although Libra claims to be fully supported by its asset reserves, the structure of its reserve assets is subject to market volatility and liquidity pressure. Once a trust crisis occurs, such as Facebook's scandal or loss of reserve assets, and global users simultaneously redeem fiat currencies (such as US dollars and euros), exceeding the immediate redemption ability of the Li bra Association, it is likely to trigger a digital run and instantly spread to multiple countries due to its cross-border nature. Secondly, there is the moral hazard of being too big to fail. If Libra successfully infiltrates the global payment system, once something goes wrong, it will force governments around the world to use public funds for rescue, but accountability and regulatory responsibilities will become blurred due to Libra's complex structure of "Swiss registration and global operation".

The third is compliance and consumer protection. At the operational level, Libra poses a serious challenge to the existing regulatory framework. In the field of anti money laundering/counter-terrorism financing, the potential anonymity of its blockchain network varies with the compliance level of global partners, which may create a breeding ground for illegal fund flows. US Congressman Brad Sherman claims that Libra will successfully facilitate "terrorism, drug trafficking, human trafficking, and especially tax evasion".

In terms of data privacy and consumer protection, Facebook's past bad records are like a lingering cloud. Regulatory authorities find it hard to believe that a company with loopholes in social data management can properly safeguard users' more sensitive financial transaction data. In addition, unlike traditional bank accounts that enjoy deposit insurance, Libra users do not have any legal protection mechanisms. In the event of the bankruptcy of the Libra Association, users will face the dilemma of no way to file complaints and no return on investment.

The fourth is a crisis of trust, as the fate of the Libra project is deeply tied to Facebook's reputation. Even though the Libra Association claims to operate independently, Facebook's dominant position in technology, ecology, and user traffic has raised doubts about its independence. There have been multiple data abuse incidents in Facebook's history, such as the Cambridge Analytica data abuse scandal in 2018 and the internal employee abuse of user data incident exposed in 2021, which directly affect Libra's public trust. Once a crisis of trust occurs, the credibility of Libra as a currency will face a severe test, and the consequences will not be borne solely by Facebook.

The failure of Libra serves as a warning to financial innovators that in the realm of currency and payments, which touch the core of modern economy, technological ambitions must confront the complex game of sovereignty, regulation, and politics. Any attempt to reshape the global financial landscape that fails to properly address the high attention of regulatory authorities in various countries to financial stability, sovereign security, and systemic risks will ultimately face a wall in the face of global regulation.

Looking back at Libra's failure, Marcus' conclusion is worth pondering. In his view, attempting to build an open global currency network must be based on "the most neutral, decentralized, and impeccable network and assets". This points to Bitcoin, not the "Frankenstein" they originally designed to become unrecognizable in compromise (a monster pieced together from corpses in the novel by British author Mary Shelley).

Post Libra Era

Although ultimately aborted, Libra has stirred up the global digital currency process like a catfish, especially the development and promotion of central bank digital currencies. According to the Atlantic Council CBDC Tracker, in 2023, over 130 countries/regions worldwide are exploring CBDC, covering approximately 98% of global GDP.

The European Central Bank has launched a "preparatory phase" project in November 2023 to lay the foundation for the issuance of a digital euro, with the clear aim of "adapting central bank currency to the digital age and addressing the current challenges facing the European payment ecosystem". The digital euro will promote inclusive finance, reduce dependence on foreign payment systems, and build a unified European payment ecosystem, ensuring Europe's autonomy in the rapidly changing global environment.

The development and pilot of China's digital yuan (e-CNY) predates the birth of Libra. As early as 2014, the People's Bank of China established a specialized research group for legal digital currencies. In early July 2019, just as Libra was announced, Zhu Min, Dean of the National Institute of Finance at Tsinghua University (former Vice President of the People's Bank of China), expressed his opinion that "we should not take Libra's emergence lightly, as it will have a significant impact on the existing financial system, monetary system, and even future reserve system. ?At present, the digital RMB has entered the stage of large-scale pilot, covering multiple scenarios such as people's livelihood consumption and government payment. It is the fastest and most widely piloted retail CBDC among major economies in the world.

Other major economies are also actively researching and exploring CBDCs. As announced by the Bank of England in January 2025, it will launch the "Digital Pound Lab" as an experimental environment and attach great importance to privacy protection, promising that neither the Bank of England nor the government can access users' personal information. The Bank of Japan released the "Central Bank Digital Currency Plan" in October 2020, stating that although the Bank of Japan currently has no plans to issue CBDCs, it is crucial to be fully prepared to cope with future changes in the situation from the perspective of ensuring the stability and efficiency of the overall payment settlement system. The Federal Reserve has stated that it has not made any decision on whether to proceed or implement a CBDC, but has been exploring the potential benefits and risks of CBDC from multiple perspectives.

These measures together constitute another important development in the 'post Libra era': the digital form of fiat currency backed by national credit, which forms a complex relationship of both competition and coexistence with private stablecoins.

Currently, US dollar stablecoins dominate the market. With the Trump administration taking office, the United States has shown a proactive embrace and positive regulation of stablecoins, cryptocurrencies, and real-world assets (RWAs), attempting to incorporate them into the financial system through frameworks such as the Genius Act to serve its economic and geopolitical goals.

In contrast, the cautious stance of the European Union and China. The EU has launched MiCA with the core aim of preventing external stablecoins from weakening the monetary sovereignty and financial stability of the eurozone. By the end of 2025, China will have multiple departments including the central bank clearly classify stablecoins as virtual currencies and prohibit their related business activities within the country. While accelerating the optimization of the digital RMB management system, the People's Bank of China has also stated that it will closely track and dynamically evaluate the development of overseas stablecoins. This cautious attitude is essentially a clear declaration of monetary sovereignty and financial security: the leadership of future monetary system reforms must be in the hands of the state and serve the overall situation of the real economy.

The competition of digital currencies is no longer just a game between private institutions and regulators, but also deeply intertwined with strategic battles between countries. The future will be a long process for emerging monetary tools to find their own positioning and boundaries between innovation and rules.

In the future, we may see a hybrid currency ecosystem: central bank digital currency will serve as the infrastructure for large-scale settlements and retail payments; Private stablecoins such as USDC, which are more compliant, may play an auxiliary role in specific cross-border trade, DeFi, and other scenarios due to their flexibility and programmability.

The story of Libra has left profound reflections on the global financial system. As one of the earliest projects led by large technology companies attempting to deeply integrate blockchain with the currency system, Libra is not only a product experiment, but also an institutional exploration of "currency, trust, and governance".

Technically speaking, stablecoins have achieved programmability of funds and improved cross-border flow efficiency through blockchain, bringing convenience to international payments, remittances, digital asset transactions, and other scenarios. But currency has never been a simple technical issue, but a comprehensive game of sovereignty, trust, and regulation.

The Libra project has also driven global regulators to think systematically about digital currencies. G7, IMF, BIS and other international organizations have successively established working groups to study stablecoin risks and regulatory frameworks; Central banks around the world have also accelerated the research and pilot of CBDCs.

The experience of Libra also provides reference for enterprises' innovation strategies. Facebook is not only a large Internet platform, but also a potential currency issuer. This "dual identity" has aroused social concern about its excessive power. It reminds technology companies that in the financial sector, compliance is competitiveness. Technological leadership does not necessarily mean breaking through regulatory red lines. Only by innovating within the regulatory framework can sustainable business models be established.

Whether it's mainstream stablecoins like USDT and USDC, or similar explorations that are still emerging, they are all trying to answer the question Libra is trying to solve: how to find a balance between efficiency and trust.

Money never sleeps ", the story of Libra has been turned over, but the competition between financial innovation and regulation has never stopped.

Li Wei is a professor of economics at Cheung Kong Graduate School of Business, Vice Dean of Asian (and Oceanian) Markets, Director of the Case Study Center at Cheung Kong Graduate School of Business, and Director of the Big Data Economy Research Center at Cheung Kong Graduate School of Business; Chen Jian, Assistant Director of the Case Center at Changjiang Business School