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Business

Inside Facebook's attempt to start a new cryptocurrency was shattered




David Marcus

gathered a team inside

Facebook Inc.

Headquartered in May to bowl a skunk works project of the year: a bitcoin-like payment system that the social media giant counted on would increase global cash flow.

"We're going to change the world," Mr. Marcus, a Facebook manager and project architect, told employees as they sipped Champagne, according to a person familiar with the matter.

It turns out it's not so easy to change the world.

Five months later, the libra project is on life support after high-profile supporters dropped out of the network under pressure from lawmakers and regulators.

Jerome Powell

and

Rep. Maxine Waters,

the Democratic leader of the House Financial Services Committee ̵[ads1]1; three people who don't agree with it – has all criticized it. European officials are trying to stop the launch.

With libra, Facebook tapped into the financial world with techno-utopian bravado, then found itself trapped in a quarrel of regulatory skepticism and rooted interests. Lawmakers, already uncomfortable with how Facebook handled privacy around users 'photos and posts, have pulled the bridge on users' money.

The Treasury Department said it was concerned that libra could be abused by money launderers and terrorist financiers. Payment companies played their part in libra in private meetings with regulators and lawmakers' offices, and major banks contacted by Facebook refused to register.

Facebook executives seemed unsure of how to navigate the bureaucracy for finance when they once showed up to a meeting of the Treasury Department and another at the Federal Reserve with brief overviews of libra that left unanswered questions.

Facebook's plan to issue its own currency, called libra, has raised a number of concerns among lawmakers. WSJ's Paul Vigna explains. Photo: Andrew Harrer / Bloomberg News

To achieve the grand ambitions of minting a new currency, Facebook leaned on a loosely welded alliance of companies, many of which joined in the midst of the wariness of the tech giant stepping on their turf. When Libra came under fire, partners including Visa Inc.,

Mastercard Inc.

and PayPal Holdings Inc. quickly skipped the ship.

The bumpy rollout of the scales is a major setback to Facebook's efforts to reduce the near total reliance on targeted advertising. It's also a warning to tech giants expanding into financial services.

Apple Inc.,

Amazon.com Inc.

and Google are each working on their own payment projects, which can give them access to sensitive personal financial data at a time when public trust in Silicon Valley is eroding.

“Do you really think people should trust Facebook with their hard-earned money? "Senator

Sherrod Brown

(D., Ohio) asked Mr. Marcus during a congressional hearing in July.

Facebook shows no signs of leaving libra; representatives from the remaining supporters met on Monday in Switzerland to advance the project. CEO Mark Zuckerberg has agreed to answer questions about it at a congressional hearing next week.

“The core of the economic system has not changed in 50 plus years. That's one reason, "Marcus said in an interview. "This is difficult change."

When Facebook was published with thinly outlined plans for libra in June, it hoped to delegate the details to a coalition of partners, the Libra Association, and position the effort as more of a public tool than a corporate land grab. It was seen as a digital alternative to government-sponsored currency, widely accepted by merchants all over the world and able to be shipped immediately across borders at low cost.

Continued loss of key business partners – payment startup Stripe Inc. and online resort

Booking Holdings Inc.

has also dropped – making a planned launch in 2020 a challenge. Some of the companies would provide the technical to get users' money into the system. Remaining partners include

Uber Technologies Inc.,

several venture capital firms and PayU, a European payment processor.

Mr. Marcus said he would have preferred it if the major payment companies lived in the Libra Association, but that they could still choose to allow consumers and merchants to use the new coin without being official members.

The Libra Association called its "founding members" was listed at an event in Geneva in September.


Photo:

fabrice coffrini / Agence France-Presse / Getty Images

"The beauty of the way we designed this, anyone can still do it. My bet is that they will," Marcus said.

Facebook has been experimenting with consumer payments for more than a decade. The company introduced its own coin , Facebook Credits, in 2009 that could be used to purchase virtual goods in video games and from its online gift shop, and a Facebook subsidiary holds licenses to transfer money in 48 states.

Mr. Marcus joined Facebook five years ago from PayPal to operate its Messenger device In May 2018, he took on a new role exploring how Facebook can use blockchain technology that supports bitcoin and other cryptocurrency.

The strategy he landed on was more ambitious than any US tech company had tried on financial services Facebook wanted to create their own digital wallet that allows libra to buy things online and off, pay bills and send money domestically and abroad to friends and family members. A user would spend dollars to buy libra coins from authorized dealers, keep them in a digital wallet and then spend them on purchases from libra-friendly dealers or send them to others.

The company views the product as a way to keep people connected to Facebook longer, and make it travel around the web and offline. It also said the goal is to make financial services more accessible to people all over the world, especially those who do not have access to the regular banking system.

In the story of Mr. Marcus, dozens of companies, eager to reach Facebook's huge user base, would join the Libra Association, contribute $ 10 million to build a global payment network and build their own apps to interact with that. To overcome the volatility that had undermined bitcoin, the value of the Libra would be linked to a pool of currencies and government-backed assets.

Sen. Sherrod Brown interrogated Marcus at a Senate hearing in July.


Photo:

Stefani Reynolds / Zuma Press

Mr. Zuckerberg, who has brought Facebook into one new area after another – advertising, hardware, original TV series – lights up the project green. Others had a less optimistic view. Finance Manager

David Wehner

Mr. Marcus asked how Libra would recover the costs and make money. Employees at WhatsApp, a Facebook-owned messaging service, considered integrating libra into the app as a low priority.

Facebook began to set up partners, targeting incumbent payment giants whose support would help support the project and ensure they would not publicly criticize. libra from the sidelines.

In pitches to Visa, Mastercard and PayPal, Marcus's team played for fear of missing out as people began to conduct their financial transactions in the same social social areas where they hung out with friends (Facebook), shared messages (WhatsApp) and interacted with their favorite brands (Instagram). Already in China, hundreds of millions of consumer credit cards disappeared in favor

WeChat

Pay, a digital wallet built into one of the country's largest messaging platforms.

Visa dropped out of the libra project earlier this month.


Photo:

Justin Sullivan / Getty Images

These companies faced a dilemma known to many who stand in the way of Silicon Valley's ambitions: Join or risk being left behind. Linking their names to libra and making a small investment – $ 10 million that Facebook wanted is about a third of Visa's profit in one day – would give card networks access to billions of potential customers. Although libra transactions would take place outside their systems, credit and debit cards could be used to load money into libra wallets, which could earn fees for the card networks.

PayPal was among the first to arrive. The project was championed by Bill Ready, PayPal's operations manager. He and Mr. Marcus had been close allies since 2013, when Mr. Marcus, the then PayPal president, negotiated a deal to buy a startup led by Mr. Ready for around $ 800 million.

From there, Facebook moved on to online sellers interested in cutting card processing. uber,

Lift Inc.

and Booking Holdings signed. Visa and Mastercard were among the last to give their support, and did so after hearing about others already on board.

Visa CEO Al Kelly raised questions about membership in July.


Photo:

David Paul Morris / Bloomberg News

Mr. Marcus's team spent relatively less time with regulators before the libra announcement in June. When Facebook executives met officials at the US Treasury, they answered many questions by saying that details would be revealed later, regarding officials.

Mr. Marcus said that Facebook took a consultative approach with regulators and wanted to hear any "deep-seated concerns" they had early. He added that answers to some questions could only be given after the Libra Association had been formed and members agreed on an approach.

"At early meetings we didn't have all the answers, but it was by design," Marcus said. "For something that at the time was a white paper with an idea to launch in 2020, I think that's pretty normal."

In June, Facebook unveiled the currency by publishing a conceptual document explaining how the currency would work and naming 27 other "basic members" as diverse as streaming music service

Spotify Technology SA

and telecom giant

Vodafone Group

PLC. The goal was to build a financial system that did not trust central bankers or Wall Street middlemen.

Washington, which has had Facebook for a long time, was not impressed. Rep. Waters asked Facebook to declare a moratorium on libra launched, and members of its committee drafted the "Keep Big Tech Out Of Finance Act" to restrict Facebook and other Silicon Valley giants from expanding deeper into financial services. Lawmakers grilled Mr. Marcus over two days of hearings in July, promising that the libra would not start until the regulatory barriers were overcome.

Around that time, representatives of several Libra Association companies jumped on a conference call to coordinate their response to the growing setback. A cacophony of voices drowned out potential solutions: A weakness in call organization software turned on many people's microphones at once.

The social media giant positioned itself as just one member of the association which on its own did not. t have the power to dictate how the network works. It asked some other partners for public lobbying for the project. They were buzzing.

Bill Ready, PayPal operations manager, was an early libra supporter, but PayPal announced in June that he was retiring.


Photo:

David Paul Morris / Bloomberg News

Meanwhile, some of Mr. Marcus's allies were sidelined. PayPal announced in June that Mr. Ready was retiring as the company's chief operating officer, removing important support for libra.

Frustrated, regulators and lawmakers began to ask Facebook's partners for answers. During the summer, the Treasury Department sent a letter to companies such as Visa, Mastercard, PayPal and Stripe asking for an overview of money laundering compliance programs and how libra would fit into them. Some companies felt it difficult to respond without more clarity from Facebook.

As the pressure grew, Facebook tried to gather its partners. It invited Libra Association members to an October 14 meeting in Geneva to review the group's charter and elect a board.

Association members had not yet ponied the $ 10 million per partner that Facebook was seeking. They had signed a no-obligation letter that allowed them to move away from the project if they changed their mind.

Share Your Thoughts

Do lawmakers and lawmakers have the right to question how libra would work? Join the discussion below.

Some companies believed that Facebook exaggerated their commitment when it announced the project in June and the harassment of being described as "founding members."

"It's important to understand the facts here and not any of us get ahead of ourselves," Visa CEO

Al Kelly

said at the company's earnings conference in July. "No one has officially joined."

The invitation to the Geneva meeting called the partners "original members."

But in early October, the support of several partners collapsed. At a meeting of Libra Association members in Washington to prepare for the Geneva Summit, participants were asked to voice their concerns. Mastercard and Visa executives said they would likely remain members, but had not made final decisions. PayPal skipped the meeting and withdrew from Libra the following day.

Lawyers turned up the heat. Sens. Brown and

Brian Schatz

(D., Hawaii) warned CEOs of Visa, Mastercard and Stripe that if they stay involved, they could "expect a high level of control from regulators, not just on libra-related payment activities, but on all payment activities." [19659057] The association then distributes Libras through authorized sellers.

The Libra Association – an independent organization created by Facebook – changes the currency.

The authorized seller exchanges the currency with the Libra Association which then burns, or destroys, the currency.

A consumer downloads a digital wallet from a new Facebook subsidiary called Calibra and then buys Libras from an authorized seller's website.

Spotify then swaps Libras which it received for dollars through a retailer.

The user uses Libras to make an online purchase, for example a subscription to Spotify one of the company's partners in the currency.

The association then distributes Libras through authorized sellers.

The Libra Association – an independent organization created by Facebook – changes the currency.

A consumer downloads a digital wallet from a new Facebook subsidiary called Calibra and then buys Libras from an authorized seller's website.

The authorized seller exchanges the currency with the Libra Association which then burns, or destroys, the currency.

Spotify then exchanges the Libra it received for dollars through a reseller.

The user uses Libras to make an online purchase, for example a subscription to Spotify one of the company's partners in the currency.

The association then distributes Libras through authorized sellers.

The Libra Association – an independent organization created by Facebook – changes the currency.

A consumer downloads a digital wallet from a new Facebook subsidiary called Calibra and then buys Libras from an authorized seller's website.

The authorized seller exchanges the currency with Libra Association who then burns or destroys the currency.

The user uses Libras to make an online purchase, such as a subscription to Spotify one of the company's partners in the currency.

Spotify then exchanges the Libras it received for dollars through a reseller.

The Libra Association —an independent organization created by Facebook —is the currency.

The association then distributes Libras through authorized sellers.

A consumer downloads a digital wallet from a new Facebook subsidiary called Calibra and then buys Libras from an authorized seller's website.

The user uses Libras to make an online purchase, such as a subscription to Spotify one of the company's business partners in the currency.

Spotify then exchanges Libra as it received for dollars through a reseller.

The authorized seller exchanges the currency with Libra Association who then burns or destroys the currency.

Visa and Mastercard sent executives to meet the senators' staff. Soon after, they announced they were dropping out of the project, and so did Stripe. Booking Holdings,

eBay Inc.

and Mercado Pago, an Argentine payment provider, also withdrew.

The loss of Visa and Mastercard support threatened to remove one of the main ways users would have moved money in and out of the libra system – a potentially crippling blow.

"When it came to Visa and Mastercard, I had to praise them for having the boldness and willingness to explore something so radically different," Marcus said. "Given the pressure they all got, it's hard to blame them [for leaving]. "

Tensions have grown within Facebook. Senior executives have asked Mr. Marcus why a new cryptocurrency – with all the baggage included – is needed to advance Facebook's financial ambitions. The company couldn't work with dollars or bitcoin,

Facebook CEO Mark Zuckerberg, shown on Capitol Hill in September, is scheduled to testify about libra in Congress.


Photo:

Samuel Corum / Getty Images

Mr. Marcus, untouched, has now contacted major US banks to join libra, according to people familiar with the matter, which could allow consumers to load money into libra wallets from checking accounts.

JPMorgan Chase

& Co. and

Goldman Sachs Group Inc.,

had, however, rejected Facebook's invitation back before its announcement in June. Both rejected in part because they worried a cryptocurrency could be used for criminal activity that would violate strict anti-money laundering and sanctions rules.

On Monday in Geneva, 21 companies, including Facebook, committed to the libra project and elected five directors to oversee the Libra Association. Mr. Marcus said that the next task is to hire a full-time CEO for it.

Although Marcus stated to change the world at the celebration in May, libra is expected to start small, by helping friends and family members send money to each other at a low cost.

Facebook had an early consumer payment product in Facebook Credits, launched in 2009, that can be used to purchase virtual goods in video games and from the online gift shop.


Photo:

Joe Raedle / Getty Images

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com, Peter Rudegeair at Peter.Rudegeair@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

Copyright © 2019 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8



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