Facebook has a justified reputation as a fearsome competitor with a farsighted CEO. So why is their latest major initiative, the global payments system Libra, already stillborn?

For something that doesn’t really exist yet, Libra has already caused its sponsor a lot of problems. Libra is a whitepaper, a plan, some code, a series of promises not to do anything without the explicit permission of U.S. regulators—and a colossal PR disaster for Facebook. Libra has led to a steady trickle of negative headlines, as one partner after another defects, and as Mark Zuckerberg gets hauled in front of Congress for hours of testimony.

The original plan was vague enough to sound either straightforward or sinister: Libra was launched as a global payments system that would allow anyone in the world to transfer money. The project was currency-agnostic, with Libra tokens backed by a basket of currencies. When Libra launched, it had a long roster of partners across industries—payments companies like Visa, Mastercard, Stripe, PayU, and Paypal; ecommerce companies like Booking Holdings, eBay, Uber, and Lyft; telcos; cryptocurrency companies; venture capitalists; and nonprofits.

Since then, they’ve lost all of their payments-industry partners with the exception of PayU and several other partners besides. They’ve been lambasted by competitors and lawmakers, and been asked to halt the project before it’s actually started.

Some cynics expected this to happen, but you can find cynics predicting failure for anything a successful company does. Historically, it’s been a bad move to bet against Facebook. The Atlantic wrote about the company’s bubbly nature and inevitable failure in 2007, less than a year after the company turned down a billion-dollar acquisition offer and months before it raised money at a $15bn valuation. It’s now worth $540bn. The cynics will eventually be right, but only on a scale too long to matter.

The two more interesting reasons Libra failed are institutional. They face institutional constraints at micro and macro scales.

At a micro scale, Facebook has fallen victim to the meta-Malthusian trap every successful organization runs into. It’s good at solving one set of problems (user growth and profitability), so its constraints are mostly from problems it’s bad at dealing with (politics and PR).

At a macro scale, Libra is a transnational effort that misunderstands the context of cross-country collaboration. Realistically, most of the forces Americans think of as inevitable features of progress—increasing freedom, fewer wars, greater international cooperation, globalization, breaking down of cultural barriers—were accidentally imposed by the U.S. in the wake of the Second World War. As the global order loses legitimacy with local electorates, these projects become untenable. Libra is half a century late, and a navy short.

The Earned Hubris Of The Successful Tech Titan

Like all Internet companies, Facebook benefits from two simple truths: human behavior is easier to track and manipulate when it’s done in digital form, and digitizing your life keeps getting cheaper.

While Mark Zuckerberg is extraordinarily rich, the story of Facebook is not a story of a get-rich-quick scheme or even a get-very-rich-slow scheme; his wealth is a side effect of his determination to retain control of Facebook. Zuckerberg has had several opportunities to sell out, most notably the Yahoo offer in 2006. At the time, the only reason the company didn’t sell was that Zuckerberg controlled the board.

(According to How the Internet Happened, a board member told Zuckerberg to consider all the things he could do with the money from the sale. His response: “I don’t know what I could do with the money… I’d just start another social networking site. I kind of like the one I already have.”)

Zuckerberg, then, is analogous to Russian President Vladimir Putin: a very rich person who essentially has billions and billions of dollars because petty cash is handy for his long-term goals. Facebook has been profitable since early in its existence, and has relentlessly invested the proceeds. This has some odd side effects: in Chaos Monkeys, a memoir of working at Facebook, Antonio Garcia Martinez articulates a sort of postmodern Marxist labor alienation. His job is to help Facebook make money from ads, and this grubby, profit-seeking work is frankly boring to senior management. Facebook’s ad exchange is just a short-term tool to help Facebook pretty-up its profits before IPO, so it can raise more money—so it can improve its product and absorb more of people’s time and attention.

Facebook has relentlessly excelled at attracting and maintaining attention, and at digitizing more of people’s lives. From the beginning, Facebook was able to target small markets, achieve dominant market share, and move on, confident that its position was unassailable (in The Unwinding, George Packer calls this “a benign version of the Brezhnev Doctrine.”)

As the product matured, Facebook had to shift their strategy to the defensive, identifying new ways people used the Internet to relate to one another, and quickly intercepting companies that spearheaded them. Sometimes, this took the form of acquisitions, like Instagram and WhatsApp. In other cases, it involved copying products and choking off competitors’ access to the Facebook platform.

Facebook hasn’t lost its user-acquisitive mojo. Some people stop using Facebook, but as more people’s lives are mediated by the platform, it gets harder and harder. You might decide you’re too cool for the app, but once you have kids, grandparents will lobby fiercely for more pictures, and you’ll reluctantly find yourself installing it again.

Facebook solved one competitive problem after another, usually by crushing the competition—they have the dominant directory of real-names, a strong position in logins, the most-used photo-sharing app, and two of the world’s most popular messaging platforms. They’ve even reached the point that, rather than waiting for users to digitize the real world, they’re using virtual reality to build a digital-first reality.

For a decade now, Zuckerberg has described Facebook as a “utility,” showing a keen awareness that cool products have a half-life and utilities last forever. But once a product is a utility, it becomes a necessity, and necessities invite regulation.

Facebook’s success as a product and as a business has eliminated all the obstacles except formal and informal political ones. Formally, Facebook faces antitrust scrutiny (regulators have retroactively upgraded their assessment of the company’s strategic brilliance and decided that the Instagram and WhatsApp acquisitions should probably not have happened). They’re also getting criticized for enabling foreign political manipulation, and for hosting child abuse content. Informally, most people instinctively believe that if there’s an institution they rely on, they ought to have a say in how it’s run. Like any other utility or large company, Facebook is ultimately answerable to public and state interest, not its own private goals.

Facebook has become a victim of its own success. They wanted to be the first app people checked in the morning and the last one they looked at before bed, which made them the best app for foreign intelligence to target with propaganda campaigns. They reacted by building up a gigantic human and technical infrastructure to track and moderate content. It is, outside of China, the single biggest investment ever made in controlling what people hear and what they can say. As Zuckerberg put it in a leaked speech: “Twitter can’t do as good of a job as we can. I mean, they face, qualitatively, the same types of issues. But they can’t put in the investment. Our investment on safety is bigger than the whole revenue of their company.” (According to the transcript, this was followed by laughter—you have to give them credit for maintaining their esprit in the face of so much criticism.)

Facebook has political obstacles because they’ve so effectively crushed the technical and business obstacles. It’s the exact converse of the problem a representative government faces: they have, by definition, a popular mandate to enact certain policies. But the people who are good at winning elections are not the same people who can effectively implement policies. Facebook’s periodic congressional hearings are a showdown between a company that can effectively execute plans but doesn’t want to be told what to do, and politicians who know exactly what their constituents want but are totally ineffective at getting it.

The Libra hearings did not focus all that much on Libra itself. Libra was a good excuse to get Mark Zuckerberg to fly to DC, but his questions addressed other problems—Russian and Iranian election interference, child porn, antitrust, cyberbullying, and a general sense of arrogance. One Congresswoman chastised Zuckerberg for his failure to solve the student debt crisis. Clearly, Congress has a higher opinion of Facebook’s ability to solve problems than Congress’.

There wasn’t much to say in part because Facebook has already bent over backwards to be as accommodating as possible. Per Zuckerberg, “we’re not going to launch anything that is a product or a part of this until we have full support from U.S. regulators regardless of what the international regulators say.” He tried to cast the project in national security terms as well, noting that “China is moving quickly to launch a similar idea in the coming months.”

All to no avail. Congress made demands, some impossible to fulfill, and some that Facebook is already engaged in. As Zuckerberg repeatedly points out in his testimony, the reason there are so many headlines about bad actors on Facebook is that Facebook invests more than anyone else in catching them.

Facebook’s regulatory troubles happen at the intersection of two Malthusian limits: a company so successful it becomes too important not to be regulated, and regulators who can measure public opinion but not act on it.

The Wrong Time For Libra

History is inevitability plus random contingency. The First World War was the inevitable result of a complex series of alliances and great-power competition between the German Empire and the British Empire, but the catalyst was an assassination attempt—four attempts, actually, three of which failed.

Economic growth also happens at the intersection of technological and political possibilities. The space race made economic sense because of a series of historical coincidences—atomic theory developing in the early twentieth century, a critical mass of physicists fleeing Europe in the 1930s and ending up at Los Alamos, Hitler’s obsession with rockets, and Soviet Russia’s post-war position as a major power not under U.S. influence. If the U.S. didn’t have both the means and motive to demonstrate that they could launch nuclear warhead–sized payloads to anywhere they chose, humans would still not have walked on the Moon.

Libra is in an unfortunate position: just as it became technologically feasible, it was rendered politically pointless.

Libra’s goal is to be a transnational payment system, allowing anyone to transact with anyone, anywhere. To an American, this is a historical inevitability: over time, barriers to global interaction have fallen. It’s easier to travel where you want, buy what you want, watch what you want, eat what you want, and it’s only been getting easier. A Marxist or a Whig historian might treat this as one of those relentless grinding historical forces, but this is actually a story with a protagonist of sorts: to countries other than the U.S., “globalization” is a story of increasing American hegemony.

To put it succinctly, the nation-state was born in Westphalia in 1648, got a terminal illness at Los Alamos in 1945, and finally died at a meeting of the Texas Railroad Commission in El Paso in 1972.

Westphalia is an obvious starting point for the nation-state; it was the point at which countries agreed that national borders were meaningful and that domestic policy was the business of a single sovereign government.

At Los Alamos, physicists invented a new kind of weapon so powerful it would define international relations, but so expensive that it meant most countries were relegated to protectorates of nuclear powers.

El Paso doesn’t have the same historical resonance, but it’s an important turning point: this was where the Texas Railroad Commission decided to end oil production quotas due to a nationwide hydrocarbon shortage. It wasn’t enough: for decades after, the U.S. was increasingly dependent on oil imports, particularly from the Middle East.

This was not just a case study in Ricardian comparative advantage, in which America focused on one set of competitive advantages, while Saudi Arabia and Venezuela focused on another—it formalized a world order in which the United States Navy kept the seas safe for trade, which allowed the U.S. economy to grow, and made America the safest place to stash assets.

This had far-reaching implications: it imposed a partial free-trade zone on the world’s oceans, allowing countries with large labor forces and high savings rights (e.g. Japan, Korea, and Taiwan) to become export powerhouses selling to the U.S. and Western Europe. It meant that the U.S. had an interest in wars far beyond our borders—when Iraq invaded Kuwait in 1990, they demonstrated the capacity to conquer, or at least disrupt, Saudi Arabia’s massive oil production, which would have turned oil from a freely traded commodity subject to market forces into a geopolitical tool subject to Saddam Hussein’s whims.

In a literal sense, the first Gulf War was a war for oil, but in a broader sense it was a war to defend a global order—an order that served the United States well, but that the United States served in turn by maintaining safe sea lanes.

This does not imply that globalization was an American conspiracy for world domination, just that when the U.S. reacted to threats, it did so in a way that protected globalization. Conspiracies are an unnecessary part of a theory when reactive behavior predicts the same outcome. It’s not a conspiracy that America is a dominant importer of goods and exporter of brand names and culture; it’s just the inevitable result of a system where we’re in charge. Our pax Americana is a bit less classy than the Roman version, but still serviceable, as long as you believe that civis romanus sum can be roughly translated into “I said, ‘Where is the nearest McDonald’s?'”

The Decline Of Pax Americana

Four forces combined to weaken this global system:

The fall of the USSR The rise of China Fracking Nationalist politicians

The collapse of the USSR temporarily fulfilled the long-term promise of the American political agenda: at last, Russia could enjoy the bounties of the American system—elections, private property, pop music, and hedge funds. But the end of the USSR meant the end of a large military as an existential necessity. An American military large enough to go toe-to-toe with the Soviets was large enough to squash any other country handily, which kept non-U.S. countries from doing anything that made them seem too much like sovereign states. Without that threat, we prudently dialed back our ability to project power worldwide.

Russia’s collapse was fait accompli long before it happened; only the fortunate timing of OPEC and the Saudi embargo, coupled with Russian oil discoveries, bailed them out. But China’s growth has been a longer-term threat, because China sees clearly what the U.S. misses: a global market, denominated in dollars and protected by the U.S. Navy, is an American market in all but name.

There’s a revealing passage in Steve Coll’s excellent history of Exxon, Private Empire: Bush administration officials were puzzled by China’s insistence on owning oil assets in Africa, rather than just buying oil on the open market. They hired an economist to make a PowerPoint presentation to Chinese officials, articulating the free-market view on energy and contrasting it with the more mercantilist Chinese approach. (This was their first mistake; America is a country run on PowerPoint presentations, but China is the sort of country where policy is made in Excel.) The U.S. Navy made oil a fungible commodity, but only to people whose foreign policy goals didn’t conflict with the U.S. Clearly, China—a country that claims sovereignty over the island of Taiwan—did not always expect the American navy to be on their side.

These geopolitical problems didn’t get resolved in Beijing or Washington, though. They got fixed in Texas and North Dakota, where the U.S. has suddenly, over the last decade, basically eliminated its energy deficit through fracking. A country full of suburban voters (many of whom drive Suburbans) will do whatever is necessary to maintain access to cheap gasoline. As it turns out, thanks to massive overinvestment in new extraction technologies, “whatever is necessary” has switched from aggressive foreign policy abroad to lax environmental policy at home.

We haven’t seen the geopolitical implications of this just yet, and the U.S. response to Iran’s drone attacks on Saudi Arabia indicates that the American military establishment maintains its commitment to keeping the Middle East free from any oil-disrupting conflicts. But, over time, energy independence allows the U.S. to adopt a less intrusive foreign policy, and to allow other countries to reassert their sovereignty.

Back when Dick Cheney was a hard-headed realist about foreign policy (which is to say, back when he was an energy executive), Cheney once said, “The good Lord didn’t see fit to put oil and gas only where there are democratically elected regimes friendly to the United States. Occasionally we have to operate in places where, all things considered, one would not normally choose to go. But, we go where the business is.” Perhaps he should have considered the lilies of the field. Perhaps the Lord saw fit to give Americans enough oil to distract them from bombing the Middle East after all.

The final force pushing against the global consensus is a more literal one: voters. In the U.S., U.K., Italy, Hungary, and many other places have elected leaders who pursue a more nationalist and less internationalist approach. This isn’t happening because changes in the energy market enable more autarky, but those changes might make the shift to nationalism more durable.

This change is hard to explain—you can blame the financial crisis for destroying faith in elites, or Russian propaganda, or simply the fact that the rich world is aging and old people are conservative. Regardless, internationalism is becoming less politically viable, just as the forces that made it possible and necessary are dwindling.

Libra Itself

Where does that leave Libra? Facebook’s public goal for Libra is to give underbanked people access to the global payments system, but that’s closer to a slogan than a business plan. They wouldn’t take the risk—either the literal upfront cost or the inevitable political backlash—if they didn’t have a more ambitious plan.

The most likely explanation is that Facebook worked backwards from what they’re good at to what problems they could solve. Payments are, fundamentally, a problem of identity. Excluding the small fraction of commerce done using bearer instruments (such as dollar bills), most payments are fundamentally a question of identity. Who is buying that high-resale-value iPad? A legitimate customer, or a hacker syndicate that’s stolen their credit card?

Facebook’s founding was enabled by a user-ID hack of sorts: every Harvard student already had a profile on Harvard’s official Facebook, and they all had post.harvard.edu email addresses, so it was trivial to verify that someone was who they said they were. As Facebook grew, it became more obvious that real-world identities mattered, and that a site full of real people was a competitive advantage in a world where MySpace users could friend any of ten thousand accounts purporting to be the Flying Spaghetti Monster or Osama Bin Laden.

Since then, Facebook has developed numerous tools and heuristics to identify real users, and to map their behavior to their Facebook account. Some of these are obvious (using phone numbers to verify new users, demanding photo ID from users who sign up using VPNs or Tor), and some are doubtless part of the company’s most prized IP.

With that as a foundation, and the blockchain as both a payments substrate and a way to attract programming talent, they can have a comparative advantage at cheaply authenticating new users. And if the world’s underbanked tend to be people with low net worths, a drop in the fixed cost of getting them onto the system means more people can get access.

While these people don’t have much money, payments systems benefit from network effects. Visa and Mastercard have very cheery shareholders because the size of each company’s cardholder network encourages merchants to accept them, and vice-versa. If Facebook can onboard hundreds of millions of first-time electronic spenders, they can bootstrap their own monopolistic payments network—but, just because of how skewed global spending and GDP are, they also need users in the rich world to have access to Libra.

Facebook could build a payments system like this on top of the dollar. Why don’t they? There are at least two reasonable explanations:

There’s already a regulatory apparatus for managing dollar-based transactions, and Facebook would rather make something different enough that the rules get written de novo. Purely dollar-based cryptocurrencies have a mixed reputation. The biggest, Tether, is essentially dollars minus money laundering laws, but—because it didn’t avail itself of the most trustworthy, regulated banking partners—is also finding itself short of dollars. Facebook would like Libra to be international, and if it’s backed by a basket of currencies rather than a single currency, its volatility to anyone using anything other than dollars is lower. For example, a hypothetical Libra that’s half dollars and half Euros has half the volatility, to a Euro-denominated user, of an all-dollar Libra. American users may find this off-putting, but Facebook knows that even though dollars are used almost everywhere, they’re not the predominant currency used by everyone.

Libra is effectively a global currency, but we already have one of those: the U.S. dollar is the default means of pricing and settling international deals. In fact, fluctuations in the dollar have an outsize impact on global trade. One might look at the global airline industry—with Boeing planes, USD-benchmarked fuel prices, English-language technical manuals—as America’s own accidental Belt and Road initiative.

The only drawbacks to using the dollar for everything are a) being stuck with the results of American fiscal and monetary policy, and b) being subject to America’s tendency to control dollar flows as a political tool. There have been multiple cases in which non-U.S. banks dealt with countries the U.S. didn’t like (e.g. Libya, Russia, and Iran) and got punished because all dollars ultimately flow through New York, putting essentially all international commerce under U.S. supervision.

Libra is certainly not Facebook’s attempt to make it easier for Mullahs to Venmo Hamas. It’s a project built from first principles about how currency should work, but it ignores the fact that currency is contingent on a social and political consensus. In other words, it’s an attempt to intelligently design something without understanding evolution.

There was a time when designing a currency system from first principles made sense, and that time was the immediate aftermath of the Second World War, when the U.S. had conventional military superiority over every other country and a new superweapon—and had the only industrial base that hadn’t been bombed flat.

The Bretton Woods system was designed in 1944 and implemented in 1945. It called for currencies pegged to the U.S. Dollar, with the dollar itself convertible into gold. To maintain the agreement, the participants either created or dramatically expanded entities like the IMF, the World Bank, and the Bank of International Settlements in order to ensure that participants did not face potential currency crises.

This put almost all of the non-Soviet world in the same currency zone. (The Soviets did not ultimately join in, though they sent delegates to Bretton Woods. Also, the main U.S. negotiator was a Soviet spy, so they had rather significant input.)

Bretton Woods tells us several things about global currency systems: first, they can work for a while, and can actually work quite well. The frequency of banking crises plummeted after the system started, and then rose once it ended. Second, they’re hard to maintain. Bretton Woods was fully operational in 1945, but ended in 1971 when the United States ended the dollar’s convertibility into gold due to a balance of payments crisis. And third, they’re always backed by military hegemons. The dominant currency in every era has been produced by the dominant military power of that era: Roman denarii, Spanish reals and escudos, British Pounds, USD. In every case, the default currency happened to be the one issued by the country with the biggest military.

One member of Congress articulates the situation quite well in the Libra hearings: “The US dollar is an excellent currency as a means of account. It serves all the needs except it’s really bad for tax evaders, drug dealers, terrorists, and that unmet need can be met by new currency.” Later, another asks: “Given your history, why should Congress, regulators, and the public trust you to create what amounts to the world’s largest bank, what really amounts to a shadow sovereign government?”

That about sums it up: to the extent that Libra is useful, its utility is a superset of the dollar’s. But the dollar serves the same goals Libra intends to, and also gives the American government a useful policy tool.

Facebook’s argument for Libra also indirectly assumes a dollar-dominant context: at one point, Zuckerberg says, “The financial industry is stagnant, and there is no digital, financial architecture to support the innovation that we need. I believe that this problem can be solved and Libra can help.” The U.S. financial sector is, in fact, stagnant; payments are faster and cheaper in other countries. And yet, American banks are quite profitable.

The way to square this circle is to treat banks as rent-seekers who profit from investment inflows into the U.S., which, as a simple matter of accounting, match our trade deficit. As long as either a) American consumers are more willing to spend than to save, or b) overseas investors prefer stable dollar-denominated assets to other options, there will be a persistent deficit—which means a persistent flow of funds that can be profitably shuffled around in Manhattan, Chicago, and Greenwich.

Finance, as a sector, only really took off in the U.S. after the Bretton Woods system died. Finance, real estate, and insurance were 15% of GDP when Bretton Woods ended and are now around 21%. Investment banks typically had a few dozen employees; Fred Schwed’s 1955 Where are the Customer’s Yachts characterizes Wall Street as a whole as a group of about 10,000 people. Goldman Sachs alone employs over 36,000 today.

Clearly, while the system isn’t working especially well for people who want to make small cross-border transactions, it’s working just fine for other people.

Libra is not an attempt to topple the current financial system, just an endeavor that somewhat misses how the system works, and identifies the wrong problem to solve.

Libra’s Place In History

Mark Zuckerberg is hardly unaware of world history, and probably has a better classical grounding than most of his critics. Zuckerberg is perhaps the only major company CEO to exclaim “Carthago delenda est” about a competitor. The competitor was Google+, and Facebook did indeed salt the earth in that instance, carrying home spoils and chattel. He’s frequently cited classics as an important influence, listed Latin as one of the languages he spoke on his Harvard application, and named one of his kids after Augustus.

He’s doubtless aware that he’ll have a place in history, and for a company of Facebook’s size any decision big enough to matter to the firm is potentially big enough to matter to history. But Libra is both too ambitious and the wrong sort of ambition; the Roman Senate kept meeting after Rome was ruled by emperors, and, in fact, continued meeting even after the Western Empire fell, but ambitious Romans didn’t aspire to the Senate once the Senate didn’t matter.

But history is always easier to read when we have a few millennia for context. A good history of the twenty-first century won’t be written for a long time, because in the moment, propaganda is more important than understanding. If we knew how modern institutions actually worked, rather than how they ostensibly work, those institutions would lose their legitimacy.

If the global order is still in place—if the rise of nationalism in the U.S. and Europe and the rise of China as a global power are both temporary flukes—then Libra is an attempt to usurp the role of the dollar, but without the military necessary to make that viable. If that global order no longer applies, then the age of transnational cooperation is passing, and Libra will be increasingly unfashionable.

Libra is a very nice idea, and under other circumstances it would work perfectly well. But under the present regime it’s presumptuous, and under the next it will be an anachronism.

Byrne Hobart works in the financial services industry and writes one of the top newsletters on Substack called The Diff. He has worked at research companies, a hedge fund, and a cryptocurrency startup.