Paving the way: Facebook execs meet with U.S. government officials to seek approval for Diem

This article comes fromThis article comes from, Original Author: Elizabeth Dwoskin & Jeff Stein

Odaily Translator | Nian Yin Si Tang

Odaily Translator | Nian Yin Si Tang

Facebook executives have been meeting with top Biden administration officials in recent weeks as the social media giant tries to assuage concerns about its controversial cryptocurrency project, but the effort is running into hurdles -- regulators more than two years into the process. I have always doubted this, which has troubled him.

Despite Facebook's rebranding and overhaul of the project -- which aims to create a global network of instant payments -- Facebook and its partners still face scrutiny from some Treasury Department officials, according to two people familiar with the matter who asked not to be named. These programs could destabilize the financial system.

Administration officials are concerned that the proposed new network — an independent Facebook-backed association now known as Diem — could grow so fast that it would threaten the broader economy if its value collapsed, people familiar with the matter said. While Diem is formally independent, its ties to Facebook exacerbate the risk because of Facebook's ability to scale its products to billions of people around the world, people familiar with the matter said.

Regulators’ concerns also apply to a broader set of emerging stablecoin projects. The goal of Diem and other stablecoins is to create a seamless system of financial transactions by creating a token, or "cryptocurrency," that can be traded digitally anywhere in the world. Unlike cryptocurrencies such as bitcoin, stablecoins have a value that is not tied to any external factors but is instead pegged to a major currency already in circulation, which is why proponents see them as more stable.

For example, the value of Diem will be pegged to the U.S. dollar, a decision the association hopes will reassure regulators. At least in theory, this would prevent it from being as wildly volatile as cryptocurrencies like bitcoin. Critics point out that when investors arbitrarily conclude that Diem has lost value, it will easily collapse. When Facebook launched Project Diem in 2019, it was initially called Libra and was not associated with any currency.Treasury Officials Are Reviewing Tether and Other Stablecoin ProjectsRapid growth, as some experts warn that such projects could create alternatives to the banking system beyond the reach of U.S. regulators. Treasury Secretary Janet L. Yellen in JulyA new federal agency task force convened

, to "cooperate on the regulation of this area and the development of any proposals for a new authority."

As it turns out, Facebook's plans have indeed attracted a lot of attention, both because of its size and because the social network has already been embroiled in controversies, including an ever-expanding lawsuit from the US Federal Trade Commission. antitrust case, and clashes with the Biden administration over the spread of coronavirus-related misinformation on its platform. The company acknowledged this "trust deficit" and said it wanted to overcome it.

Facebook, which has invested aggressively in lobbying in Washington, isn't giving up on cryptocurrencies. The company plans to further aggressively pursue this and other priorities in the coming months, according to a person familiar with the matter. The person, who spoke on condition of anonymity, described the company's internal deliberations.Last week, David Marcus, head of Facebook Financial, the company’s payments arm,visited washington

, and meet with regulators — one of several meetings Facebook plans to hold on the issue this fall and next year, according to Marcus and another person familiar with the matter.

In a meeting with the Treasury and other regulators, Marcus talked about the value of cryptocurrencies in helping the unbanked and suggested that Novi, Facebook's Diem-based payments platform, could help make that happen, said another person familiar with the discussions. People said. He spoke on condition of anonymity because he was not authorized to discuss the issues publicly.

The Treasury Department declined to comment on the details of ongoing discussions about the stablecoin review. This process includes several government agencies, such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), which regulate the banking industry.

Diem declined to comment on the record. Facebook declined to comment, but cited Marcus' Augusta blog postand an interview with him in Washington last week.

Marcus wrotewrote

: “(Diem) has addressed all legitimate concerns raised in its process of designing and building a high-quality stablecoin that offers broad consumer protections and a highly compliant payments network to support it — all within U.S. regulation.” He also said Facebook’s Novi project was “ready to go public” after a long journey.

Marcus also mentioned concerns about Facebook's size. He pointed out that just because Facebook has billions of users, it doesn’t mean it will convert many people to digital currencies overnight.

A Diem executive, who asked not to be named, said regulators had told Diem that its stablecoin design was “positive.” The entire project has been revamped to gain approval from regulators, including adding features such as prohibiting anonymous transactions, the person said.

Facebook first floated the idea of ​​creating a digital currency and wallet in a 2019 white paper it touted as a breakthrough technology that would make transferring money anywhere in the world "as easy and cheap as sending a message." ".

Facebook said at the time that the cryptocurrency would be operated and regulated through an independent organization called the Libra Association.

The company said such a service would be an exceptionally beneficial payment service for developing countries, as it would reduce costs, facilitate cross-border remittances and help tens of millions of people around the world who do not have access to the banking system to participate in the financial system. Facebook has more users in emerging markets than in developed markets, and many of these "underbanked" users are already using the company's services. Facebook plans to launch a peer-to-peer payment system this year.

But the project sparked so much controversy that it was later "stopped". Regulators sounded the alarm, lawmakers held hearings on Capitol Hill, and several Libra Association partners, including eBay and Visa, pulled out.

Last year, the Libra Association renamed itself "Diem," which means "day" in Latin for a new day, and Facebook also renamed its wallet Novi, which means "new" in Latin. The name is Calibra. A digital wallet is an online program that allows users to store money in electronic form, whether it's cryptocurrencies or bank deposits. Diem has also hired a supervisor, Stuart Levey. Levey served as Treasury Under Secretary for Terrorism and Financial Intelligence under Presidents George W. Bush and Barack Obama. This year, the company moved its headquarters from Switzerland to the United States. Facebook's Marcus currently sits on Diem's ​​board, along with Silicon Valley venture capital firm Andreessen Horowitz (a16z) and other fintech firms. Uber (Uber), Coinbase and Shopify are all members of the association. Facebook is an investor in the project, but not the largest.

But the lofty ambitions of Facebook, Diem and other stablecoin groups have clashed with U.S. officials and lawmakers, who remain concerned that it could create a shadowy class of financial instruments beyond the reach of government regulators. Financial instability has become a major concern as cryptocurrencies have grown in recent years. Unlike traditional currencies like the U.S. dollar or stablecoins like Diem, Bitcoin is not controlled by a regulator or central banker. The price of Bitcoin has fluctuated sharply many times this year.

"I'm not sure how Facebook and the Diem Association can address 'all legitimate concerns' given the regulatory uncertainty surrounding many aspects of the crypto space." Rep. Warren Davidson, the top Republican on the House Financial Services Committee's Financial Technology Task Force said in a statement on the Facebook blog post.

His concerns were echoed on the other side as well.

“Facebook may have rebranded the project by changing its name, but they have done nothing to address the primary privacy, national security, consumer protection and monetary policy concerns raised by me and other members of the Financial Services Committee,” said Rep. Maxine Waters said. She chairs the House Financial Services Committee, which had Facebook CEO Mark Zuckerberg and Marcus testify about Libra in 2019. She is one of the most outspoken and forceful critics of the program on Capitol Hill.

Treasury Department officials are leading a review of Diem, which more broadly covers emerging stablecoins, and the matter has risen to the “highest level” at the Treasury Department, two people familiar with the matter said. The review, expected to wrap up within weeks, includes a host of federal regulators with the ability to make or break Facebook's stablecoin and other currencies.

One concern among regulators is whether the new payments system, which allows private companies to create de facto pools of mutual funds, creates financial risks, the people said. During the 2008 financial crisis, regulators found that money market funds — which were supposed to provide investors with a safe and liquid place to invest — could actually be subject to wild swings, despite being regulated by the U.S. SEC.

This is because when there is a financial panic, such as during the financial crisis or early in the coronavirus pandemic, people rush to liquidate all their investments in channels such as money market funds, easily leading to digital bank runs. In these past crises, the government has stepped in to provide assurances that money market funds will not be allowed to collapse, creating a kind of moral hazard by letting investors know they are effectively protected by the government.

If there was a similar mass exodus of a Facebook-linked digital currency that regulators fear could lead to an economic collapse, they could face a dangerous decision about whether to bail out users tied to Diem, the people continued. While Diem has stressed that it will be used to process new payments, which would take it outside the purview of financial regulators, officials worry that Diem could overwhelm the financial system if billions of people use the cryptocurrency to store money. poses bank-like risks.

"This is the treasury's worst fear: After all the lessons we've learned about money market mutual funds from the financial crisis, all of a sudden, Facebook could create a massive mutual fund -- with far less regulation, said a U.S. official with knowledge of the matter.

A previous concern about the Facebook-backed encryption project — the possibility of money laundering — is now less of a risk, one of the people said, because transactions will not be anonymous in the revised project, which is currently under review.

In an interview, Marcus highlighted how Facebook and the Diem Association are working hard to win over regulators to demonstrate that a cryptocurrency project can be stable and secure, and that it can be independent of Facebook. He said the company had been dormant for two years and it was time to resurface.

“In our absence, a lot of the stories were told by other people. Now we are back, reaffirming our enthusiasm, mainly meeting with regulators and sharing our intentions,” Marcus said.