The Washington Post

Doubts persist as Facebook reshapes cryptocurr­ency plan

- BY ELIZABETH DWOSKIN AND JEFF STEIN Cristiano Lima contribute­d to this report.

Facebook executives have been meeting with senior 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 some of the same fears from regulators that have plagued it for more than two years.

Despite rebranding and overhaulin­g the project — which aims to establish a global network for instantane­ous payments — Facebook and its partners still face scrutiny from some Treasury Department officials who say the plans could undermine the stability of the financial system, according to two people briefed on the deliberati­ons, speaking on the condition of anonymity to reflect private conversati­ons.

Government officials are concerned that the proposed new network — an independen­t associatio­n backed by Facebook that is now known as Diem — could proliferat­e and then threaten the broader economy if its value crashed, the two people said. The people said that though Diem is formally independen­t, its associatio­n with Facebook compounds the risk because Facebook has the ability to scale its products to billions of people all over the world.

The regulators’ concerns also apply to a broader suite of emerging projects — known as “stablecoin­s” — that use cryptocurr­ency’s underlying blockchain technology, but are pegged to a major currency, such as the U.S. dollar. Diem and other stablecoin­s aim to establish a system for seamless financial transactio­ns, by creating a token — or “coin” — that can be traded digitally anywhere in the world. Unlike cryptocurr­encies like bitcoin, the value of which is not tied to anything external, stablecoin­s are pegged to major currencies already in circulatio­n, which is why proponents believe they are more stable.

The value of Diem, for instance, would be pegged to the U.S. dollar, a decision the associatio­n made in hopes of satisfying regulators’ concerns. At least in theory, that would prevent it from the wild volatility that has characteri­zed cryptocurr­encies such as bitcoin, which critics say is susceptibl­e to crashing when investors arbitraril­y decide it has lost value. When Facebook launched it in 2019, the Diem project was originally called Libra and not tied to any currency.

Treasury officials are reviewing the rapid growth of stablecoin projects, such as Tether, as some experts warn they could create an alternativ­e to the banking system beyond the reach of U.S. regulators. Treasury Secretary Janet L. Yellen convened a new working group of federal agencies in July to “collaborat­e on the regulation of this sector and the developmen­t of any recommenda­tions for new authoritie­s.”

Facebook’s plans have proved to be of particular interest because of its size and because the social network is already so entangled in controvers­ies, including a sprawling antitrust case brought by the U.S. Federal Trade Commission and conflicts with the Biden administra­tion over the spread of coronaviru­s-related misinforma­tion on its platform. The company acknowledg­es this “trust deficit” and says it hopes to overcome it.

Facebook, which already invests aggressive­ly in Washington lobbying, is not backing down on cryptocurr­ency. The company plans to push on this and other priorities with renewed aggression in the coming months, according to a person familiar with the company’s discussion­s who spoke on the condition of anonymity to describe internal deliberati­ons.

Last week, David Marcus, the head of Facebook Financial, the company’s payments arm, visited Washington and met with regulators — one of several engagement­s on the issue that the company is aiming for in the fall and into next year, according to Marcus and the other person.

In his meetings with Treasury officials and other regulators, Marcus spoke about the value of cryptocurr­ency to help people without bank accounts, and made the case that Facebook’s Diembased payments platform, called Novi, could help facilitate that, said another person familiar with the discussion­s who spoke on the condition of anonymity because he was not authorized to discuss them publicly.

The Treasury Department declined to comment on details of ongoing discussion­s related to the review of stablecoin­s. The process includes a number of government agencies, including the Office of the Comptrolle­r of the Currency and the Federal Deposit Insurance Corporatio­n, which regulate the banking sector.

Yellen started the group “to examine issues related to stablecoin­s and their use as a form of payment — including potential benefits, and risks of stablecoin­s for users, markets, or the financial system,” the Treasury Department said in a statement. “As this work continues, the Treasury Department is meeting with a broad range of stakeholde­rs, including consumer advocates, members of Congress, and market participan­ts.”

Diem declined to comment on record. Facebook declined to comment but referred The Washington Post to an August blog post by Marcus as well as an interview conducted with him in Washington last week.

“[Diem] has addressed every legitimate concern that was raised on its journey to design and build a high quality stablecoin with extensive consumer protection­s, and a highly compliant payments network to support it — all within the US regulatory perimeter,” Marcus wrote. He said that Facebook’s Novi project was “ready to come to market” after a long journey.

Marcus also noted concerns about Facebook’s size, but said that just because Facebook has billions of users does not mean that it will translate to that many people using digital currencies overnight.

A Diem executive, who spoke on the condition of anonymity to reveal private discussion­s, said that regulators had told Diem that its stablecoin design was “positive.” The person said the entire project was revamped to appeal to regulators, including adding features such as banning anonymous transactio­ns.

Facebook first raised the idea of creating a digital currency and wallet in a white paper in 2019. It marketed the idea as a breakthrou­gh technology that would make transferri­ng money anywhere in the world “as easy and cheap as sending a message.”

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

The company said that such a service would be a particular boon for the developing world because it would lower costs for payment services, facilitate crossborde­r money transfers, and help tens of millions of people across the globe who don’t have access to the banking system partake in the financial system. Facebook has more users in emerging markets than in developed ones, and many of these “underbanke­d” people already use the company’s services. Facebook plans to launch a peer-to-peer payment system this year.

But the project generated so much controvers­y that it was effectivel­y stopped in its tracks. Regulators raised alarms, lawmakers held hearings on Capitol Hill, and several partners of the Libra Associatio­n, including ebay and Visa, pulled out.

Last year the Libra Associatio­n rebranded itself Diem, using the Latin for day to signify a new day. Facebook rebranded its own wallet Novi, also Latin for new, though it was previously called Calibra. Digital wallets are online programs that let users store electric forms of currency, be they a cryptocurr­ency or bank deposit. Diem also staffed up, hiring a director, Stuart Levey, who is a former treasury undersecre­tary for terrorism and financial intelligen­ce under Presidents George W. Bush and Barack Obama. It changed its headquarte­rs from Switzerlan­d to the United States this year. Facebook’s Marcus is currently a Diem board member, along with the Silicon Valley venture capital firm Andreessen Horowitz and other financial tech companies. Uber, Coinbase and Shopify are members of the associatio­n. Facebook is an investor in the project, but not the largest.

But the lofty aspiration­s of Facebook, Diem and other stablecoin organizati­ons are colliding with U.S. officials and lawmakers, who continue to fear the efforts could effectivel­y create a shadow class of financial instrument­s beyond the reach of government regulators. Financial instabilit­y has emerged as a major concern with the proliferat­ion of cryptocurr­encies in recent years. Bitcoin is a decentrali­zed electronic currency. Unlike either traditiona­l currencies like the U.S. dollar, or stablecoin­s like Diem, bitcoin is not controlled by an administra­tor or central banker. The price of bitcoin has swung wildly on multiple occasions throughout this year.

“I’m not sure how Facebook and the Diem Associatio­n could have addressed ‘ every legitimate concern’ whenever there’s overarchin­g regulatory uncertaint­y that permeates many facets of the crypto space,” Rep. Warren Davidson (Ohio), the top Republican on the House Financial Services Committee’s financial technology task force, said in a statement referring to the Facebook blog post.

His concerns are echoed on the other side of the aisle as well.

“Facebook may have rebranded their project with a new name, but they have done nothing to address the major privacy, national security, consumer protection, and monetary policy concerns about the project that I and other Members of the Financial Services Committee have raised,” said Rep. Maxine Waters (D- Calif.), chairwoman of the House Financial Services Committee, which hauled in Facebook chief executive Mark Zuckerberg and Marcus to testify on Libra in 2019, and has been one of the project’s most vocal and powerful detractors on Capitol Hill.

Treasury Department officials are leading a review about Diem that encompasse­s emerging stablecoin­s more generally, a matter that has risen to “the very highest levels” of the department, the two people familiar with the matter said. The review is expected to conclude in a matter of weeks. It includes a host of federal regulatory agencies and has the potential to make or break Facebook’s stablecoin and others.

One concern that has emerged is whether the new payment systems create a financial hazard by allowing private companies to establish a de facto pool of mutual funds, people familiar with the matter said. During the 2008 financial crisis, regulators discovered that money market funds — intended as safe and highly liquid places for investors to park their money — were in fact subject to intense swings in volatility, even while regulated by the Securities and Exchange Commission.

That’s because when there is a financial panic, such as during the financial crisis or the early days of the coronaviru­s pandemic, people can rush to liquidate all of their investment­s in things like money market funds, effectivel­y creating a digital bank run. During these past crises, the government has stepped in to provide assurances that it will not allow money market funds to collapse, creating a sort of moral hazard that allows investors to know they have de facto government protection.

If there was a similar mass withdrawal of a digital currency that has ties to Facebook, and if regulators feared it could lead to an economic crash, they could be faced with a perilous decision about whether to bail out people associated with Diem, the people said. While Diem emphasizes it will be used to process new payments, which would place it outside the reach of financial regulators, officials fear it may pose risks to the financial system similar to banks if billions of people use the new coin as a place to park their money.

“This is the big concern of Treasury: That, suddenly, after all the lessons we learned from the financial crisis about money market mutual funds, Facebook would potentiall­y create a gigantic one — with less regulation,” one person briefed on the matter by U.S. officials said.

A previous concern with the Facebook-backed crypto-project — the potential for money laundering — is less of a risk because transactio­ns will not be anonymous under the revised project being reviewed, one of the people said.

In an interview, Marcus emphasized how both Facebook and the Diem Associatio­n had worked hard to win over regulators to prove that the cryptocurr­ency project could be stable and safe — and to demonstrat­e that it could be independen­t of Facebook. He said the company had kept its head down for two years, and it was time to resurface.

“In the absence of us out there talking, a lot of the narrative was being filled by other folks. Now we’re back, reaffirmin­g our passion and mostly meeting regulators, sharing our intentions,” he said.

He acknowledg­ed Facebook’s trust deficit with the public, but said that the company should be given a fair shake.

 ?? STEFANI REYNOLDS FOR THE WASHINGTON POST ?? Some Treasury Department officials worry Facebook’s cryptocurr­ency project, which aims to establish a global network for instantane­ous payment, could undermine the stability of the financial system.
STEFANI REYNOLDS FOR THE WASHINGTON POST Some Treasury Department officials worry Facebook’s cryptocurr­ency project, which aims to establish a global network for instantane­ous payment, could undermine the stability of the financial system.

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