End of Facebook’s cryptocurrency dreams points to challenges for stablecoins

LONDON: Facebook is said to be winding down its cryptocurrency project Diem and preparing to sell its assets following regulatory pushback in the US

The Diem Association, launched by Facebook in 2019 and supported by 25 businesses, will sell its technology to California-based Silvergate Bank for $200 million, the Wall Street Journal reported, citing people familiar with the discussions.

Originally named Libra, the crypto coin was initially planned to be backed by a basket of currencies, but under pressure from regulators narrowed its ambition to assuming the status of a stablecoin, backed one-to-one by US dollars.

Similar products already exist in the form of other stablecoins, such as Tether, Dai, Binance USD and USD Coin.

They are braced for action from regulators, who have shown an increasing interest in stablecoins and other crypto assets of late. Facebook’s failure to launch a preapproved coin does not bode well for them.

A report in November from the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency called for urgent legislative action to limit the issuance of stablecoins to insured depository institutions and to enable their regulation.

They are most concerned about their ability to destabilize the financial system if there is a sudden run on withdrawals. The market for stablecoins is growing rapidly — up to nearly $130 billion as of the end of October from closer to $23 billion at the same time last year.

Stablecoins are mainly used in transactions involving other digital currencies, but they have the potential to be used in retail transactions as companies like Visa explore services relating to them.

However, there are reasons to believe stablecoins will not meet the same fate as Diem, which faced some unique challenges.

Because of Facebook’s size – it has about 2.9 billion users – it was always going to face greater scrutiny than rival products. It was liaising with regulators during a period of numerous scandals, including the Cambridge Analytica privacy row, which meant trust in the social media pioneer was historically low.

Diem hired former HSBC legal chief Stuart Levey as its first CEO and, in May last year, moved its headquarters from Switzerland to the US in an attempt to placate regulators. But the writing was on the wall when founder David Marcus left the company at the end of 2021.

However, Facebook’s parent company, Meta, has not given up all its crypto ambitions. It built a digital currency wallet, called Novi, and released it as a small pilot in October. Novi is central to its plans to pivot toward projects related to allowing its users to buy and sell non-fungible tokens, known as NFTs, which became a $40 billion market in 2021.

Don’t expect this to be the end of Meta’s crypto ambitions.

On the markets today, Bitcoin was down 0.6 percent to $36,379, while Ethereum declined 2.9 percent to $2,379.

However, outflows of $670 million of Bitcoin from centralized exchanges is a bullish sign for the largest cryptocurrency, according to CoinDesk. Most investors prefer to have direct custody of coins when they intend to hold them for the longer term, it said.