The stablecoin that launched a thousand regs

From: POLITICO's Morning Money - Thursday Feb 10,2022 01:02 pm

Feb 10, 2022

By Victoria Guida, Kate Davidson and Aubree Eliza Weaver

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Diem, the stablecoin formerly known as Libra, officially died on Jan. 31. What’s striking, though, is that the Facebook-backed project seems to have only narrowly missed out on success, according to seven people with knowledge of the saga.

The project was envisioned as a payment system that could be used within Facebook using a Facebook-operated digital wallet (though not exclusively). From the beginning, the project was met with severe skepticism from lawmakers and key officials like Federal Reserve Chair Jay Powell.

“Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” Powell said at a hearing in July 2019. “These are concerns that should be thoroughly and publicly addressed before proceeding.”

But the people behind the project, which was renamed Diem, made great strides over the course of two years in pleasing federal regulators by designing the coin with their input, from reserves to anti-money laundering controls.

“In the United States, a senior regulator informed us that Diem was the best-designed stablecoin project the U.S. Government had seen,” Diem Association CEO Stuart Levey said in a public statement last week.

After moving its operations from Switzerland to D.C. to accommodate U.S. preferences, the association had aimed to partner with Silvergate, a Fed-regulated bank to issue the coin, which would be tied to the value of the U.S. dollar. Last July, however, the firms were informed that neither the Fed nor the Treasury Department were comfortable blessing the project (originally reported by Bloomberg).

That was partially because U.S. financial agencies were still drafting the report that would lay out their vision for regulating stablecoins. But when that report came, it also implicitly pointed to what had been a big concern: Facebook’s business model. “The combination of a stablecoin issuer or wallet provider and a commercial firm could lead to an excessive concentration of economic power,” U.S. regulators wrote, citing “advantages in accessing credit or using data to market or restrict access to products.”

So, Treasury came down against approving the project, and the Fed followed suit after Treasury Secretary Janet Yellen directly urged Powell to do so.

The story doesn’t end there. Diem then turned to the New York Department of Financial Services, hoping to partner with a New York-regulated trust, which would allow it to issue the stablecoin without explicit permission from a federal agency. The NYDFS under then-Superintendent Linda Lacewell seemed close to approving the project, multiple sources told MM. But then New York Gov. Andrew Cuomo resigned in August over sexual harassment allegations. Lacewell, a longtime Cuomo ally, left soon after, leaving in place an acting financial regulator who wasn’t officially confirmed to the post until January.

Ultimately, it was judged that there wasn’t a path forward, given that there was no regulatory framework in place, one person familiar with the matter told MM. The association said on Jan. 31 that it would sell its intellectual property and assets to Silvergate.

MM sidebar: The question following this story is whether the world is better off without Diem. Certainly, plenty of policymakers think so. House Financial Services Chair Maxine Waters (D-Calif.) in a hearing this week said she hoped the sale of Diem’s assets would permanently end “Facebook’s misadventures in cryptocurrencies.”

But more sympathetic observers say the federal government might have been better off with a widely used stablecoin that it helped develop.

Regardless, Diem is gone but not forgotten. The project can easily be credited as having increased the policy focus on cryptocurrencies, prompted governments around the world to consider issuing their own digital currencies, and launched an intense debate about what payments will look like in the future. The stablecoin that launched a thousand regs.

IT’S THURSDAY — Everybody have their game faces on for today’s inflation report? Some price-related news this week: An order at Chipotle costs about 10 percent more than it did a year ago, the restaurant chain said when reporting earnings Tuesday. (Time to cut back on the guac??)

Thoughts on today’s CPI report? Tips or story ideas? You know what to do: vguida@politico.com, kdavidson@politico.com, aweaver@politico.com, or find us on Twitter @vtg2, @katedavidson or @aubreeeweaver.

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Driving the Day

Consumer price index data released at 8:30 a.m. … World Bank President David Malpass discussion on the global outlook with Renaissance Macro Research at 10 a.m. … Senate Banking hearing on how landlords change the housing market at 10 a.m. … CFPB Director Rohit Chopra joins virtual discussion with Washington Post Live at 10 a.m. … Richmond Fed President Tom Barkin speaks at 7 p.m.

WHITE HOUSE WEIGHS OBAMA ECONOMIC ADVISER FOR TREASURY INTERNATIONAL POST — A Wednesday scoop from your MM host and Daniel Lippman: “Jay Shambaugh, who was a key economic adviser in President Barack Obama’s White House, is under consideration to be Treasury under secretary for international affairs, the agency’s top financial diplomat, according to three people familiar with the matter.”

An MM source who has worked closely with Shambaugh but who didn’t want to weigh in publicly because a nomination has not been announced, writes: “Jay Shambaugh would be perfect. Has all the substance down cold, works well with others, politically savvy but doesn’t let it shade his analysis.”

MCHENRY THROWS COLD WATER ON STOCK TRADING BAN — And another scoop, from our Zachary Warmbrodt: “The top GOP member of the House Financial Services Committee is opposing efforts to ban lawmakers from stock trading and plans to offer an alternative set of limitations on the practice.

Rep. Patrick McHenry (R-N.C.) said in an interview Wednesday that "it's a terrible idea to remove lawmakers from society, generally speaking."

"Both sides are trying to score political hits around a handful of members actively trading stocks," he said. "We have to make sure that we're actually fixing a problem rather than passing dumb law to cover for a handful of people's questionable actions."

U.S.-CANADA BRIDGE JAM HITS AUTO PARTS, ALREADY AN INFLATION LEADER — Our Alex Daugherty and Tanya Snyder: “The U.S. auto industry's most important border crossing has been held hostage for days by Canadians who oppose Covid rules, crimping the supply of parts for the auto industry and sending the White House scrambling for a solution just as new inflation numbers are due to be released.

“A tumultuous protest in Canada, ostensibly started by long-haul truck drivers incensed about cross-border vaccine mandates, has forced the closure of the Ambassador Bridge , a crucial arterial that runs from Detroit to Windsor, Ont., carrying auto parts and other goods across the border.

“The closure has meant the roughly 8,000 trucks that otherwise pass over it daily — or roughly 27 percent of U.S.-Canada trade — have had to find other ways through or call it a day.”

LAWMAKERS PUSH FOR MORE CRYPTO OVERSIGHT — Our Sam Sutton: “The Senate Agriculture Committee is angling to expand the Commodity Futures Trading Commission’s oversight of crypto markets, with lawmakers from both parties signaling support for the derivatives regulator taking a stronger role in rooting out fraud and abuse.

“Over the course of a two-and-a-half-hour committee meeting on Wednesday, Chair Debbie Stabenow (D-Mich.) and Sen. John Boozman of Arkansas, the ranking Republican, indicated they were open to broadening the CFTC’s jurisdiction beyond its traditional role policing derivatives and options markets. That's something agency Chair Rostin Behnam characterized as a necessary step for protecting investors.”

SEC WANTS A STOCK MARKET MAKEOVER — NYT’s Emily Flitter: “The Securities and Exchange Commission wants to shorten the time it takes to complete a stock trade , a change agency officials believe will reduce market risk, according to a proposal announced on Wednesday. Right now, there is a two-day window between when a trade is agreed upon between a buyer and a seller and when the money and the stock in question change hands. The S.E.C. is proposing to cut that time in half, to one day.”

FED WATCH

BOSTON FED NAMES SUSAN M. COLLINS AS ITS NEW PRESIDENT — NYT’s Jeanna Smialek: “The Federal Reserve Bank of Boston has selected Susan M. Collins, a University of Michigan economist and administrator, as its new president — making her the first Black woman to lead a regional reserve bank in the Fed system’s 108-year history.

“Ms. Collins, who is a provost and executive vice president for academic affairs at the university, will be one of 12 regional reserve bank presidents within the Fed system and will vote on monetary policy in 2022.”

FED HOPES ECONOMY IS ON THE CUSP OF INFLATION — Reuters’ Howard Schneider: “New data on Thursday is expected to show U.S. inflation still at multi-decade highs, but Federal Reserve officials are holding out hope that the peak may be near. ‘There is some evidence we are on the cusp’ of inflation that begins to ease perhaps by midyear, Atlanta Fed president Raphael Bostic said in an interview with CNBC on Wednesday.”

— A hotter-than-expected U.S. inflation print may push the Federal Reserve closer to considering its single-largest rate hike in more than two decades, Bloomberg’s Steve Matthews and Reade Pickert write.

— But Cleveland Fed President Loretta Mester says she doesn’t see a compelling case to start with a 50 basis-point increase, Reuters reported.

MM sidebar: A White House official tells MM that the administration won’t be surprised to see a January inflation reading in line with the 7.2 percent expected by economists. But the official emphasized they are keeping a closer eye on month-to-month inflation changes, which give a better view of what’s happening with prices now than year-over-year figures that show what’s changed since January 2021.

Jobs Report

BitFury has hired former banking regulator Jonathan Gould to be its chief legal officer, reuniting the one-time OCC deputy comptroller and chief counsel with former boss Brian Brooks. Brooks, who was acting Comptroller of the Currency during the Trump administration, is now CEO at the crypto mining company.

Alan Fitts is now VP and chief of staff for corporate affairs and comms at American Express. He most recently was executive director of international government affairs at JPMorgan Chase, where he managed the firm’s international council, and is an Obama White House and State Department alum.

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

Fly Around

BOOK CLUB — Western New England Law professor Jennifer Taub has signed a deal with Viking Press for her new book, “Taxation Nation: Lessons from the Loophole Factory.” The book will explore “the evolution of our current tax system in the U.S., the inequality embedded in it, and how we can fix it — told through the stories of the people who profit from it and whom it has failed,” per Publishers Marketplace.

RUSSIA THRIVED AS IT INTEGRATED WITH THE WEST. A NEW COLD WAR IS UNRAVELING THAT — WSJ’s Greg Ip: “Russia’s annexation of Crimea in 2014 was an inflection point for globalization. The economic integration between east and west that began with the fall of the Berlin Wall in 1989 started to unravel. That process will accelerate dramatically if Russia invades Ukraine and is met with punishing sanctions by the West. “

MENTAL HEALTH ON WALL STREET — The National Alliance on Mental Health’s New York chapter has launched a year-long initiative exclusively for Wall Street financial services providers, aimed at reducing the stigma around employee mental health challenges and increasing social support.

Deutsche Bank has joined as a founding partner of the NAMI-NYC Wall Street Mental Health Collaborative. Also part of the inaugural cohort: CVC Advisors, Mizuho Securities, UBS, the Riverside Company and Värde Partners.

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