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Diem, the stablecoin project formerly known as Libra, is dead. In an announcement on Monday evening, the Diem Association confirmed prior reports that it was shutting down and selling off all its assets to crypto bank Silvergate for $200 million.
The announcement amounts to a death notice, But in Diem's death notice is a curious line that caught the attention of many on Crypto Twitter: "As we undertook this effort, we actively sought feedback from governments and regulators around the world, and the project evolved substantially and improved as a result. In the United States, a senior regulator informed us that Diem was the best-designed stablecoin project the US Government had seen."
It's quite a claim, considering that pushback from regulators is widely seen as the main cause of Diem's demise. And it isn't the first time Diem has said it.
In October, in a public response to a letter of concern from Congress, Diem said: "Beyond financial crime compliance, we engaged extensively with an interagency regulatory team about the design of the project. As part of that review, we made adjustments to reflect feedback we received, and we were informed by a senior regulator that Diem is the best-designed stablecoin project that the U.S. government had seen." (A spokesperson for the Diem Association declined to comment for this story, beyond directing Decrypt to that October press release.)
As a recent Decrypt investigation found, there is ample evidence that the U.S. government's plan for stablecoins is to tamp down the industry by bringing the largest stablecoin issuers under the control of big banks. And as Coin Center executive director Jerry Brito told Decrypt for that story, Facebook’s announcement of Libra in 2019 was a watershed moment that alerted the U.S. government to the rise of stablecoins. (Depending on your view of whether more regulation will help or hinder the crypto market, you can either thank or shun Facebook for this move.)
Diem's sale announcement also praises the Biden Administration's recent report on stablecoins, which may also come as a surprise. "We are gratified that the subsequent Report on Stablecoins issued by the President's Working Group on Financial Markets validated many of Diem's core design features," the announcement read. "Those features address not only the risks related to the issuance of a stablecoin, but also the risks associated with transferring stablecoins between parties."
So, is it plausible that a regulator praised Diem? And why bother to remind everyone of that praise in an announcement that the project shutting down?
There are a few subplots at play here.
a senior regulator said what? lol & that's not suspicious at all. https://t.co/ZM6iFlJpmu
— zico.eth (@zico_eth) February 1, 2022
First of all, Silvergate, which has bought up the bones of Diem, plans to launch its own stablecoin. It's unlikely it will use the Diem name, but if it's planning to build off Diem's tech, the fact that a regulator smiled upon Diem's design could be a line meant to encourage Silvergate shareholders.
"My sense of that line is that they wanted it to be a nice hand-off for Silvergate," says Steven Kelly, a researcher at the Yale Program on Financial Stability. "They didn't want to say, 'We are bailing on this because of all the regulatory concerns' and leave Silvergate to answer to its own supervisors and investors. If they just said, 'We can't meet regulatory standards,' that bank is going to face some questions."
Still, the language of the line, which Kelly calls "Trumpian," is "just not how regulators talk," he says. "Even if they were the most pro-Diem regulators, they just don't say things like that. So that makes me think it's not made up. But also, this could be anybody, right? It could just be one employee of the government who said, 'Hey, yours is the best one I've seen.'"
Makes total sense, every federal regulator I’ve ever talked to has loved editorializing about specific products. They love giving unsolicited opinions https://t.co/3Hqt6G5rNK
— a burrito (@JayJayerJayest) February 1, 2022
All of this matters for the many players still left in the stablecoin race, even if that no longer includes Meta.
That list includes: Silvergate; Paxos, which is behind USDP and partnered with Meta on its Novi crypto wallet (which still exists, though it was originally called Calibra and was meant to hold Libra, which does not exist); Tether, the largest stablecoin but also the one with the most baggage and questions surrounding it; Circle, which partnered with Coinbase on USDC; and, perhaps most interestingly, PayPal, which is exploring its own stablecoin and will no doubt seek to avoid the same pitfalls Meta's Diem fell into.