Last year, when Facebook officials were hauled in front of Congress to defend their plans for a cryptocurrency called Libra, they arrived with a pitch about financial inclusion. With Libra, people anywhere in the world would have access to a common payment network, they said, whether or not they had access to a bank. All it would take was a phone and a Facebook account.
Representative Rashida Tlaib, (D–Michigan) a member of the “squad” of progressive first-term lawmakers, had heard similar pitches before. Her Detroit district, the third-poorest in the country, is populated with the very unbanked people Facebook executives were describing. In the past, they had been promised faster tax returns, paycheck advances, or check cashing without a checking account. But these offerings came with little regulation, and often with excessive fees or interest rates. Now, here was Libra, a cryptocurrency that also seemed poised to fall through the regulatory cracks, backed by an industry with a lot of power and data. She wondered if this was the next iteration.
“People don’t realize that this is coming. I feel like a mama bear, and I have to watch out for what is coming for my district and my neighborhood,” Tlaib says. That’s why she wants to talk with you about a thing called stablecoins.
Not familiar? Eyes glazing? It’s a bit niche, for now. Stablecoins are a form of digital currency that, as the name suggests, hold a constant value. That’s what Libra is, technically, but there are many other flavors. Stablecoins might be backed by an actual currency or a basket of assets, or they might use algorithmic tricks to hold steady, but the point is that their price in, say, dollars, doesn’t change. It’s a promise. Stablecoins were initially used to help with buying and selling volatile cryptocurrencies like bitcoin. But increasingly, some stablecoins, like Libra, have been proposed for more common uses, like paying for actual stuff. That’s because they can be fast, easy to use on phones, and are, well, stable.
The problem is that stablecoins are not much more familiar to members of Congress and regulators than they are to you and me. In the Facebook hearings last year, everyone seemed to want Libra to be regulated, but the unanswered question was how. So this week, Tlaib introduced a bill, cosponsored by representatives Stephen Lynch (D–Massachusetts) and Chuy Garcia (D–Illinois), that offers a possible solution: requiring stablecoins that promise a fixed value in US dollars to be issued by banks. That, the legislators argue, constitutes taking a deposit, which is something only banks can do—not tech companies nor the associations they set up to issue coins on their behalf.
That logic takes aim squarely at Facebook’s stablecoin plans. This year, while we were worrying over social distancing and reproduction values, Libra went through major changes. Instead of a global, borderless coin backed by a number of currencies and assets, it’s now proposed as a series of coins for different places: a coin for Europe denominated in euros, a coin for the United States denominated in dollars, and so on. That’s given some relief to central bankers who were concerned that Facebook's currency would compete with their ability to control the local money supply. Libra also abandoned a plan to eventually let anyone build services on its network, a feature that raised money laundering concerns, in favor of a closed system controlled by its official members.
Oh, and there were a few naming tweaks along the way. Facebook’s Calibra division, which is designing the company’s Libra wallet, now wants to be called Novi. And earlier this week, Libra itself—both the currency and the association that issues it—became Diem. Got that? Novi deals Diem. Think of it as an effort to assert the project’s independence from Facebook—though, as a reminder, the company did come up with the idea, built most of the technology, set up the association with close allies, and will likely provide by far the most users for whatever coins are eventually issued.
Those changes appear to have cleared the way to get Diems into people’s Facebook accounts. The initial Libra model raised plenty of red flags for regulators, but the most obvious stumbling block was that a coin backed by a bundle of assets, including dollars, euros, yen, and bonds looked to some like a security. Declaring it so would kick in regulations that would make it impractical as money. But the new Diem model, where one Diem dollar represents one US dollar, looks more like moving money within Venmo or Square. So the Diem association members that plan to offer digital wallets for the coin, like Facebook’s Novi, are following a similar path of labeling themselves money transmitters, which in the US involves the burdensome but ultimately trivial process of seeking licenses from all 50 states. A Financial Times report this week suggested Diems could be issued by the Diem Association as soon as January, pending approval from financial regulators in Switzerland, where it is based.
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Requiring stablecoin issuers to be banks would erect a much bigger hurdle. The idea is to establish “bright lines” between finance and tech that have been blurred by products like stablecoins, says Raul Carrillo, a research scholar at Yale University who gave input on the bill. He says it’s important to establish clear regulations early on for new products like stablecoins. Big tech companies like Facebook are largely shut out of obtaining bank charters, because of traditional barriers between banks and retailers, as well as antitrust scrutiny that such a move would likely raise. Another option would be to ask a bank to issue Diems. Carrillo says that even that degree of separation, along with rules placed on banks, would be a good start to Facebook and Diem’s ambitions in check.
Facebook, however, is not the only company interested in stablecoins. If the bill were enacted, a small but growing industry of stablecoin issuers would likely need to rethink their strategy. That includes companies like Circle, which said Wednesday it had partnered with Visa to issue a credit card that would allow businesses to use its stablecoin called USDC, or US Dollar Coin. In an email, Jeremy Allaire, Circle’s CEO, called Tlaib’s bill a “huge step backward for digital currency innovation.” A Diem spokesperson said the association does not comment on pending legislation, and a spokesperson for Novi said the company was still reviewing the bill.
Brian Brooks, the acting US comptroller of the currency who was recently nominated by President Trump for a five-year term, describes the bill as “a solution searching for a problem.” He says some of the provisions, such as ensuring adequate reserves and the ability to redeem stablecoins for dollars, can be handled without requiring issuers to become banks, which he argues would stifle competition. “What if email got invented and somebody said only the post office can issue email accounts?” he asks. As acting comptroller, Brooks has advocated for more flexibility for non-banks that want to provide digital payment options, including stablecoins.
In Tlaib’s view, a little more friction for private issuers wouldn’t be a bad thing. She would prefer to see digital coins issued directly by the US government—which could be accessed by individuals through accounts at local post offices or directly through accounts at the Federal Reserve. That’s for all the same reasons Diems might appeal to people in her district, she says: ease, low costs, and simplicity. It could be a way, for example, to get Covid-19 relief (should that ever happen again) to people sooner than mailing checks. The important thing, as she sees it, is to level the playing field at the start. “I just know the people who are going to be impacted from not truly having oversight are people who are underbanked and unbanked,” Tlaib says. “They’re going to talk at them, and it’s going to look very shiny and great and easy. They can label it whatever they want, rebrand it, but it’s going to be communities like mine that will be hurt by their experiments.”
Will such a bill pass in the tumultuous final weeks of the Trump administration? Not likely, says Judith Rinearson, a law partner at K&L Gates who closely follows fintech regulation. “But it’s a sign of where the winds are blowing,” she says. The legislators plan to reintroduce a version of the bill next year.