Dive Brief:

• The Diem Association is winding down and selling its technology to La Jolla, California-based Silvergate Bank for roughly $200 million, The Wall Street Journal reported Thursday, citing an anonymous source.
• Silvergate agreed in May 2021 to be the exclusive issuer of the Diem USD stablecoin and to manage the currency reserve. That move came as Diem announced it was shifting its primary operations to the U.S. from Switzerland.
• Federal Reserve officials last summer refused to give Silvergate their sign-off on the arrangement, effectively putting the Facebook-backed digital currency effort at a standstill, Bloomberg reported Wednesday, citing people familiar with the matter.

Dive Insight:

The reported sale appears to be an attempt to return some value to Diem’s investors, who committed $10 million apiece when the association of the then-Libra Association launched. Backers include Coinbase, Andreessen Horowitz, Uber, Lyft, Spotify, Shopify, Ribbit Capital and Singapore’s Temasek Holdings.

It is unclear whether Silvergate will serve as a landing spot for some of the engineers who developed Diem’s technology.

Regardless, a deal would effectively end Facebook’s circuitous 2½-year journey in the digital currency space — one fraught with pushback from the start. Libra, as Diem was first known, was pitched in June 2019 as a token backed by a basket of currencies. Lawmakers and regulators in the U.S. and European Union nearly immediately raised concerns over the digital asset’s potential to enable money laundering and terrorism financing. 

Senate and House committees summoned Facebook CEO Mark Zuckerberg and Libra co-creator David Marcus to testify the following month. And two Democratic U.S. senators in October 2019 wrote letters urging the CEOs of Stripe, Mastercard and Visa to reconsider their companies’ backing of the project. They did.

Libra scaled back its ambitions, rebranded itself and applied for a payments system license from the Swiss regulator Finma. Months later, it withdrew that application, switched focus to the U.S. and registered as a money services business with the Financial Crimes Enforcement Network (FinCEN).

Facebook in October launched a pilot of its digital currency wallet, Novi, but did so without Diem, the stablecoin it was built to hold. Novi opted to use the Paxos Dollar instead, with Coinbase providing custody services. 

But Diem, at the time, appeared very much in the picture. "Our support for Diem hasn’t changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live," Marcus wrote on Twitter.

A month later, Marcus announced he would leave Facebook — by then rebranded Meta — at the end of 2021.

Another potential stumbling block for Diem may have been a report the President’s Working Group on Financial Markets issued in November asking Congress to pass legislation that would require issuers of the digital assets be insured depository institutions subject to the same regulations as traditional banks. 

When the working group convened in July, Treasury Secretary Janet Yellen pressed attendees to "act quickly to ensure there is an appropriate U.S. regulatory framework in place." Though the group’s initial summary of the meeting was sparse in detail, sources told Bloomberg days later that Diem and Tether were the impetus behind Yellen's directive.

Diem’s absence was noted, too, in December, when executives from six cryptocurrency companies testified on Capitol Hill on the "challenges and benefits of financial innovation."

As regulators lean toward a tougher stance on stablecoins, Silvergate, for one, updated its application with the New York Department of Financial Services to form a limited purpose trust company to hold dollar stablecoin reserves, Bloomberg reported last week.

Silvergate CEO Alan Lane said the bank is "not concerned … at all" at the prospect of a potential Fed-backed digital currency treading on a space now occupied by stablecoins. If the central bank were to issue a digital dollar, its arrival on the market likely would be several years away. 

"We’re sitting here, ready to launch something in 2022," Lane told Bloomberg.

Silvergate did not comment to the Financial Times on the Diem matter. A Fed spokesman declined to comment to Bloomberg on the central bank’s talks with Diem. Meta did not respond to a request for comment from either publication. The Diem Association declined to comment.

Meta owns about one-third of the Diem venture, Bloomberg reported Wednesday, citing an anonymous source.