The U.S. congressional hearings on Libra may determine the future of the project. Here is what regulators think about Facebook’s crypto…
This week is crucial for the future of Libra: Facebook’s cryptocurrency project will be subject to two back-to-back hearings in the United States Congress. First, the Senate Banking Committee will discuss the token on July 16. Then, on the following day, Libra will be reviewed by the House Financial Services Committee. The cryptocurrency’s co-creator, David Marcus, has announced that he will testify at both hearings.
Libra has been making waves worldwide since its white paper was unveiled in June. Specifically, the project has been experiencing massive political and regulatory pushback. Financial institutions of numerous countries, including the U.S., Japan, China, France and the United Kingdom, have expressed their concern regarding Facebook — the social media giant that has been surrounded by privacy-related scandals like in 2018 with Cambridge Analytica — having control over users’ sensitive financial data and releasing a digital asset that could potentially undermine their sovereign fiat currencies.
Brief introduction to Libra
Libra is a stablecoin-like digital asset and a blockchain-based financial infrastructure project that is lead by Facebook. As per the promotional material, it largely targets the unbanked population (which accounts for around 1.7 billion adults across the globe, according to the World Bank) and will initially focus on cross-border remittance. The latter aspect puts Libra alongside traditional operators Visa and Mastercard (both of which have notably invested in the project), as well as some fellow cryptocurrency companies like Ripple and its XRP token.
Libra was officially announced on June 18, when the social media giant published its white paper. The release followed several media reports suggesting that Facebook was developing a cryptocurrency that will facilitate payments across its platforms — WhatsApp, Facebook Messenger and Instagram — which have ostensibly amassed a combined 2.7 billion monthly users. According to the paper, Libra is “a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform.”
The cryptocurrency will be backed by a reserve of assets ostensibly “designed to give it intrinsic value” and to mitigate volatility fluctuations. These assets consist of a basket of bank deposits and short-term government securities that will be held in the Libra Reserve for every Libra token that is issued. Marcus has since specified that those securities will be denominated in U.S. dollars, euros and “certain other major currencies.”
As Libra tokens are not technically pegged to any given national currency, unlike most stablecoins, the white paper stresses that users will not always be able to redeem the token for a fixed amount of fiat, although the reserve assets have reportedly been chosen to minimize volatility.
The new cryptocurrency will be governed by the “Libra Association,” a not-for-profit, Switzerland-based consortium, which includes Mastercard, PayPal, Visa, eBay, Coinbase, Andreessen Horowitz, Lyft, Farfetch and Uber among a total of 28 founding members, the majority of which are U.S. companies.
The Libra Association is itself controlled by the Libra Association Council. The council’s initial members are the founding members, each of whom runs a validator node on the network and was required to make a minimum investment of $10 million to secure the position. Each $10 million investment grants an entity one vote on the council, per Facebook’s rules, although no council member can acquire more than 1% of total votes (evidently, to prevent a monopoly).
While the reserve assets are allegedly held by “a geographically distributed network of custodians” in order to ensure decentralization, the reserve is managed by the association itself, which is the only party able to mint and destroy Libra. New coins are minted once authorized resellers have purchased them from the association with enough fiat to fully back their value and burned when authorized resellers sell the token back to the association in exchange for the underlying assets. Moreover, the white paper states, “Since authorized resellers will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a ‘buyer of last resort.’”
Facebook reportedly plans to expand the association to around 100 members by the time Libra launches, which is scheduled for the first half of 2020. Notably, according to the white paper, “while final decision-making authority rests with the association, Facebook is expected to maintain a leadership role through 2019.”
Furthermore, “to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network,” Facebook has created a regulated subsidiary called Calibra, which will also be responsible for providing the necessary financial infrastructure, namely a digital wallet that will allow users to store Libra tokens and send them to each other. Marcus — who is also CEO of Calibra — later explained that the product is expected to become “one of many competing digital wallets available to customers.”
Facebook has also noted that the software powering the Libra blockchain has been kept open-sourced in order to create an interoperable ecosystem of financial services and to broaden inclusion. In addition, Facebook has revealed the release of the Libra Investment Token — distinct from its public-oriented cryptocurrency Libra — which can be purchased or distributed as dividends to the association’s founding members and accredited investors.
Below is a list of the countries who have commented on the release of Facebook’s token so far:
Reaction: Negative, wary
Critics: The Senate Banking Committee, the House Financial Services Committee, Donald Trump, Rep. Maxine Waters
The U.S. — arguably the most powerful jurisdiction when it comes to controlling Facebook — has expressed a lot of concern regarding Libra, as local lawmakers’ reactions vary from cautious inquiries regarding the potential security of users’ data to outright calls to terminate the project.
In May, a month prior to the official announcement (which had not been revealed beforehand), the U.S. Senate Banking Committee started pressing Facebook about its cryptocurrency project, as a number of reports from The New York Times, the Wall Street Journal and Bloomberg had suggested that something was brewing in the social media behemoth’s offices.
The congressional group wrote an open letter to Facebook founder and CEO Mark Zuckerberg, asking him to share details about the then-secretive project. In a series of questions, the Senate highlighted certain aspects of consumer protection, asking Zuckerberg how the company plans to protect users’ financial information. The committee also asked the social media mogul whether Facebook shares or sells consumer data with unaffiliated third parties, something the company has been accused of before. Moreover, on June 18, the same day the Libra white paper was released, Rep. Maxine Waters, chairwoman of the House of Representatives’ Financial Services Committee, called for Facebook to halt the development on its cryptocurrency. Specifically, Waters argued:
“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action.”
On July 2, the House of Representatives Committee on Financial Services sent another letter to Facebook seniors, effectively requesting the company and its partners to stop the development of the Libra stablecoin and Calibra wallet. The lawmakers claimed that the project may lead ”to an entirely new global financial system that is based out of Switzerland and intended to rival U.S. monetary policy and the dollar.” The committee noted that such an endeavor could have serious implications:
”This raises serious privacy, trading, national security, and monetary policy concerns for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy.”
On July 3, Marcus published a blog post, emphasizing that Libra users will not have to put their trust in Facebook. Specifically, he reiterated that the social media corporation is not the only member of the Libra Network, and that they are relinquishing control of the network. In the post, he wrote:
“Facebook will not control the network, the currency, or the reserve backing it. Facebook will only be one among over a hundred members of the Libra Association by launch. We will not have any special rights or privileges.”
Marcus then stressed that while Facebook does own the crypto wallet company Calibra as a subsidiary, no financial data will be available to Facebook. He also said that users are free to use a range of custodial and noncustodial wallets from different companies to store and to make transactions with Libra. Users do not have to put their trust in Facebook just to use Libra. He reiterated:
“Bottom line: You won’t have to trust Facebook to get the benefit of Libra. And Facebook won’t have any special responsibility over the Libra Network… We’ve been clear about our approach to financial data separation and we will live up to our commitments and work hard to deliver real utility.”
On July 8, David Marcus finally addressed some of the congressional inquiries directly. In the letter to Chairman Mike Crapo and Ranking Member Sherrod Brown of the U.S. Senate Banking Committee, the Calibra CEO reportedly wrote:
“We want, and need, governments, central banks, regulators, non-profits, and other stakeholders at the table and value all the feedback we have received. That’s why we and the other members of the Libra Association issued a whitepaper early in this process, so that there could be ample time for policymakers to ask questions and share concerns.”
Further, Marcus explained that the purpose of the Libra Association is to “reduce transactions costs and expand access to the financial system using blockchain technology.” Their team intends to comply with applicable Anti-Money Laundering (AML) initiatives, as well as other laws fighting the financing of terrorism and various criminal deeds, he added.
There has been no further public discussion regarding Libra among U.S. regulators, except a hearing before the House Financial Services Committee on July 10, during which Federal Reserve Chair Jerome Powell said there needs to be broad satisfaction with the way Facebook is handling regulatory concerns regarding its upcoming cryptocurrency. Rep. Steve Stivers asked Powell during the meeting, “If Facebook can’t sufficiently answer your questions about Anti-Money Laundering, Know Your Customer, what would your message be to the banks that provide banking to Facebook, and what would your advice to Facebook be?” Powell replied: “I just think it cannot go forward without there being broad satisfaction with the way the company has addressed money laundering, all of those things. The number of concerns that I list at the beginning, data protection, consumer privacy, all of those things will need to be addressed very thoroughly and carefully.”
Powell further argued how the project falls outside conventional regulatory bounds:
“I think it’s something that doesn’t fit nearly or easily within our regulatory scheme. It does have potentially systemic scale.”
Most recently, U.S. President Donald Trump has also weighed in on the topic. Trump appears skeptical about Facebook’s project, suggesting that the company should not try to escape the obligations of banks while rolling out a digital currency:
“Facebook Libra’s ‘virtual currency’ will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International. We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!”
The European Union
Notably, the European Union government (not separate member countries, which will be discussed below) seems to treat Libra as a sign of inevitable evolution. That, in turn, spurred Brussels to get ready in advance. Thus, on July 7, European Central Bank (ECB) executive board member Benoit Coeure said that financial regulators must act fast to prepare for Facebook’s Libra. Specifically, Coeure argued that allowing for the development of new financial services and asset classes in a regulatory void is irresponsible. He concluded: “We [the financial regulators] have to move more quickly than we’ve been able to do up until now.”
According to Coeure, the development of digital assets has exposed gaps in current financial regulations and underlines banks’ slow rate of adoption of new technologies: “All these projects are a rather useful wake-up call for regulators and public authorities, as they encourage us to raise a number of questions and might make us improve the way we do things.”
Furthermore, on June 26, Reuters reported that EU banks could have an instantaneous payments system in place by 2020. Although there had been preconditions before, the news agency noted, the adoption may accelerate now that Facebook’s Libra is shaping up to be a competitor to local banks.
Critics: Villeroy de Galhau (France’s central bank), Bruno Le Maire
France was quick to comment on Facebook’s project, prompting other jurisdictions to group up and discuss the possibilities for regulation. Hours after Libra was officially announced, French Finance Minister Bruno Le Maire took to Europe 1 radio to strongly oppose the idea of the stablecoin becoming a replacement for traditional currencies. “It is out of question’’ that Libra becomes a sovereign currency, Le Maire declared. “It can’t and it must not happen,” the finance minister added.
Later, on June 21, reports surfaced that the Group of Seven (G-7) — an alliance that includes France, the U.K., the U.S., Italy, Canada, Japan and Germany — is forming a taskforce at the initiative of France’s central bank. The group will specifically examine how central banks can regulate cryptocurrencies, such as Facebook’s Libra. Its first meeting is expected to take place in Chantilly, France on July 17-18. Francois Villeroy de Galhau, the governor of France’s central bank, announced:
“We want to combine being open to innovation with firmness on regulation. This is in everyone’s interest.”
He later added that Facebook’s cryptocurrency must comply with AML regulations and seek banking licenses if it offers banking services. While Villeroy reportedly admitted during an interview with French magazine l’Obs that there was room to improve cross-border money transfers, he also pointed out that Libra has to comply with existing banking regulation because “the risks are increased by the anonymity that Libra users would have.” The head of France’s central bank also touched on possible requirements for a banking license:
“If the project seeks to go beyond payments to offering banking services like deposits, it will then have to be regulated like a bank with a banking license in all the countries it operates. Otherwise it would be illegal.”
Critics: Felix Hufeld (BaFin), Markus Ferber
The head of the German Federal Financial Supervisory Authority (BaFin), Felix Hufeld, has urged regulators to develop standards in response to Facebook’s forthcoming cryptocurrency. In Hufeld’s view, policymakers and regulators should not stand aside on the issue of Libra, as considerable control questions could arise once the coin comes into use. Further, the head of BaFin hinted at possible regulatory measures introduced by his agency, but also pointed to the need for an international regulatory framework:
“We certainly can not just watch. We will have to respond appropriately in any way. I can only hope that we will succeed in developing at least European, if not globally, basic standards.”
On a separate note, Markus Ferber, a German member of the European Parliament, has said that Facebook could become a “shadow bank” and that regulators should be paying close attention.
Proponents: Mark Carney (Bank of England)
Critics: Financial Conduct Authority
The governor of the Bank of England (BoE), Mark Carney, has been keeping an open mind in regard to Libra. Specifically, Carney said Libra could have genuine use cases if it can conform to regulatory demands, saying, “Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulations.” Carney further suggested that Facebook’s cryptocurrency can indeed solve some financial problems:
“It’s way too expensive to do domestic payments. It’s way too slow, and that hurts consumers and businesses. It stifles innovation, and it’s far too expensive to send money cross-border, and there are huge financial inclusion issues related to that and costs related to that. So, while we are trying to address all these issues, we have to absolutely acknowledge the problem that they’re trying to solve.”
In addition, Christopher Woolard, the executive director of strategy and competition at the Financial Conduct Authority, Britain’s financial watchdog, argued that Libra will require close examination. The forthcoming cryptocurrency’s “size and scale will pose questions for society and government more generally about what is acceptable and desirable in this space,” Christopher Woolard said, adding, “Historically, this may have been a sector that has lived by the mantra of ‘move fast and break things, but the issues raised here require deep thought and detail.”
Russia has made it clear that it will not develop a separate regulation for Libra. The statement was made by Deputy Finance Minister Alexei Moiseev, who explained there will be uniform rules for all circulating digital currencies:
“No one is going to introduce a ban. A large number of businesses ask when it will finally be possible to legally conduct an ICO [initial coin offering] transparently. This will definitely be regulated, permitted, and that is about it.”
Previously, the chairman of the Russian State Duma Committee on Financial Markets, Anatoly Aksakov, said that Facebook’s Libra will not be legally accepted in Russia, as it may pose a threat to the financial system of the country.
Critics: Reserve Bank of India (RBI)
India — which is notably the largest market for Facebook — has presented itself as one of the most hard-to-reach territories for the social media titan’s cryptocurrency. In fact, Facebook has already announced it won’t be offering its Calibra product in India, at least in the near future. According to Bloomberg, that means that the company has effectively cancelled “the rollout of its Libra cryptocurrency in the country.”
“There are no plans to offer Calibra in India,” a Facebook spokesman reportedly told the publication. “As you may know, there are local restrictions within India that made a launch of Calibra not possible at this time.”
The company’s representative was most likely referring to the cryptocurrency ban imposed by the Reserve Bank of India (RBI) in 2018. Previously, local publication The Economic Times reported that Libra may not be available in India due to the current ban of blockchain-based currency transactions.
Critics: People’s Bank of China (PBoC)
China — a country that has been favoring the “blockchain before Bitcoin” policy since introducing the blanket ban on cryptocurrencies in 2017 — has recognized Libra as a potential threat to traditional forms of money. Consequently, the country might use the concept behind Libra for its own monetary system. A former governor of the People’s Bank of China (PBoC), Xiaochuan Zhou, has already stated that Beijing may delegate the issuance of digital currency to commercial entities.
Zhou also urged policymakers to read Facebook’s Libra white paper and said the tech giant’s plans to peg the coin to a basket of fiat currencies, overseen by a not-fot-profit consortium featuring two dozen major companies, could be of interest, as China develops its own sovereign digital currency: “Libra has introduced a concept that will impact the traditional cross-border business and payment system.”
Nevertheless, the former head of the PBoC has also stated that “China should take precautions” against the trend represented by Facebook’s Libra. Indeed, according to media reports, China’s central bank has started developing its own digital currency in response to Libra. Wang Xin, director of the PBoC research bureau, argued that “if it [Libra] is widely used for payments, cross-border payments in particular, would it be able to function like money and accordingly have a large influence on monetary policy, financial stability and the international monetary system?”
Wang said that the bank decided to create its own digital currency specifically because of the unclear role of the U.S. dollar once Libra is issued:
“If the digital currency is closely associated with the U.S. dollar, it could create a scenario under which sovereign currencies would coexist with U.S. dollar-centric digital currencies. But there would be in essence one boss, that is the U.S. dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences.”
Critics: Bank of Japan
Japanese regulators seem to waste no time in regard to Facebook’s forthcoming crypto project. According to Cointelegraph Japan, local authorities have already started investigating the impact of Libra ahead of the aforementioned meeting of the G-7 finance ministers in France.
Per the report, Japanese regulators have set up a liaison conference tasked with investigating the impact of Facebook’s stablecoin on monetary policy and financial stability. The conference will reportedly consist of the Bank of Japan, the Ministry of Finance and the Financial Services Agency, which already started meeting last week.
Specifically, the newly formed group will coordinate policies that would address the consequences of Libra’s implementation on regulation, tax, monetary policy and payment settlements.
While it is currently unclear how Japanese regulators will treat Libra as a result of their discussion, the central bank has already expressed its concerns regarding the tech giant’s project. Thus, a Bank of Japan official has reportedly stated that Libra will pose a risk to financial systems by “piggybacking for free on a financial system that takes heavy costs.” The central bank representative added, “It will move money into an absolutely virtual world, so it is completely different than other forms of digital payment.”
Critics: Financial Services Commission
South Korea’s financial regulator, the Financial Services Commission (FSC), published a report titled “Understanding Libra and Related Trends” last week. In it, the agency reportedly stresses that little information regarding the project has been revealed, and there is a possibility that personal data might be leaked.
Meanwhile, Libra has a higher chance of being successfully commercialized compared to other cryptocurrencies due to Facebook’s unprecedented large audience, the FSC adds. Moreover, the watchdog argues that “Libra may turn into a money laundering solution,” if the project is not regulated.
Singapore is one of the few countries that have ostensibly held discussions with Facebook about its upcoming Libra cryptocurrency. According to Ravi Menon, the managing director of the Monetary Authority of Singapore (MaS), Libra wields a number of potential benefits, such as making payments cheaper or supporting the unbanked.
However, Menon said the regulator needs to understand exactly how the tech giant’s system will work. Additionally, Singapore would be seeking further assurances on security and privacy issues before making a regulatory decision, he added.
According to Reuters, Switzerland’s financial regulator, the Swiss Financial Market Supervisory Authority, has also been in touch with Facebook regarding Libra. Thomas Moser, alternate member of the governing board at the Swiss National Bank, reportedly said the tech giant has indicated it is “willing to play according to the rules.” He concluded, “I think it’s an interesting development and I’m pretty relaxed about it.”
Although there is no further information available at the moment, Switzerland’s position regarding the cryptocurrency should be crucial for the project, given that the Libra Association is based in Zug.
Will Facebook be able to meet regulatory requirements?
So far, Facebook and Libra Association executives have stated that they will incur sales tax and capital gains taxes. In a recent conversation with TechCrunch, it was also confirmed that Facebook is in touch with local convenience stores and money exchanges to ensure AML checks are applied when people exchange Libra for fiat. Additionally, the social media giant has reportedly applied for the BitLicense to use the upcoming cryptocurrency in New York.
As Dante Disparte, head of policy and communications for the Libra Association, told Cointelegraph, “We are committed to working with regulators should they determine that development of additional guidelines is warranted.”
But what if Libra is prohibited by U.S. regulators? A Calibra executive limited the answer to that question by saying that “Libra can do a lot of good for a lot of people,” during the interview with TechCrunch, which may suggest that Facebook might not have a plan B at the moment. In any case, even if U.S. authorities do not have the explicit power to stop Facebook from launching Libra, the social media giant won’t risk coming into conflict, according to what John Todaro, director of research at Tradeblock, told Cointelegraph:
“Facebook is still heavily subject to government laws and regulations around data collection, privacy, and taxation. Openly flouting government requests to halt Libra until further notice, would likely bring Facebook more in the cross-hairs of regulators.”
In any case, if the Libra Association proceeds with its token and manages to deploy it in developing economies — which host most of the unbanked and thus represent key markets for the forthcoming crypto — it could be powerful enough to take financial control over those markets, according to Benjamin Tsai, president at Wave Financial. He told Cointelegraph:
“In my opinion, the impact to the U.S. financial system is not going to be so large, as the U.S. economy is stable and there are various acceptable payment options that will be harder to replace. The impact could potentially be much larger for smaller countries with small economies and weak currencies.”
Some experts seem to think that Libra will challenge sovereign currencies to develop instead of just sabotaging them altogether — and possibly revolutionize cross-border remittance as a result. Jeff Wentworth, co-founder of Curvegrid, told Cointelegraph:
“I don’t think Libra is going to undermine sovereign currencies, but I think it will change them, much in the same way that the Internet has forever changed how we purchase goods and services, like buying a book, Libra will change the way that individuals use money. Fiat currency was an evolution from the gold standard, and fiat currency has value because we collectively believe in the strength of a given national economy, and where it sits in the world economy.”
Furthermore, the regulation of Libra — which is likely to happen, given the scale of the political pushback that Facebook has been facing — can further tighten the scrutiny in regard to other, more conventional cryptocurrencies, as financial watchdogs are now rushed to develop a new framework. Todaro told Cointelegraph:
“If there is a new subset of rules and regulations that are adopted around Libra, this rule-set would then likely be applied to many existing digital currencies. That being said, many existing digital currencies, such as Bitcoin, are sufficiently decentralized so that even if governments seek to censor or limit proliferation of certain currencies, there is only a limited course of action governments can take.”
Currently, the outlook is not too promising for Facebook. As Marcus is preparing a presentation to convince U.S. regulators in Congress, a drafted bill entitled “Keep Big Tech out of Finance” has recently surfaced online, allegedly deriving from within the House of Representatives Financial Services Committee. The Libra Association does not seem discouraged, however, as it expected the wide-ranging responses from regulators across the world. Disparte told Cointelegraph:
“The Libra Association welcomes this public policy dialogue and will contribute to what we hope will be a multi-stakeholder process for designing regulations that support the potential economic and social contributions of digital currencies. The lead up to the launch of Libra in 2020 builds in the time for conversations with regulators and policymakers around the world to take their questions into account.”
Libra Vs. US Congress: All There Is to Know Ahead of Hearings
Libra Vs. US Congress: All There Is to Know Ahead of Hearings