House members suggested Wednesday that Facebook Inc.‘s proposed cryptocurrency could be deemed an exchange-traded fund, a currency or a commodity, all of which could require some degree of regulatory oversight.
“What we’re struggling with is: What are you?” said Democratic Colorado Rep. Ed Perlmutter summing up a four-hour House Financial Services Committee grilling of a company executive about the proposed cryptocurrency known as Libra.
“Which is it, fish or fowl?” wondered Michigan Republican Rep. Bill Huizenga. “It seems more like platypus to me.”
Facebook’s David Marcus is set to run Calibra, a Facebook-owned digital wallet for holding Libra, a cryptocurrency that would be backed by a basket of reserve currencies such as the dollar and the euro, which would be held by the Libra Reserve. Libra and the Libra Reserve will be overseen by the Libra Association, a Swiss-based nonprofit group with 100 companies and nonprofit groups.
Marcus faced a similar line of questioning Tuesday before the Senate Banking Committee.
Marcus said that Calibra will run as a money service business, meaning a payments firm like money order or currency exchange companies that have to register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and with every state they operate in. According to Facebook’s white paper on the proposal, Calibra will be just one of many wallets and other services operating on Libra.
But lawmakers offered other ways of viewing the proposal.
“This looks exactly like an exchange-traded fund,” said Rep. Jim Himes, a Connecticut Democrat and former banker.
If Libra — or the Libra Association or Libra Reserve — were considered an exchange-traded fund (ETF), it would have to register under the Investment Company Act of 1940. The Securities and Exchange Commission is currently looking into whether Libra would have to register as an ETF.
Marcus disagreed that Libra was an ETF, “despite the fact that . . . it is using operational mechanisms that are similar.” Libra is a payment tool, Marcus argued, so it could not be an ETF.
But that doesn’t matter, Himes replied. “The SEC doesn’t say if you’re a payment tool, you’re not an exchange traded fund,” he said. “The SEC says that if you have a security backed by other securities, you’re an exchange-traded fund.”
Marcus argued that, unlike an ETF, Libra wouldn’t be designed to return a profit. He said securities law should not apply to Libra.
“When you look at a definition of securities or Howey test used by the SEC it uses the idea that you invest for a profit that results in the management of the product — and this product is not a product, it’s a payment tool, not actively managed — and you cannot use an ETF for payments,” Marcus said. Howey refers to the 1946 Supreme Court decision still cited to define a security.
Marcus admitted that Libra users would face exchange rate risks. If the value of one of the reserve currencies fell sharply, so could the value of a Libra holding.
Other members asked whether Libra should be treated as a commodity, and thus subject to the futures and swaps regulations overseen by the Commodity Futures Trading Commission.
“It may be, but we believe it is a payment tool,” Marcus said.
California Democratic Rep. Katie Porter likened Libra to pre-Civil War wildcat banks that took deposits in dollars and issued private notes in return. They were outlawed in 1863 after a series of failures.
Marcus said Libra would maintain a one-to-one reserve, and when Porter questioned whether that meant self-regulation, Marcus said no. “I believe the right oversight, not self-regulation, particularly at the [Libra] Association level — notably on the [Libra] Reserve — is important,” Marcus said.
Pressed by Porter, he acknowledged he didn’t know what agency should be the regulator. “To be determined by the G-7 working group,” he said, referring to a panel set up ahead of next week’s G-7 finance chiefs next week.
Marcus tried to settle concerns that Facebook would dominate the cryptocurrency’s management, saying it would be just one of 100 corporations and nonprofit groups comprising the Libra Association: “Facebook will only have one vote and not be in a position to control the association.”
But Rep. Carolyn B. Maloney said it doesn’t matter if Facebook alone or a conglomerate of large corporations manages it, adding that they propose a privately controlled currency that would compete with government-issued money.
“I don’t think we should launch Libra at all because the creation of a new currency is a core government function and should be left to democratically accountable institutions,” the New York Democrat said.
Slow official response
Lawmakers and regulators have been slow to respond to the rise of cryptocurrencies and other blockchain-backed technologies that collectively aim to compete in nearly every aspect of the financial system. Most U.S. financial regulatory agencies have created offices to address the disruptive technologies only in the past two years.
Facebook’s release of the Libra white paper in June, however, prompted official responses.
Federal Reserve Board Chairman Jerome Powell said last week that Libra could create a “systemic risk” to the financial system. Secretary Treasury Stephen Mnuchin expressed skepticism at a Monday press conference, echoing sentiments from President Donald Trump.
“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,” Trump tweeted.
The scrutiny of Libra also comes as Facebook itself faces criticism and fines over its data management. The Federal Trade Commission and Facebook reportedly agreed last week that the company would pay $5 billion in a settlement over a 2018 breach that involved 87 million users’ data.
Ohio Republican Rep. Anthony Gonzalez scoffed at Marcus’s pledge that Calibra wouldn’t share user information with Facebook, and Del. Michael F. Q. San Nicolas, a Guam Democrat, was skeptical when Marcus said he had no projections for how much money they’d expect users to convert into Libra.
Facebook has sold Libra as a way to expand access to banking services to the 1.7 billion adults worldwide who remain unbanked, but both Democrats and Republicans questioned the validity of that claim.
“What percentage of users on Facebook are underbanked?” asked Kentucky Republican Rep. Andy Barr.
Marcus said he didn’t know that figure, or how many Facebook users live in “bank deserts,” or rural areas without banks. But he said anyone who could afford a “$40 smart phone and a data plan” would be able to access banking services on Libra.
Unbanked individuals cite a lack of money to keep in accounts, distrust of banks, and privacy concerns as top reasons they don’t have a bank account, according to the FDIC’s 2017 survey of unbanked U.S. households.
Pressed by Massachusetts Democratic Rep. Ayanna S. Pressley how someone would get access to banking services via Libra if Calibra wouldn’t require someone to have a bank or credit account to use it, Marcus did not say.
Ranking member Patrick T. McHenry didn’t join the skepticism. He called a draft bill to block Facebook from launching a cryptocurrency premature. “Just because we may not fully understand a new technology proposal does not mean we should immediately call for its prohibition,” said McHenry. “Especially when that proposal is still just that: a proposal.”
“But, it’s Facebook,” the North Carolina Republican added.
He then alluded to Facebook’s oft-derided slogan, “move fast and break things,” saying: “To be clear, it’s not about advocating for a ‘break it and figure it out later’ approach, but when it comes to finances we must ensure that consumers and investors are protected. So, Mr. Marcus, let’s get to work let’s have that conversation.”