Regulators the world over are gearing up to create a framework that could monitor, direct and control the way cryptocurrencies like bitcoin and Facebook’s FB Libra operate. Cryptocurrencies have been around for a while, but Facebook’s June 18 announcement that Libra would hit markets in 2020 has created the urgency.
That’s because Facebook has a huge network of 2 billion people that could make the kind of difference to economies and governments that can’t be dreamed of by other fiat/crypto coin systems. And Facebook has a spotty history of maintaining users’ privacy and security.
Facebook’s David Marcus, who joined the company from PayPal PYPL, back when it was still a part of eBay EBAY, is co-creator of Libra and the head of Switzerland-based Facebook company responsible for Libra. So in that capacity, he faced questions from the Senate Banking Committee and the House Committee on Financial Services last week.
At the House Committee on Financial Services
Chairwoman Maxine Waters has been sharply critical of Libra since its launch. So at the meeting on Wednesday, she said that Libra would allow the company "to wield immense power that could disrupt” governments and central banks.
Given the repercussions for people, banks and governments all over the world, Democratic Representative Carolyn Maloney, strongly opposed the launch of Libra. She suggested that the company at least do a pilot program with a million users overseen by U.S. financial regulators, including the Federal Reserve. "I don't think you should launch Libra at all…At the very least you should agree to do this small pilot program," she said.
Democratic U.S. Representative Alma Adams pointed to privacy and security issues for users: "You expect us to believe that you're going to start collecting financial data and not share it because you promised not to do that?" she said.
There were also concerns regarding consumer protection and prevention of use for illegal activities like money laundering or terrorist financing.
Republican U.S. Representative Ann Wagner mentioned every other concern while saying that the launch seemed hurried. "I'm concerned a 2020 launch date represents deep insensitivities about how Libra could impact U.S. financial security, the global financial system, the privacy of people across the globe, criminal activity and international human rights."
Marcus explained that the company viewed Libra as a payment tool rather than a security or an exchange-traded fund (an indication that it was not subject to oversight by the SEC. The company hasn’t spoken to SEC Chairman Jay Clayton yet, although representatives have reportedly reached out to others in the organization). He said that it could be treated as a commodity under current law. While remaining noncommittal about a pilot program, he promised to do whatever was necessary to satisfy regulators and “get this right”.
At the Senate Banking Committee
On Tuesday, the senate committee had similar concerns and Marcus went about explaining what Libra was, how it could change the way people do personal finance, etc. He also mentioned consumer protections like making mandatory a valid photo ID. In addition, Marcus tried to push the idea that the U.S. should take a leading role in developing a new global currency before others did (interesting that the company didn’t choose the U.S. as its headquarters though).
Others Are Also Concerned
Treasury Secretary Steven Mnuchin, for one, is concerned about national security money laundering and other illicit activities. “We will not allow digital asset service providers to operate in the shadows.” “Bitcoin is highly volatile and based on thin air,” Mnuchin said. “We are concerned about the speculative nature of Bitcoin and will make sure that the U.S. financial system is protected from fraud.”
Federal Reserve Chairman Jerome Powell thinks the broad adoption of digital currencies like Libra could be risky on multiple counts.
President Donald Trump said that Libra and other cryptocurrencies should face banking regulations. He also said that the U.S. regulatory system may not be adequately equipped to handle the broad adoption of the huge digital payment system that Facebook envisaged.
The Group of Seven (G7) Are Concerned
Much the same concerns were raised at the G7 meeting in Chantilly, France. Country leaders were also concerned about the safeguards to withstand a run on reserves and users' privacy and ownership rights.
Benoit Coeure, the European Central Bank board member said his G7 working group on stablecoins would work on the matter until the International Monetary Fund's annual meeting in October, after which it will hand over the matter to the Financial Stability Board of global financial regulators. He also outlined the broad risks-
"A global stablecoin for retail purposes could provide for faster and cheaper remittances, spur competition for payments and thus lower costs, and support greater financial inclusion. However ... they give rise to a number of risks related to public policy priorities including anti-money laundering and countering the financing of terrorism, consumer and data protection, cyber resilience, fair competition and tax compliance…Market discipline is useful but I wouldn't see it as progress to shift monetary sovereignty from governments to private multinationals."
Finance Minister Bruno Le Maire of France, which holds the rotating presidency of the G7 top world economies, told a news conference, "We cannot accept private companies issuing their own currencies without democratic control." He spoke for the ministers and governors to say that "stablecoins and other various new products currently being developed, including projects with global and potentially systemic footprint such as Libra, raise serious regulatory and systemic concerns."
The G7 also agreed to tax large tech companies for money they made in a country even if they weren’t physically present. They agreed to fix a minimum taxation to eliminate competition between themselves for foreign investments. France, Italy, Britain and Spain already have a plan in force that could be replaced with the new tax.
What the Market's Saying
Coin Center Executive Director Jerry Brito says that Libra is a company-issued asset whereas a true cryptocurrency has decentralized control and wasn’t issued by any central authority. For instance, no company issues bitcoin.
Blockchain Association Director Kristin Smith seemed to welcome the publicity Libra brought while remaining wary about Facebook’s past. It’s mixed,” she said. “We certainly don’t want the whole industry to become associated with some of the issues that Facebook has had as a company in the past.’’
Cryptocurrencies were appreciating after the announcement of Libra, but lost some value in the last week as regulators pressed down on Facebook. All the major currencies including bitcoin, ethereum and ripple responded.
A few weeks into the debate and it does look like Facebook has bitten off more than it can chew. To convince regulators the world over about the efficacy of broadly adopting a stable coin is going to be neither easy, nor cheap.
No doubt the idea was innovative and something governments might pursue in the future (as the People’s Bank of China has apparently said it’s doing), especially given the growing digitization of services. But there doesn’t seem to be a good reason they would turn over control to a private multinational company.
And then of course there’s the question of how Facebook has reacted to its mistakes/transgressions in the past. None of that inspires a lot of confidence. As Senator Sherrod Brown said, it is like the “toddler” with the book of matches. “Facebook has burned down the house over and over and called every arson a learning experience.”
That said, if the government wants to really block the company, it has to come up with some legislation or designate the regulator.
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