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Why US regulators are struggling to step up to regulate Facebook's Libra

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Regulators, lawmakers on Capitol Hill, and the Libra Association itself appear to agree that regulation is needed to ensure that Facebook’s new digital currency is safe and secure to use.

But no one appears to have a clear framework for who should take the first steps to actually doing something.

With no explicit cryptocurrency regulator in the U.S., at least six regulatory agencies will have to get involved in scrapping together some framework to cover the concerns related to payments, anti-money laundering, data security, and consumer protection.

In June, Facebook (FB) unveiled a white paper detailing plans to build a blockchain that will support a “low-volatility” cryptocurrency called Libra. The currency would be backed by short-term government securities and fiat currency, which users would deposit into the reserve when they exchange their money for units of Libra.

Facebook, which is spearheading Libra’s development via a new subsidiary called “Calibra,” has also gathered a consortium of companies that will supposedly have equal commitments with Facebook itself once Libra launches in the first half of 2020. Mastercard, PayPal, Spotify, and Vodaphone Group are listed among the 28 founding members, which Facebook hopes it will grow to 100 by the time Libra launches.

Meet the regulators

Regulatory discussions have already begun; in Congressional testimony this week Calibra head David Marcus said his team had been engaged with U.S. regulators and committed to holding off on launch until “we have addressed all concerns fully.”

“This needs to be analyzed, understood and the proper oversight needs to be set up before Libra can launch,” Marcus told the House Financial Services Committee on July 17. “This is in the spirit that we released the white paper very early, before any launch, so we could have the time to engage with all of the proper regulators, and central banks, and lawmakers to ensure that we will get this right.”

Marcus said Calibra has engaged the Financial Stability Oversight Council, a panel of 10 regulatory heads representing agencies handling financial matters ranging from banking regulation (Federal Reserve) to commodities rules (Commodity Futures Trading Commission).

Although Marcus said Calibra has also individually engaged member agencies “under the umbrella” of the FSOC, few agencies were willing to tell Yahoo Finance on the record if they had meetings with Libra. The two agencies that spoke publicly about meeting with Facebook have expressed the view that their authority over regulating the project could be limited.

Fed Chairman Jerome Powell confirmed that the Fed had a meeting with Facebook representatives months before the announcement. But Powell said the Fed has little power to oversee Facebook, Libra, Calibra, or the Libra Association since they are not banks.

“You would want to see a particular regulatory body that has oversight over the whole project, and that doesn’t appear to be the case,” Powell told the Senate Banking Committee July 11. “There isn’t any one agency that can stand up and have oversight over this. We do not have oversight over Facebook.”

The Consumer Financial Protection Bureau — which enforces consumer protection laws at banks but also non-bank financial providers like mortgage servicers and payday lenders — also reportedly confirmed meeting with Facebook on the Libra project. But Director Kathleen Kraninger said the bureau’s “jurisdiction in this area is fairly limited.”

Other agencies, which can address other elements of the Libra project, declined Yahoo Finance requests to share if Libra had independently engaged with their staff. The Federal Trade Commission, which just fined Facebook $5 billion for mishandling user data, could further address protection of data on the Libra blockchain. The Securities and Exchange Commission, meanwhile, has authority over public disclosures and investment vehicles. Both agencies declined to comment.

A ‘lead’ regulator

In addition to the Fed, CFPB, FTC, and SEC, the Libra project faces concerns over its potential in commodity markets (in the jurisdiction of the Commodity Futures Trading Commission) and its possible use to launder money (under the purview of the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN).

FSOC, chaired by the Treasury secretary, could tackle Libra regulation in piecemeal, by delegating to its member agencies. But in addition to the fact that the FTC is not part of FSOC, the council’s record on handling non-bank regulation is thin. After the crisis, the council designated four companies (AIG, MetLife, Prudential, and GE Financial) as systemically important financial institutions, but all four have since shed extra oversight by either shrinking their financial businesses or taking FSOC to court.

WASHINGTON, DC - OCTOBER 16:  U.S. Secretary of the Treasury Steven Mnuchin (L) talks to Chairman of Securities and Exchange Commission Jay Clayton (R) during a Financial Stability Oversight Council meeting October 16, 2018 at the Treasury Department in Washington, DC.  (Photo by Alex Wong/Getty Images)
WASHINGTON, DC - OCTOBER 16: U.S. Secretary of the Treasury Steven Mnuchin (L) talks to Chairman of Securities and Exchange Commission Jay Clayton (R) during a Financial Stability Oversight Council meeting October 16, 2018 at the Treasury Department in Washington, DC. (Photo by Alex Wong/Getty Images)

Some are advocating for one of the agencies to step up to the plate. Former CFTC head Gary Gensler told Congress July 17 that he would like to see the SEC take the first steps by regulating Libra as an “investment advisor,” since it will be actively managing currency boards with fiat currency from around the world.

Former Federal Deposit Insurance Corp. head Sheila Bair wrote in Yahoo Finance that the Fed should be the primary regulator since users may opt to migrate money from traditional deposits to Libra to avoid checking account fees. The risk of Libra functioning as a de facto bank, Bair argued, means that bank regulators should apply capital and liquidity standards on the project.

Powell acknowledged Bair’s op-ed, telling Congress July 11 that it is an “interesting idea.”

“I wouldn’t want to pre-judge what we do,” Powell added.

California Democrat Maxine Waters, the chair of the House Financial Services Committee, pondered the idea of “a whole new regulatory agency” in an interview with Yahoo Finance July 17.

“I don’t know at this point, because it is not well-defined in ways that we understand,” Waters said. “I cannot tell you who should or could be regulating something like this.”

Banking charter?

Concerns over Libra’s potential to hold substantial amounts of deposits are raising questions over how involved bank regulators should be this early on.

President Donald Trump has raised this question, tweeting on July 12 that Libra has “little standing or dependability” and will need to get a banking charter if it wants to serve as a bank. Depending on the bank charter, Libra would face regulation from the Fed, the FDIC, and/or the Office of the Comptroller of the Currency, introducing more regulators into the mix.

But as planned, Libra has little aspiration to be a bank; Libra does not plan on taking traditional deposits like a commercial bank does, nor is there any mention of offering loans or other banking services. Calibra pitches the project as a way to give unbanked users access to a cheaper way to send money around the world. In this sense, Calibra would not need a banking charter — it would instead be regulated as a payments system.

At the FSOC-level, a payments system could be regulated as a “systemically important” financial market utility, or FMU. The council has already designated eight FMUs (such as the Chicago Mercantile Exchange and the Clearing House Payments Company) as systemically important, generally on the grounds that they are large enough to cause liquidity or operational problems in the event of failure or disruption. No cryptocurrency has been designated a systemically important FMU.

Powell acknowledged that there is a case for designating Libra as “systemic,” arguing that Facebook’s scale of use — with a user base of over 2 billion — means it could have massive uptake.

“It does have systemic scale,” Powell said July 10. “It needs a careful look, so I strongly believe we need all to be taking our time here.”

Ridge Barker, chair of corporate finance at law firm Withers, told Yahoo Finance that FSOC is more likely to apply a “systemically important” label to Libra than it would be to apply bank-like regulations. But he said a challenge is whether or not Libra’s business model could change.

“If you try to build other businesses off of that it changes the nature of the analysis,” Barker said. “If consumers have credit based on Libra, then you’ll change the dynamic very quickly.”

For the time being, Libra is the furthest from systemic — it doesn’t even exist yet. With regulatory ambiguity and Marcus’s insistence that it will not launch until regulators are satisfied, it is unsure when we might see Libra go live.

Powell said it is unlikely there will be implementation of a regulatory framework “within 12 months,” which could make Libra’s 2020 goal a stretch.

Calibra did not respond to Yahoo Finance’s request for comment on their conversations with the CFPB, FTC, SEC, CFTC, FDIC, FinCEN, or the OCC.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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