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Washington insiders and Waters’ memo: Here’s what Congress wants to know about Facebook’s Libra next week

Quick Take

  • Facebook will address Committees in the Senate on Tuesday and House of Representatives on Wednesday about its Libra cryptocurrency
  • A memo obtained by The Block plus exclusive industry sources reveal exactly what Capitol Hill wants to know
  • Some of the questions Congress have include: whether Libra is an ETF; if it introduces systematic risk to the economy; and why it is based in Geneva, Switzerland

Facebook is set to testify in front of lawmakers next week, and there are a number of critical questions hanging over the company’s cryptocurrency project before Mr. Marcus goes to Washington. 

Facebook gatecrashed the cryptocurrency world when it recently announced its plans for Libra along with dozen of major partners including Visa, MasterCard, PayPal, Uber, eBay and Vodafone. It is still very early innings of the pre-launched project, which the social media firm hopes will serve the billions of people around the world who are unbanked. 

Nevertheless, the ambition and structure of Libra, in which private companies would create money that could rival government currency, has shocked lawmakers and regulators around the world. Many are concerned that it could pose a risk to the global financial system or that it represents a type of security that needs to be regulated. 

Facebook’s David Marcus, a former PayPal executive and the head of the Calibra, Facebook’s crypto spin-off, is set to address those questions and more in Senate and House hearings next week. But we already have a good sense of what they are planning to talk about. 

Currency ETF?

A Wall Street Journal report has confirmed speculation by The Block’s sources that the structure of Facebook’s Libra cryptocurrency, and how it will be regulated, are currently being examined by the Securities Exchange Commission. People familiar with the situation told The Journal that staff at the watchdog are looking into whether Libra, which is backed by a basket of currencies, would be categorized as an exchange-traded fund (ETF).

Indeed, Jerry Brito, Executive Director of Coin Center, and Kristin Smith of lobbyist firm Blockchain Association, told The Block that congressional staffers on Capitol Hill are also examining whether or not Libra might fit the definition of a security, equity derivative, or ETF. Per white papers on the project written by Facebook, Libra will be backed by a basket of currencies and other securities. The reserves of Libra will be managed by a consortium of companies, collectively called The Libra Association, each of which will receive a percentage return for their role as so-called “validator node operators.”

“That sounds a lot like a fund,” said Brito. “I don’t know what type of fund exactly — maybe it is a mutual fund. But it’s a question Facebook is going to have to address Tuesday.”

“If it is a mutual fund, then how does that work as a currency,” Brito added. “How do you buy things with mutual fund shares. Think about the tax implications.”

Indeed, Dave Nadig, a managing director of ETF.com, called Libra “the most interesting ETF filing ever” in a June 25 blog post. Specifically, Nadig pointed out a section of Libra’s white paper that explains that Libra users would interact with so-called “authorized resellers” who will engage in large fiat and Libra transactions. Users of the currency would have to go to these resellers to redeem their tokens. 

“That sounds a lot like creation and redemption in an ETF,” Nadig said. He went on to compare it to WisdomTree Emerging Currency Strategy Fund, an actively managed fund. 

Brito said Tuesday will likely be the first time Facebook addresses the question of whether or not its cryptocurrency’s structure represents a security. 

“Clever legal arguments can work, but usually not when the president, the Fed chair, and bipartisan majorities of the committees of jurisdiction in Congress are all negative on your thing,” Brito mused. 

The question was also explored in a memorandum sent out to members of the House Committee of Financial Services on Friday. California Democratic Congresswoman Maxine Waters is the Chairwoman of the Committee.

If an asset is an investment company and not exempt from registration, it must comply with regulations designed to minimize conflicts of interest, including regular disclosure of their financial condition and investment policies to investors,” the memo said. “Like ETFs, Libra will redeemable by certain authorized resellers and bought and sold in the open market,” echoing Brito’s remarks. 

There are also concerns over whether Libra or The Libra Association would qualify as a bank under current law. It’s a question President Donald Trump raised last week in a tweet in which he said Facebook would have to “seek a new Banking Charter.”

There are several uncertainties surrounding Libra’s development that make it difficult to determine its status as a bank or nonbank under Dodd Frank,” as per the memo.

Those uncertainties include:

  • How Libra is secured
  • How dramatic shifts in the currency are prevented or responded to
  • Whether or not authorized sellers should be deemed broker dealers

Privacy

Facebook’s tarnished history in protecting the data of its users is at the center of most lawmakers anxieties about its new crypto. This week, the FTC reportedly fined Facebook $5 billion for former user data and privacy transgressions. Many ask how Facebook, which struggled to protect the privacy of its more than 2.5 billion users, can be trusted with creating a new monetary system of a similar magnitude. 

Facebook, and its small but powerful group of supporters, will point to the Libra Association as support that there will be checks and balances to the social-media giant’s power over the coin, thereby preventing any single actor from pursuing nefarious behavior. It’s a point that is well understood on the Hill, Smith says.

“They understand that there is a consortium behind this,” Smith, who’s held meetings with dozens of congressional offices over the last week, said. 

The problem is, most in the Capitol aren’t moved by this point. 

“Nobody is going to say ‘Oh, Uber is involved, I am okay with this now,'” said North Carolina congressman Ted Budd in an interview with The Block. “It doesn’t move the needle on comfort.”

The concern of privacy is noted in the aforementioned memorandum. 

“Facebook has had issues with safeguarding its users’ information in the past. For example, Cambridge Analytica, a political consulting firm, had access to more than 50 million Facebook users’ private data which was used to influence voting behavior.”

Geneva???

Despite the great concerns, Facebook’s privacy issues and the possibility that Libra is possibly an ETF are not the number one concern, according to Smith. 

“It’s that the Libra Association is headquartered in Switzerland,” she said. 

Indeed, it was a concern of Budd who told The Block said he didn’t like that it would “bring innovation outside of the United States.”

Smith said other folks are concerned it will limit U.S. oversight over the project.

For Facebook and Marcus, the future of Libra may very well lay in the balance next week.