What will be the martyrdom of David Marcus at the upcoming two Libra hearings?

For Facebook's Libra cryptocurrency, last week was a long and exhausting week, as most celebrities end up standing against the upcoming cryptocurrency assets. Just last week, the Libra virtual currency, backed by social giant Facebook, was criticized by Federal Reserve Chairman Jerome Powell, and soon after, US President Donald Trump also posted on Twitter about Libra's “unreliable”.

Meanwhile, a report in the Wall Street Journal last week confirmed that Libra's cryptocurrency structure is currently being closely watched by the US Securities and Exchange Commission (SEC), which is currently considering how to regulate this new digital asset in the market. The report also said that Libra has been supported by a number of payment companies such as Visa, Mastercard and Paypal, and therefore questioned whether Libra would be considered an exchange-traded fund (ETF).

In addition, last week, US Congress leaders drafted a draft called " Keep Big Tech Out of Finance Act " to keep large technology companies away from the financial sector bill, recommending that large technology companies be prohibited from launching digital currencies, designed to block the Internet and Technology giants have become financial institutions that prohibit these companies from “establishing, maintaining, or operating digital assets that are widely used as a medium of exchange, accounting units, and value storage.” And according to the draft, any technology company with a global annual revenue of more than $25 billion and a third-party connectivity platform that provides online public markets, exchanges or platforms will fall under the jurisdiction of the Act. Violators will be fined $1 million a day. According to people familiar with the matter, the draft discussion was proposed by the staff of the US House Financial Services Committee.

We know that the Senate Banking Committee and the House Financial Services Committee have announced that they will be on Facebook on July 16 (this Tuesday) and July 17 (this Wednesday). The Libra project held a hearing and it is currently determined that Calibra CEO David Marcus will attend both hearings.

The theme of the hearing on Tuesday by the Senate Banking Committee was “ Examining Facebook's Proposed Digital Currency and Data Privacy Considerations .” Democratic Senator Sherrod Brown is the Democratic leader of the committee. One of the first members to question Facebook's new cryptocurrency. Brown previously said: "Facebook is too big and too powerful. It has used its power to take advantage of user data without protecting user privacy. We can't allow Facebook to run through a Swiss bank account without supervision. A risky new cryptocurrency. I call on our financial regulators to scrutinize this to ensure that users are protected."

The theme of the hearing on Wednesday by the House Financial Services Committee was " Examining Facebook's Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System (reviewing Facebook's proposed cryptocurrency and its impact on consumers, investors and US finance) The impact of the system). On June 18th, the chairman of the committee, Maxine Waters, immediately called for Facebook to suspend Libra development after Facebook announced the Libra project. In addition, Waters joined forces with other four members of the US Congress on July 2nd. Letter Facebook asked them to suspend Libra's development and stated in a letter that Facebook provided too little information on the goals, roles, potential uses and security of Libra and Calibra, exposed significant risks and lack of clear regulatory protection. If products and services like this are not properly regulated and adequately supervised, they can trigger systemic risks that threaten US and global financial stability."

On July 12, 2019, the US House Financial Services Committee issued a letter regarding the July 17 hearing, expounding the arrangement of the hearing and the main issues involved in the discussion. Let’s take a look at this time. The much-anticipated hearing will be on which questions and questions will be answered by Calibra CEO David Marcus. Below is the translation of the letter content:

Background Information

Cryptographic currency is often defined as a digital exchange medium that uses encryption to control the creation of currency units and verify the transfer of funds. Cryptographic currency uses blockchain technology, while blockchain technology is a shared digital ledger that records transactions in a public or private blockchain network. These blockchain networks can be composed of individuals, financial entities or other businesses.

On June 18, 2019, Facebook announced plans to develop a new cryptocurrency called Libra, and a digital wallet Calibra that stores this cryptocurrency. According to a white paper published by Facebook, Libra will be built on top of the blockchain, backed by a basket of assets and managed by the Libra Association. The Libra Association is an independent non-profit organization based in Geneva, Switzerland. It is currently comprised of Facebook and 27 other member companies. Members of the association will be responsible for verifying transactions in the Libra blockchain as a “verifier node”. Facebook's goal is to attract more than 100 companies to join the association in early 2020.

According to Facebook, Libra will be “fully supported” by a combination of bank deposits and short-term government securities , which will be deposited in the Libra repository. When a particular agent purchases Libra coins from the Libra Association through their bank deposits or securities, the new Libra currency will be cast. Interest generated by Libra's reserve assets will first be used to pay for the association's operating expenses, and then dividends will be paid to investors using the “Libra Investment Token”. Facebook intends to sell Libra Investment Token to member companies and other investors of the association to raise startup costs.

According to the testimony provided by Federal Reserve Chairman Jerome Powell to the House Financial Services Committee on July 10, 2019, “ Libra has raised many concerns about privacy, money laundering, user protection and financial stability .” Powell also said that if the project The existence of these concerns will be “unable to advance”.

Facebook subsidiary Calibra will operate a digital wallet for the association. The wallet will be available in 2020 through Facebook's Messenger, Whatsapp and standalone Internet applications on smartphones. Facebook plans to extend Calibra's applications to other services, such as bill payment.

01. Impact on investor protection

The federal securities laws that protect investors apply to securities, including stocks, bonds, notes, and investment contracts, whether or not they are digital assets. In April 2019, the US Securities and Exchange Commission (SEC) issued a guidance to determine which digital assets are in line with the "investment contract" based on the so-called "Howey test." According to the “Hay Test”, the investment contract needs to meet the following conditions: 1) capital investment; 2) common enterprise; 3) reasonable income expectation from the efforts of others. If a digital asset meets this standard, it is a security that must either be registered with the SEC or must be exempt.

According to the Howie test, Libra Investment Token may be equivalent to a security because it will be sold to investors to raise the start-up cost of the project and provide interest dividends to investors. The Libra token itself may also be a security , but Facebook does not intend to pay dividends, nor does it know whether investors will have a “reasonable earnings expectation”. However, the issuance and sale of Libra coins may also be integrated into the Libra Investment Token, so both may be in the securities category.

If a digital asset is a security and is not exempt from SEC registration, the issuer must make full and fair disclosures and provide the necessary information to potential investors so that investors can make informed investment decisions. The issuer must also disclose “the issuer’s financial status, management’s identity and background, and the price and quantity of the securities to be issued…” those intermediaries that act as securities (such as exchanges and brokers) and those who own securities Institutions with trusteeships may also have to comply with certain regulations designed to protect investors from fraud and other misconduct.

The securities law also manages investment companies. The Investment Company is a financial intermediation agency that pools the funds of individual investors and invests in a variety of securities or other assets. The performance of an investment company is based on the performance of securities and other assets held by the investment company. An exchange-traded fund (ETF) is an investment company fund that can be redeemed through funds as a mutual fund, but also allows investors to trade at market prices throughout the day. If an asset is an investment company fund and is not exempt from registration, it must comply with relevant regulations designed to minimize conflicts of interest, including regular disclosure of financial status and investment policies to investors. Like ETFs, Libra can also be redeemed through certain authorized resellers and traded on the open market .

Although Libra and Calibra will be based in Switzerland, if they are sold to US citizens, the US federal securities laws will still apply .

02. Impact on consumer protection

The sale, exchange or marketing of cryptocurrencies may result in cryptocurrency exchanges or other related businesses being subject to certain consumer protection laws. For example, Article X of the US Dodd-Frank Act authorizes the Consumer Financial Protection Authority (CFPB) to establish and regulate certain rules and requires law enforcement agencies to enforce and enforce certain laws to protect consumers from “unfair, Infringement of deception or abuse of behavior and practices. These regulations apply to a wide range of financial industries and products, as well as to cryptocurrency exchanges. Although CFPB does not exercise regulatory power over the cryptocurrency industry, it is accepting complaints related to cryptocurrencies and states that consumer financial laws will be enforced where appropriate .

In addition, the Federal Trade Commission (FTC) has taken some enforcement actions against cryptocurrency promoters and mining operations because they may violate the Federal Trade Commission Act. All states in the United States have laws against fraudulent activities, and state regulators can use enforcement rights against cryptocurrency-related businesses. But these laws are not uniform, and the degree of rigor of regulation may vary from state to state.

In addition, the 1978 Electronic Funds Transfer Act (EFTA) requires traditional financial institutions involved in electronic funds transfer to disclose certain transfer fees, correct errors discovered by consumers, and limit consumption in the event of unauthorized transfers. Responsibility. It is unclear whether EFTA's protective measures are applicable to cryptocurrency transactions .

03. Impact on data privacy & security

It is unclear which data privacy laws will apply to the Libra Association and Calibra. Facebook did not specify how it intends to obtain user consent, but simply stated that personal data will be shared to combat fraud, as well as for research and data analysis improvements and compliance with legal requirements. To obtain Libra coins and access the Calibra Wallet, the user must provide a valid government identification. However, if there is no clearer measure of obtaining user consent in its Terms of Service, the user may not know how their data will be used.

Cryptographic exchanges are also often the target of cyber attacks and data breaches. To facilitate its cryptocurrency transactions, Facebook will manage to maintain a digital repository of social, financial, and government data about users, which may further increase the risk of being attacked . Facebook used to have problems protecting user information. For example, Cambridge Analytica, a political consultancy hired by the Trump campaign team in 2016, has private data of more than 50 million Facebook users to influence voting. As a result, Facebook expects to pay up to $5 billion in fines to the US Federal Trade Commission (FTC) and will continue to accept an order from the FTC on the grounds that Facebook has deceived consumers and failed to protect the privacy of consumer data. In addition, only in the last year, Facebook unsafely stored the user's password (can be traced back to 2012); paid for young users to download a spyware that allows Facebook to access their mobile phones and network activities; Attacks on nearly 50 million accounts; and a software vulnerability that allowed third parties to access photos of 6.8 million users.

04. Impact on systemic risk

The Dodd-Frank Act seeks to reduce systemic risk by strengthening the Federal Reserve's regulatory power over banks and non-bank institutions. Large banks automatically accept more stringent standards, while non-bank institutions and financial market utilities require the Financial Stability Oversight Council to designate financial institutions that are systemically important before they accept federal regulators. Strengthen supervision.

At present, there are several uncertainties surrounding the development of Libra, making it difficult to determine the status of its banks or non-bank institutions under the Dodd-Frank Act, including: (1) how to protect this cryptocurrency ; (2) The extent to which measures are in place to prevent and respond to drastic changes in the value of Libra reserves ; and (3) whether authorized dealers of Libra reserves are in the brokerage category . Libra plans to introduce banking functions such as allowing users to deposit, providing loans and requiring users to deposit money, but unlike traditional banks, Libra tokens are not covered by federal insurance. Given the proposed Libra structure, the relationship with government-backed currencies, and Facebook's global coverage of the product, if the Libra Association will be an unregulated entity, the risks to the financial system will be high. .

05. Impact on monetary policy

To achieve the dual mission of low inflation and maximum usage of the dollar, the Federal Reserve (Fed) manipulates the supply of dollars by injecting cash into the system when buying securities, or by withdrawing cash from the system when selling securities. The monetary level in the economy stipulates the short-term benchmark interest rate, which is the price paid by banks when they borrow from the bank lending market, while the bank lending market determines all other lending rates. The Fed is able to pass monetary policy in this way because it has a monopoly on the money supply (including the dollar currency, cash, and check and savings account balances, etc.). If another currency that is not controlled by the government (such as cryptocurrency) is widely used and feasible, this may have a negative impact on the Fed's monetary policy , because the Fed will lose control of inflation and inflation through the manipulation of cash in the system. The monopoly of the target .

06. Impact on national security

The US Bank Secrecy Act and related US anti-money laundering regulations provide guidance for potential illegal activities within the financial system. To ensure the security of our country and economy, regulated entities, including cryptocurrency exchanges and transporters, must understand their customers and monitor transactions to ensure they can identify suspicious activity and report it to relevant authorities. These laws ensure that law enforcement and its partners have the information they need to discover and combat money laundering, terrorist financing, fraud, tax evasion and other financial crimes.

Libra and Calibra may bring several national security concerns. First, it is unclear how the parties will accurately identify users or beneficiaries of Libra or Calibra wallets (especially when these users or beneficiaries do not have verifiable identities) and how to trade specific transactions with Individuals or entities are associated . Second, it is unclear which compliance standards (if any) should be used to review Libra's new users and their transactions. These risks will be further enhanced when Libra transforms into a decentralized, license-free model in the future. Malicious people will likely use Libra's open access to build their own exchanges and wallets and conduct their own transactions. Once users (whether legal or not) acquire Libra, their tokens and identities may be transmitted anywhere in this stateless ecosystem and exchanged with any value form (including other cryptocurrencies and fiat currencies). It is also unclear how the Libra Association will address issues such as sanctions enforcement, stolen asset recovery, taxation and crime . In addition, there are concerns about potential government failures caused by decentralization, or weak French currency or economic collapse due to long-term use of Libra.

. . .

As can be seen from the above letter, the current US Congress has six main concerns about Libra, so David Marcus will need to respond mainly from these six aspects. How will David respond? We will wait and see!

Author | Biraajmaan Tamuly

Compile | Jhonny