Since its launch in June this year, Facebook's idea of developing a cryptocurrency covering its social network has been condemned and criticized by global legislators and international organizations. Part of the reason is the lack of detail.
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Although Facebook released some documents about Libra in June, it barely disclosed any information about this digital currency. Even Libra's co-founder, David Marcus, was vague at the July congressional hearing and did not give a definitive answer.
Zuckerberg’s attendance at the hearing will allow the US Congress to unveil the ambitious plan that could have a major impact on the world economy. What should parliamentarians ask him? Here are three questions.
1. Who will supervise Libra?
In the testimony of the US Congress, Libra's co-founder and head of Marcus insisted that this blockchain and cryptocurrency will pay attention to the concerns of global regulators before launch.
But given its wide range of operations and the lack of extensive details, it is difficult to identify the right regulator. Katie Porter, a Democrat from California, pointed out this issue during the last congressional hearing. She said:
“I am not sure whether Libra is under the jurisdiction of the Investor Protection Subcommittee or the Consumer Protection Subcommittee.”
At a global level, Libra's regulatory issues are more complicated. Marcus said in an interview that developers who develop apps on their blockchain are responsible for complying with the legal rules of their respective jurisdictions. This is the regulatory approach used by cryptocurrency businesses such as Localbitcoins.
The problem is that, at least for Facebook, it faces higher standards. This is mainly because the geographic scope involved extends the scope of Libra's operations. In a centralized transfer system, financial service providers (such as PayPal) assume operational responsibility.
This is not possible in a decentralized system. Assuming money-laundering cases, the division of responsibilities is not clear. Payment apps located in a jurisdiction may not comply with AML/KYC obligations, but use Libra to transfer funds to another similar entity.
2. How does Libra plan to distribute tokens?
According to the current release of the document, Libra plans to sell tokens through authorized agents. Not to mention this practice has further led to the centralization of Libra's operation, and the mechanisms and requirements for becoming an agent are still unknown. This is important because authorized agents play an important role in the Libra ecosystem, similar to the role commercial banks play in the economic world.
Interestingly, the futures platform CoinFLEX recently released a futures contract on Libra's online time. The contract is settled in kind and the trader will eventually receive the Libra token at the time of settlement. The emergence of this contract raises an important issue. Is CoinFLEX an authorized Libra agent or is applying to become an agent? Regardless, the answer to this question may provide clues to the role and location of authorized agents in the Libra ecosystem.
3. Is Libra a security?
Libra will be managed by the Libra Association, an alliance of established companies and non-profit organizations, each of which will pay $10 million. They are also responsible for running mining nodes to dig out Libra tokens, and the association plans to make regular payments for their investments.
According to the definition of the US Securities and Exchange Commission (SEC) (based on the Howey test), it appears that Libra is a securities asset. The Howey test uses four metrics—investment contracts, profit expectations, use of third parties for promotion, and the existence of an ordinary business—to determine whether a token is a security.
The Libra Association can be understood as a common business, and the low volatility of Libra's price ensures that its members are profitable. Although SEC chairman Jay Clayton declined to comment on Libra, he recently told lawmakers at a hearing that it "sounds like a kind of security."
Congress should have an in-depth understanding of Libra's core operating mechanisms and find out more about how the Facebook program motivates Libra Association members and developers.