Facebook Pressed on Protections for Cryptocurrency Users
July 17 2019 - 5:13PM
Dow Jones News
By Dave Michaels and Paul Vigna
WASHINGTON -- House lawmakers asked Facebook Inc. how it would
protect users of its cryptocurrency, underscoring the political
hurdles the company needs to clear before it can issue the digital
cash.
Some legislators at a Wednesday House Financial Services
Committee hearing said they were baffled at Facebook's suggestion
that Libra, its planned global cryptocurrency targeting average
consumers, could launch without the close federal supervision that
Wall Street and even local banks have lived under for decades.
Facebook has said Libra's governing body would neither fall
under bank rules -- which prioritize the protection of depositors'
money -- nor be subject to securities laws requiring detailed risk
disclosures and other investor protections.
"We think you're a bank, but you're not quite like a bank," Rep.
Earl Perlmutter (D., Colo.) said at the hearing. "If you're bank,
we regulate the heck out of you. That is the resistance you're
feeling."
Facebook executive David Marcus, who testified for the company
on Wednesday after appearing before a Senate panel the day before,
said the group backing Libra has "no plans to engage in banking
activities." He also said Libra isn't an investment "because it is
designed for stability," meaning speculators wouldn't buy it
seeking a profit.
But Rep. Jim Himes (D., Conn.) said Libra's design resembles
that of an exchange-traded fund, an investment vehicle that trades
on stock exchanges and holds stocks, bonds or derivatives. Libra
will be backed by a large reserve of bank deposits and government
securities, Facebook has said.
Gary Gensler, a former chairman of the Commodity Futures Trading
Commission and a senior Treasury official during the Clinton
administration, told the House committee in prepared testimony that
the fund backing Libra is "a pooled investment vehicle that should,
at a minimum, be regulated by the Securities and Exchange
Commission."
Libra, when it finally launches, will technically be two assets:
a digital coin for consumers, and a reserve of deposits and
government securities that pays interest to members of the Libra
Association, a group of companies that includes Facebook and which
governs the system. Assuming the reserve generates excess revenue,
association members will receive dividend payments. Consumers using
Libra won't receive interest on their holdings of the digital
cash.
Mr. Marcus, who leads Calibra, the Facebook subsidiary that
developed Libra, also faced questions about why the entity in
charge of Libra would be based in Switzerland. He said that choice
was partly due to Switzerland's efforts to tailor regulation for
digital assets.
Other lawmakers asked whether Libra was truly a cryptocurrency,
since merchants storing it for customers, including Calibra, would
have to track users' identities and report suspicious transactions
to the government.
Republican lawmakers praised Facebook's plans, unveiled last
month, as innovative but also questioned whether Libra's strategy
and mission would lead it to compete with regulated institutions
such as community banks.
"Do you believe Calibra and the Libra Association should be
subject to some of the same regulations on the banking side as our
financial institutions are?" said Rep. Scott Tipton (R., Colo.)
Mr. Marcus has said Facebook won't move forward with Libra until
it has satisfied regulators' concerns. The company has been in
touch with Swiss regulators about overseeing the Libra Association,
a group of 28 companies that includes Facebook.
"As far as the Calibra wallet is concerned, we will be active in
the payment space like many other non-banks are active in the
payment space, " he said.
A group of U.S. regulators, the Financial Stability Oversight
Council, has convened a working group on cryptocurrencies that will
examine digital assets including Libra.
If approved, Libra could make cryptocurrencies more transparent
to regulators and law enforcement. U.S. authorities have sometimes
struggled to trace digital assets that are illegally sold to
investors, while pure cryptocurrencies such as bitcoin are designed
for anonymous ownership and use.
With Libra, Mr. Marcus said, law enforcement could have more
insight into the movement of money because Libra's transaction
history will be recorded and stored on its network. Anybody signing
up for a Libra account or wallet would have to provide proof of
their identity. Those identities wouldn't be public, but they would
be recorded and maintained, and likely available to law enforcement
when needed.
"We will improve on the current system," Mr. Marcus added.
Write to Dave Michaels at dave.michaels@wsj.com and Paul Vigna
at paul.vigna@wsj.com
(END) Dow Jones Newswires
July 17, 2019 16:58 ET (20:58 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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