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By Dave Michaels and Paul Vigna
WASHINGTON -- Facebook Inc. was questioned by senators who said they don't trust the social-media giant to operate a global cryptocurrency. But its main challenge will be overcoming skepticism from global regulators and how to apply decades-old conventions on the oversight of money.
Facebook has said its digital coin, known as Libra, won't be an investment vehicle and that the company and its partners have no plans to act like a central bank. Both points, made at a Senate hearing Tuesday and in private meetings with government officials, are meant to tamp down concerns about the social-media company's sweeping cryptocurrency ambitions.
"We don't actually have a regulatory framework that sufficiently addresses the cash market for digital assets that aren't securities, like bitcoin," Timothy Massad, former chairman of the Commodity Futures Trading Commission, said in an interview. "We don't have a comprehensive way of looking at it."
Libra could be the spur that changes that. The Federal Reserve Board, which once said it had no authority over bitcoin, has suggested in recent weeks that Libra comes with "serious concerns" including financial stability.
The Financial Stability Oversight Council, an umbrella group of regulators that includes the Fed, has formed a working group to discuss oversight of digital assets, Treasury Secretary Steven Mnuchin said Monday. Similar efforts are under way within the Group of Seven industrialized nations to debate whether a global cryptocurrency could inflame financial markets.
Facebook and its partners are conferring with all of those agencies and won't move forward with Libra until it has "fully addressed regulatory concerns and received appropriate approvals," Facebook executive David Marcus told the Senate Banking Committee on Tuesday. Consumers could send the digital coins to one another or use them to make purchases both on Facebook and across the internet.
Yet it isn't clear which approvals Libra needs, beyond certain state and federal licenses for transmitting money. Those regimes guard against the risk of money laundering and other illicit finance; they have little to do with how an asset trades or how to guard against the risk of a run on the asset.
"Libra is based on a relatively new and continually evolving technology in which it is not entirely clear how existing laws and regulations apply," Senate Banking Chairman Mike Crapo (R., Idaho) said at the Tuesday hearing.
For Facebook, the hearing in part showed the toll of a series of missteps and scandals over the past several years that have dented the company's reputation and driven a change in strategy.
The social-media giant is still hugely profitable, and around 2.7 billion people globally use its services each month. But Chief Executive Mark Zuckerberg is attempting a shift toward more private communications and ephemeral messaging.
That shift will likely force Facebook to find new sources of revenue and growth, and the company sees Libra as a key project that would help it move away from its reliance on targeted advertising.
"You guys have had a rough couple of years and so the question is why are you moving on to a new and challenging thing other than the grandiosity of Silicon Valley, which causes you to get bored with your own thing and try to move into a new line of business?" Sen. Brian Schatz (D., Hawaii) asked.
Mr. Marcus sought to persuade lawmakers that Facebook won't be in sole control of Libra once it is operational. A Switzerland-based association that will govern Libra includes 27 other companies, including traditional financial firms such as MasterCard Inc., and consumers will be able to choose digital wallets to store Libra offered by other companies, Mr. Marcus said.
"They will have plenty of choice with established companies that have a lot of trust," Mr. Marcus said.
Relatively few questions at the Senate hearing probed the regulatory minefield or whether Facebook's stated purpose for Libra -- to make finance cheaper for the poor and "unbanked" -- will lead it toward other activities that would stress the wall between banking and technology.
If lower-income consumers are truly the target users for Libra, for instance, its backers could find that making short-term loans is necessary.
"And if you do things like that, shouldn't you be regulated as a bank? Shouldn't you be subject to all the same consumer-protection measures and financial-stability regulations that we impose on banks?" said Mr. Massad, now a senior fellow at Harvard University's Kennedy School of Government.
Mr. Marcus is likely to hear the same tough questioning on Wednesday, when he goes before the House Financial Services Committee. That panel's staff has circulated an idea for legislation that would keep Facebook out of banking or creating digital assets.
Ultimately, though, new laws aren't likely, said Jerry Brito, the executive director of Washington-based research firm Coin Center. If Libra doesn't work under existing laws, he said, then Facebook and its partners are likely to adapt.
Hester Peirce, a Republican member of the Securities and Exchange Commission who has spoken optimistically about the potential for cryptocurrencies, said she hopes Facebook's plans get a fair hearing. "It contains some of the aspirational vision that is possible for cryptocurrency," Ms. Peirce said at a conference in Aspen, Colo.
--Heather Somerville contributed to this article.
Write to Dave Michaels at email@example.com and Paul Vigna at firstname.lastname@example.org
(END) Dow Jones Newswires
July 16, 2019 18:43 ET (22:43 GMT)
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