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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 firstname.lastname@example.org and Paul Vigna at email@example.com
(END) Dow Jones Newswires
July 17, 2019 16:58 ET (20:58 GMT)
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