By Amy Leisinger, J.D.
Five industry participants and academics testified before the House Financial Services Committee following the head of Facebook subsidiary Calibra, Inc. David Marcus in response to his defense of the company’s proposal to develop a global virtual currency, Libra. The panelists highlighted the notable differences between Libra and cryptocurrencies such as Bitcoin and analyzed Libra's features with regard to existing law. Two of the panelists expressed vehement opposition to the development of Libra, both in terms of its proposed management and reserve structures and the virtual currency itself.
Libra vs. Bitcoin. According to CoinShares Chief Strategy Officer Meltem Demirors, Libra is not a cryptocurrency. There are clear differences separating Libra from Bitcoin and other cryptocurrencies, and these differences mean they pose very different risks, she said. Bitcoin is decentralized with no entity able to block or reverse transactions, Demirors noted, but Libra is highly centralized in that it will maintain a multi-billion dollar reserve, manage the network code, and control access by means of the Libra Association. In addition, she explained that Bitcoin is its own asset, but that Libra is backed by a pool of currencies and instruments managed by the association. Bitcoin is also permissionless, allowing anyone to validate transactions or build products, while Libra is permissioned with the Libra Association controlling who can access the network, according to Demirors. Moreover, the Bitcoin network supports many companies while Libra only benefits only one entity, Facebook and the other companies in the association, she stated.
“[W]hile Libra may represent an exciting innovation for the Facebook platform and its ability to provide new products and services to its customers and that of its affiliates or associates in the Libra consortium; it simply cannot be compared to Bitcoin,” Demirors stressed.
Potential regulatory issues. Former CFTC Chairman and MIT professor Gary Gensler opined that the Libra Reserve is a pooled investment vehicle that should be regulated by the SEC and that the Libra Association should register as an investment adviser. He also suggested that there is a basis to treat the Libra Reserve as a bank. On a larger scale, Gensler echoed a recent comment by Federal Reserve Chairman Jay Powell: “The size of Facebook’s network means it could be, essentially, immediately systemically important.” The challenge of combatting money laundering and tax evasion could also be quite large, and while Calibra has registered with FinCEN, full compliance could be difficult to achieve, he explained.
In addition, Gensler took issue with Libra being designed to be a “stable value” token, noting that Libra’s value will most certainly fluctuate with the basket of deposits and securities in the Libra Reserve and that any changes will be shouldered by Libra token holders. With regard to the Calibra wallet, according to Gensler, users would not have to keep track of a private key, but they would take the risk that the wallet operator may lose or misuse their funds.
“Calibra has not yet indicated any restrictions on its custody of such customer Libra tokens,” he explained.
Areas of concern. Columbia Law School Professor Katharina Pistor suggested that Libra is designed to become a global currency to complement fiat currencies, basically as a “for-profit ‘currency of currencies.’” With the reserve of “safe” assets backed by public mechanisms, Libra “will be free riding on a public safety net for which they are not paying,” she opined. Further, the concentration of power in the Libra Association is not matched by accountability to Libra holders or the jurisdictions that develop the “safe” assets, Pistor noted. Libra’s global reach could put the organization outside the reach of regulators, she explained.
Public Citizen President Robert Weissman echoed these concerns, renewing his organization’s call for a moratorium on Facebook’s Libra plan. The launch of a private currency tied to a company as large as Facebook could present grave risks to the global economy in terms of stability, control over illicit transactions, and market competition, he opined. “The Libra proposal poses a fundamental threat to nations’ ability to maintain their own monetary policy and to take measures to address currency crises,” he said. Its dominance could improperly extend into the global payments and goods markets and lead to exclusion of competitors and harm consumers, Weissman explained. Libra also will make it difficult to ensure appropriate disclosures, civil remedies, and other protections for consumers, he stated.
According to Georgetown University Professor of Law Chris Brummer, Facebook’s Libra white paper “is peppered with big promises and few details” and fails to disclose the risks, including the potential for losses, to purchasers. These failures are even more disturbing given the possible implications of the federal securities laws, he explained. “Libra potentially comprises a source of systemic risk,” Brummer opined, and many issues need to be addressed before Libra should be launched.
The panelists also noted Facebook’s history of privacy failures and the resultant loss of public trust. The white paper says that the Calibra subsidiary will not share information with Facebook, but there is a definite possibility that this approach will be altered over time, Weissman explained.
“In short, this is not a corporation that should get the benefit of the doubt,” Weissman concluded.