At a hearing this week, a congressman suggested that Facebook’s proposed Libra stablecoin should be classified as a security that should be regulated. Such a designation threatens the future of the social media giant’s foray into cryptocurrencies.
While most of the discussion in the media for the past several weeks has centered around the blockchain-based Libra stablecoin, the Libra token—separate from the coin—is also an integral part of what the project is about.
The Libra stablecoin is a type of cryptocurrency meant to keep a stable value so that it can be used as a global digital currency by anyone, including the 2.7 billion users of Facebook’s Messenger, WhatsApp, and Instagram apps. To be a stablecoin, the Libra coin needs to be backed by a basket of fiat currency.
That’s where the Libra investment token comes in. The token will be sold to raise that cash, with token holders earning interest on their investment.
Essentially, the argument is that because the Libra coin and Libra investment token are unusable individually, both are part of a single product. And that product is an SEC-regulated security.
That was the argument made by Rep. Al Green (D-Texas), at a September 24 oversight hearing of the U.S. Securities and Exchange Commission (SEC).
“[I]t seems that we have integrated the [Libra investment] token into the Libra coin in some way such as to produce a return, which would then deem it [the Libra coin] to be a security,” Green said. He then asked Clayton, “generally speaking, [is that the] kind of transaction makes it a security?”
Noting that he could not address the still-theoretical Libra project directly, Clayton did not say no.
Calling it “quite a sophisticated question,” the SEC chairman added, “I believe a lot of lawyers have probably spent a lot of time trying to find out where that line is, where whether there’s a sufficient amount of integration to cause something that would be a simple store of value [such as the Libra coin] to become a security.”
It is, he added, the kind of issue “that we’re going to have to be looking at when we look at assets of this type.”
The question of whether stablecoins are actually securities has been raised before. Valerie Szczepanik, associate director of the SEC’s division of corporation finance and senior advisor for digital assets and innovation, suggested in May that this might be the case.
The Libra Association’s goal was to avoid this issue by separating its investment token—likely a security—from its stablecoin.
Do two Libras equal one security?
In order to keep its price level, the Libra coin will be backed one-to-one by a basket of fiat currencies, including the dollar, euro, and yen.
That fiat money will be raised by the $10 million investment made by members of the Libra Association, the independent non-profit that will govern the stablecoin created by Facebook.
The 28 current members—Facebook wants 100 when the Libra coin is launched—will get a Libra investment token, which entitles them to a vote in the Libra Association and an equal share of the interest earned by that basket of currencies.
The regulatory issue comes down to those two rights. Together they make Libra Association membership an investment that gives the buyer rights in the enterprise, and is made with the expectation of a return.
Which is fairly close to how Clayton described the expectation of a return on investment that makes a financial product an SEC-regulated security. “[D]oes it give you rights in an enterprise or is it somehow packaged as a product that is designed to give you a return on your investment,” he said earlier in the September 24 hearing. “Those are the types of things that are a security.”
Still hostile to cryptocurrencies
Judging by some of Clayton’s other comments, his critical opinion of cryptocurrencies hasn’t changed.
“I do think that crypto assets, while they have benefits including eliminating frictions and the like can present a great deal of risk,” he told the House committee. “Particularly in cases where in form they are the same as securities or the same as currencies or are the same as payment systems, but they’re not regulated in the same way.”
Saying that the existing financial regulatory system is able to handle “a great deal of risk to investors and risks to our markets more generally, Clayton added, “[t]o the extent a crypto asset would be to evade those regulations, I have a real problem.”
The SEC has so far taken a hard-line position on this in the current spate of enforcement lawsuits over what type of cryptocurrency initial coin offerings (ICO) were actually securities offerings.
On September 23, Kik shut down its messaging app and laid off most of its staff in the face of an SEC lawsuit saying its 2017 ICO was an illegal, unregistered securities sale. Kik raised $100 million for its Ethereum-based Kin (KIN) token, which is used for microtransaction payments to app developers. Kik whittled its 100-plus person staff down to 19 who will focus on expanding the use of Kin.
The same old tune
During the rest of the House Financial Services committee meeting, Libra project was, as usual, variously slammed hard and gently supported by the Financial Services Committees’ two top members, Chairwoman Maxine Waters (D-Calif) and the ranking minority members, Patrick McHenry (R-N.C.).
Waters asked Clayton about the risks Libra poses to investors and the global financial system. McHenry asked about the need to encourage the financial innovation that digital assets like utility tokens can make possible. He suggested carving out a “safe harbor” where innovation can thrive.
The most cryptocurrency-hostile comment unsurprisingly came from Rep. Brad Sherman (D-Calif.), who in May called for banning Bitcoin. The congressman told Clayton that alternate currencies generally meet the needs of four markets: tax evaders, terrorists, sanctions evaders, and drug dealers. “Hence there’s a market for an alternative based on those four markets,” said Sherman, opining that tax evaders were the biggest of those by far.
Referring to the libra stablecoins as “Zuck Bucks” after Facebook’s founder and CEO, he told Clayton, “Mark Zuckerberg has a lot of money, but he doesn’t have the power to print more. He will have that power If Libra … fulfills all of its expectations. Please do what you can to stop this.”
Clayton, for his part, said that the Libra proposal has been a good thing simply for raising the attention paid to cryptocurrency regulation around the world and focusing regulators’ attention.
Facebook has promised to resolve those international regulators’ concerns—and there are many—by the time the Libra coin launches. That was set to be in 2020, but on September 25, Facebook CEO Mark Zuckerberg told the Nikkei Asian Review that the deadline was flexible.
“A lot of people have had questions and concerns, and we’re committed to making sure that we work through all of those before moving forward,” he said. “Obviously we want to move forward at some point soon [and] not have this take many years to roll out. But right now I’m really focused on making sure that we do this well.”