If anyone has doubts about U.S. regulators and their feelings about Facebook's Libra, two pieces of pending legislation will clear things up quite nicely. News reports say that two bills, known as the Keep Big Tech Out Of Finance and Stablecoins Are Securities Acts have been written specifically to target Facebook. They are broad enough that they would apply to most other tech company cryptocurrencies if signed into law.
Facebook seems undeterred by the legislation thus far. Except for making a few changes to the Libra white paper, they appear confident that they can get their cryptocurrency project off the ground sometime this year. However, they must know that Congress acting against them could mean that Libra is eventually shut out of U.S. markets.
It is too early in the game to know how all this will play out. However, it is instructive to learn about the U.S. legislation and what it is regulators are trying to accomplish here. There are some very good lessons to learn in all of this. As Facebook fares in the U.S., so it will likely fare in the rest of the world. We could be on the verge of most national governments taking a firm stand against big tech companies and their plans to enter the crypto market.
Keeping tech companies out
The Keep Big Tech Out of Finance Act was first offered in draft form this past July (2019) by the U.S. House of Representatives Financial Services Committee. Committee members made no bones about the fact that the legislation was drafted in direct response to Facebook's Libra announcement the previous month. They were also very vocal about their opposition to Facebook in general, citing safety and privacy concerns.
According to reports, the legislation bars technology platforms and services with annual revenues of at least $25 billion from being engaged in financial services. It specifically states the following:
"A large platform utility may not establish, maintain, or operate a digital asset that is intended to be widely used as medium of exchange, unit of account, store of value, or any other similar function, as defined by the Board of Governors of the Federal Reserve System."
The wording is pretty straightforward and strong. If the bill ever becomes law, it could prevent Facebook from launching Libra in the U.S. as anything other than a novelty token for use exclusively on the Facebook platform. Libra could not be offered as a monetary system, a security, or any token with any real value.
In essence, Libra would be rendered valueless. It would be no more valuable than the tokens exchanged in modern role-playing games. People might be able to purchase tokens on Facebook and use them to enhance their Facebook activity, but that would be about it. Even that limited amount of activity could be called into question under the legislation.
Making stablecoins securities
The second piece of legislation, the Stablecoins Are Securities Act, was published as a first draft bill in October 2019. Proponents of the bill intend for it to regulate stablecoins the same way most other securities are regulated. If passed, it will bring clarity to a part of the cryptocurrency market that is rather ambiguous at this time.
The bill's authors created legislation in order to bring stablecoins under the authority of the Securities Act of 1933. It states, in part:
"Because issuers of managed stablecoins nevertheless maintain that managed stablecoins are not securities, it is appropriate for Congress to provide clarity by amending statutory definitions of the term security to include managed stablecoins."
Did you notice the language here? Proponents of the legislation are apparently unhappy that those behind stablecoin projects claim that their projects are not securities. U.S. law, as it currently stands, has no means of addressing such assertions. This new legislation is intended to do just that. It is intended to redefine securities so that stablecoins are included.
How does this relate to Facebook? Libra is described in its white paper as a stablecoin tied by a basket of fiat currencies. The majority of the backing will be in U.S. dollars. To members of Congress, this puts Libra on the same plane as stocks, commodities, and Forex trading. They believe it needs to be regulated accordingly.
In order to get around the legislation, Facebook has reportedly altered its white paper to remove dividends as an incentive to early-stage investors. Paying investors a dividend would clearly bolster the government's case that Libra is a security. Take out dividends and the case against Libra gets weaker.
Trying to neuter Facebook
Looking at both pieces of legislation together makes it clear that the U.S. Congress is trying very hard to neuter Facebook as it attempts to get its foot through the door of financial services. The two bills would almost certainly doom the future of Libra in the U.S. And, given that the majority of Libra's backing is the U.S. dollar, not launching in the U.S. would be a significant blow to the project.
Things look bad enough for Facebook at this point, but it gets worse. Germany, France, and the rest of the EU have already publicly stated their opposition to Libra as well. Moreover, China has now begun testing its own central bank digital currency. A successful test would likely mean full roll-out throughout China by the end of 2020.
Stop and think about what that means. If Facebook is shut out of the U.S., the EU and China, there is not much left for them. They could still corner the market in Indonesia and some parts of Central and South America, but that might not be enough to keep investors on board and happy.
Whether you are a proponent of cryptocurrencies or not, you have to admit that Facebook finds itself facing significant resistance around the world. That resistance may be enough to thwart Libra before it sees the light of day. That leads to a broader question: what will those same governments do in relation to pure cryptocurrency platforms like Bitcoin and Litecoin?
Bitcoin is no threat
Facebook's Libra is a very distinct kind of digital asset intended to combine the best of stablecoin technology with Facebook's massive network capabilities. It takes advantage of Facebook's global reach in the social media realm, and its ability to leverage that reach to offer financial services. For right or wrong, it is easy to understand why government regulators would be wary of it.
On the other hand, a platform like Bitcoin doesn't create the same kind of existential threat represented by Libra. For starters, the Bitcoin network does not have nearly the same reach as Facebook. It probably never will. Second, Bitcoin's network is interminably slow and lacking in scalability.
Bitcoin is essentially an alternative monetary and payment system that allows seamless, cross-border transactions without having to rely on banks. It is secure, safe, and relatively cheap. From a central bank standpoint, Bitcoin can coexist with fiat with no harm to either one.
The only thing regulators are truly concerned about in relation to Bitcoin is how it is traded. Regulators are fully aware that there are millions of casual users whose Bitcoin activity represents little more than sending remittances and shopping online. But they also know there are serious traders who make good money buying and selling Bitcoin. Those are the users that regulators are concerned about.
More targeted regulations
It is reasonable to believe that U.S. lawmakers will not stop with the two pieces of legislation discussed in this post. If they can manage to get both of them signed into law, it is likely they will take up additional legislation to regulate other aspects of the cryptocurrency space.
The goals here would be multifaceted. At the top of the list would be increasing tax revenues. As long as people are going to make money buying and selling Bitcoin, regulators want their fair share by way of taxation.
A second goal is to control distributed ledgers more tightly in order to facilitate investigations that will ostensibly weed out criminal activity. In short, regulators do not want cryptocurrency platforms used for things like money laundering, drug trafficking, etc.
And finally, regulations are likely going to carve out a very defined space for different kinds of digital assets for the express purpose of making sure every player stays within a set of boundaries. The point here is to not allow either genuine cryptocurrencies or stablecoins to infringe on central bank digital currencies.
That is where all of this is going in the end. Regulators around the world have embraced the concept of replacing cash with digital currencies. They are going to do it one way or another. First however, they have to get projects like Libra and Bitcoin under control so that such projects do not infringe on their sovereign space.
It is clear that the U.S. Congress is no friend of either Facebook or Libra. They have introduced two pieces of legislation aimed squarely at preventing Libra from ever launching. Now we wait to see if Facebook will go toe-to-toe with regulators or back down.