Libra is a security, says a former Commodity Futures Trading Commission (CFTC) chairman in prepared remarks to the U.S. House of Representatives.
Gary Gensler, who chaired the CFTC from 2009 to 2014 and previously held leadership roles at the U.S. Treasury Department, says in written testimony that Facebook’s new cryptocurrency project looks like an investment vehicle and that Libra may even resemble some banking structures.
Gensler will testify before the House Financial Services Committee on Wednesday, as part of a panel of expert witnesses on the potential implications of Libra. He will join Public Citizen president Robert Weissman, Columbia University law professor Katharina Pistor and Georgetown University law professor Chris Brummer.
In Gensler’s remarks, obtained by CoinDesk, he describes how the Libra cryptocurrency might be classified as a security.
At the heart of his argument is Libra’s structure: Libra itself is intended to act as a kind of stablecoin, with its value pegged to a basket of sovereign currencies and government bonds. Members of the Libra Association, the governing council charged with overseeing the cryptocurrency’s ongoing development after it launches, will receive a Libra investment token – a security token, as Facebook has acknowledged.
Collateral earned on the basket of currencies backing Libra (referred to as the Libra Reserve) will go to holders of the investment token, according to documentation Facebook published about the project last month.
Gensler argues this means Libra itself looks like a security, saying:
“As currently proposed, the Libra Reserve, in essence, is a pooled investment vehicle that should at a minimum, be regulated by the Securities and Exchange Commission (SEC), with the Libra Association registering as an investment advisor.”
‘Pooled investment vehicle’
According to Gensler, Libra is a security for the same reasons that the Libra Investment Token is a security.
There may be debates on whether and how Libra qualifies as a security under the Investment Company Act of 1940, the Howey Test, or the “Reves Family Resemblance Test,” but none of these are strictly important for this analysis, he argues, explaining:
“It’s unambiguous that [the Libra Investment Token] is a security as it will receive a net return based upon interest on the Libra Reserve.”
In Gensler’s view, the actual Libra token is “part of the same pooled investment vehicle,” and therefore faces the same market risks as the investment token.
The SEC is already considering whether Libra could be considered a security, and therefore falls under its purview, according to a Wall Street Journal report.
“Further, investor protection will be just as important for the proposed Libra token as it is for investors in international bond funds or in commodity ETFs such as gold, silver, or oil ETFs,” Gensler says. “I also believe that each Authorized Reseller of the Libra token would need to be a registered broker dealer.”
He describes holders of Libra as a “2nd class of investors” in the Libra Reserve.
Securities concerns aside, aspects of Libra’s setup also may fall under banking regulations, Gensler adds.
The Libra Reserve is effectively proposing “a private form of money” which can be used for payments, storing value and lending “the proceeds to banks (as deposits) and governments (as debt securities),” he says.
These applications are similar to services offered by banks.
“Thus, there is some basis to consider the Libra Reserve as a bank or to apply bank-like regulation to it,” Gensler proposes. “At a minimum there should be restrictions on Libra Reserve’s investments and prohibition on its ability to lend or operate as a fractional bank.”
(It’s worth noting there’s actually precedent for a stablecoin issuer operating as a fractional bank: Tether.)
British Hacker to Hand Over $1M in Crypto for Phishing Attacks 1348
A British judge has ordered the confiscation of $1.1 million worth of cryptocurrency from a hacker who used phishing attacks to steal personal data and sell it on the dark web.
As The Telegraph reported on Aug. 23, judge Joanna Korner of Southwark Crown Court ruled that the police could confiscate $1.1 million worth of digital currency from Grant West.
In his cyber attacks, West allegedly operated under the online pseudonym “Courvoisier” and used phishing emails to steal customers’ personal data — including financial data, as well as credit and debit cards details — before selling it on the dark web with cryptocurrency.
78 million individual usernames
West targeted companies including Sainsbury’s — the second largest retail chain in the United Kingdom — general merchandise retailer Argos and Uber. During the investigation, the police seized an SD card containing 78 million individual usernames and passwords, and the information of 63,000 credit and debit cards.
West was reportedly sentenced to ten years for conspiracy to defraud and possession of criminal property in May. At the time of West’s arrest, the value of the cryptocurrency was around $1.96 million, but price volatility made it difficult for authorities to determine the exact value of the confiscation, according to prosecuting barrister Kevin Barry.
The seized digital currency is set to be sold and West’s victims will be compensated for damages.
In July, a gang of masked men raided a Bitcoin (BTC) exchange in the English city of Birmingham, sparking a police investigation. On that occasion, the group had reportedly attempted to steal a Bitcoin automatic teller machine using a rope attached to their car.
According to blockchain security company CipherTrace, outright thefts, scams and other kinds of misappropriation of funds from digital currency holders and trading platforms resulted in around $4.3 billion in losses throughout 2019.
Hybrid stablecoins such as Facebook’s Libra could lose benefits offered by centralized, decentralized assets
One of the main drawbacks associated with the cryptocurrency market is its highly volatile price activity. The volatility was and still is, considered a major hindrance when it comes to the mass adoption of virtual assets. The introduction of stablecoins was meant to tackle this associated crypto-volatility. However, not all stablecoins operate the same way or are based on the same principles of work.
Linda Xie, Co-founder and Managing Director at Scalar Capital Management, recently spokeabout the future of stablecoins, on the basis of their contrasting credentials.
Xie classified the stablecoins industry as being centralized and decentralized assets, while also having dissimilar functionalities.
Speaking about centralized stablecoins, Xie took the example of USDC which is pegged 1:1 by USD in a bank. The advantage of a centralized stablecoin, she said, is the existence of a centralized entity that is responsible if anything goes wrong in terms of financial capacity. However, accessibility is limited to certain places and it will only be available if the individual resides in an area of “supported jurisdictions.”
Xie mentioned the case of DAI as a decentralized stablecoin, explaining that its major disadvantage in the market was its significant complexity and low stability, when compared to centralized stablecoins. The absence of potential censorship is also a plus point. However, the fact that no one central body would be liable if major issues surfaced with the asset is a price to pay.
“The lack of collateral and reliance solely on algorithms to get the price to be stable means a well funded, motivated individual or institution could attack the system and cause people to lose confidence in the stability of the model. This could then lead to a death spiral and the collapse of the stablecoin.”
Finally, Xie spoke about the inception of Hybrid stablecoins; Libra being a prime example, where the social media giant is trying to develop an asset-backed by a plethora of fiat currencies. Xie largely dismissed the idea of such stablecoins as they lose the “benefits” of both centralized and decentralized assets.
Xie concluded her analysis with the belief that centralized stablecoins will evolve over time, suggesting that the likes of USDC and DAI could co-exist in the ecosystem.
Recently, European Central Bank [ECB] had also shed light on the matter, stating that it did not consider virtual assets as a “threat to the financial stability of Europe.” The ECB believes that stablecoins had great potential as they were considerably less volatile than other assets like BTC, LTC, etc.
However, centralized assets have had their share of problems with Tether recently accused of not having their virtual assets completely backed 1:1 with fiat. Tether is one of the few regulated centralized stablecoins and the disputed allegations attached to it impacts the stablecoin market too.
Preston Byrne, Attorney at byrnestorm, had remarked back in 2017,
“A stablecoin that is collateralized by itself is a complex and fragile Nakamoto Scheme doomed to fail. A stablecoin that is collateralized by real assets and structured correctly is not a stablecoin, but a unit trust.”
John McAfee’s cryptocurrency trading platform launches Shadow Trading feature
Eccentric crypto-proponent, tech security expert and U.S Presidential candidate, John McAfee, today announced the introduction of a Shadow Trading feature on his latest cryptocurrency trading platform, McAfee Magic.
McAfee’s tweet read,
https://t.co/5jRN3sAXvG Shadow Trading is now functional. Give it a try.
— John McAfee (@officialmcafee) August 23, 2019
On the FAQ section of the webpage, a statement read,
“Trade Portal is your place for all your manual or automatic magic trades. Shadow Portal allows you to copy trading operations executed by professional traders.”
Dubbed “McAfee Magic,” the trading platform’s Shadow Portal is meant to cater to amateur traders. The platform allows novice traders to ‘shadow’ trading experts, with the ease to shadow multiple professionals simultaneously. According to the official website, the “magic” factor in the latest roll-out is that newbies are not required to fund trader accounts, despite retaining control over their funds at exchanges -“Your keys, your crypto.” Essentially, while using McAfee Magic’s platform, the funds are stored on the users’ exchanges and “only funds on the platform are used to fuel the trades.”
Shadow trading allows users to diversify their trading operations and manage risks better by enabling users to follow up to three professional traders at a time. Shadow portal fees are determined by the trader that the users’ are shadowing. The McAfee Magic team will be reviewing and approving all professional traders.
However, shadow trading isn’t something that has emerged out of the blue. The general industry-accepted term is “social trading,” wherein a new trader with a lack of industry expertise chooses to follow an experienced trader[s] on the platform.
According to a research published in July, eToro is the most popular social trading platform, followed by ZuluTrade and Shrimpy.