U.S. lawmakers repeatedly pressed Facebook’s top blockchain executive to halt development of the Libra cryptocurrency during a contentious hearing on the project Wednesday.
They didn’t get far.
David Marcus, the CEO of Facebook’s subsidiary Calibra, reiterated his promise that Libra would not launch until regulators’ concerns were fully addressed. But he stopped short of committing to freezing technical work on the project, much to the chagrin of House Financial Services Committee members.
The committee’s chairwoman, Rep. Maxine Waters (D-Calif.), had previously called for a moratorium, and it was one of the first things she brought up in the hearing, asking the Facebook executive:
“Will you stop dancing around this question and commit here in this committee … to a moratorium until Congress enacts an appropriate legal framework to ensure that Libra and Calibra do what you claim it will do?”
Marcus responded with roughly the same talking point he’s been using for weeks.
“I agree with you that this needs to be analyzed and understood before it can be launched … and this is my commitment to you. We will take the time to get this right,” he said.
Rep. Carolyn Maloney (D-N.Y.) raised the issue during her turn to question Marcus. He started to give a similar answer to what he said earlier, but before he could finish, she cut him off.
“I take that as a no,” she said.
Maloney then asked Marcus if he would at least promise to do a small pilot test of Libra, involving no more than 1 million users and overseen by the Federal Reserve and the Securities and Exchange Commission (SEC), before fully launching the currency. Again, he demurred, saying only that he would commit to working with regulators.
Not that a pilot would be her preferred outcome. “I don’t think you should launch a new currency at all,” Maloney said.
Like the previous day’s Senate Banking Committee hearing, Wednesday’s panel was wide-ranging, with lawmakers grilling Marcus on everything from money laundering to financial stability to whether Libra should be regulated as an exchange-traded fund (ETF) or a bank.
Rep. Brad Sherman (D.-Calif.), perhaps crypto’s loudest Congressional critic, suggested that Libra was somehow more dangerous to America than 9/11.
Comparatively sober colleagues wondered if the project would become “systemically important,” Beltway-speak for “too big to fail.”
The Republicans on the panel were less hostile but nevertheless asked pointed questions.
Rep. Sean Duffy (R.-Wis.), for example, complimented Marcus for Facebook’s innovation but asked if Libra would ban controversial speakers like Milo Yiannopoulos or Louis Farrakhan from using the platform, as Facebook has done in its flagship social network.
“Personally, I believe we shouldn’t be in the business of telling people what they can do with their money,” Marcus responded, adding a caveat that such policies would be up to the governing council of the Libra Association consortium.
AOC weighs in
Rep. Alexandria Ocasio-Cortez (D-N.Y.), the young lawmaker known for her social media savvy and socialist economic positions, brought an interesting bit of monetary history into the discussion.
She suggested that the Libra currency would be a digital version of scrip, a type of private money that corporations once used to pay employees. (Coal miners and loggers, for instance, were paid in scrip they could use to buy goods at the company store.)
Marcus, a former president of PayPal, said he was not familiar with the term.
Ocasio-Cortez also questioned the governance of this aspiring global currency. “Were the members of the association democratically elected? Who picked them?” she asked Marcus.
He replied that the membership is open, subject to certain requirements.
“So we’re discussing a currency governed by private corporations,” Ocasio-Cortez went on. “Do you believe the currency is a public good? Do you believe Libra should be a public good?”
Marcus answered that “it’s not up to me to decide.”
Inside the basket
Marcus also provided more detail than before about the makeup of the basket of fiat currencies that would back Libra.
He told the lawmakers (several of whom were concerned about Libra’s threat to U.S. financial dominance) that the reserve will “mainly” be backed by the U.S. dollar. The Facebook executive later specified that it would be 50 percent dollars, with euros, British pounds and the Japanese yen also included in the collateral.
Regarding Libra’s collateral, Rep. Katie Porter (D-Calif.) seized on another historical comparison: the wildcat banks of the early 19th century, which issued their own notes purportedly redeemable for gold and often failed to deliver on their promises to pay noteholders.
“How is it fundamentally different from wildcat banking?” she asked Marcus.
“A very important difference is the one-to-one reserve,” he said.
Porter then asked what’s to stop the Libra Association from swapping out the reserve from 50 percent greenbacks to, say, 100 Venezuelan bolivares.
Marcus answered that the Libra Association would be regulated. By whom, Porter asked. Marcus said it would be an oversight group of the Group of Seven (G7) nations that he’d mentioned Libra was working with several times before.
The first part of the hearing wrapped up around 18:45 UTC. After Marcus, a panel of expert witnesses, including former Commodity Futures Trading Commission chairman Gary Gensler, is scheduled to testify.
Chinese National Cryptocurrency Turns Out Not Being an Actual Crypto
The People’s Bank of China (PBoC) has completed the development of a prototype for issuing a national cryptocurrency, as Cointelegraph reported on Aug. 11. As it turned out, it will be powered by a two-tier operating system, which, however, will not be fully decentralized.
What do we actually know?
The fact that China is close to issuing state digital money, which for the past three years has been on the tongues of the local authorities, was revealed at China Finance 40, the forum dedicated to policy research on Chinese economics and finance. Speaking at the event, PBoC Deputy Director Mu Changchun didn’t disclose the details of the development and the release date, though expressed his belief that digital currency will replace cash and other cryptocurrencies, and will also help increase the turnover of the yuan, or renminbi, in the world.
The statement on the high level of readiness to issue the new cryptocurrency was made soon after PBoC representatives announced their intention to speed up the process of creating the state’s digital money on Aug. 2. According to authorities, the new currency will be able to bypass trade sanctions imposed by the United States, and will also increase investment flows to the country.
Some analysts suggest that after the U.S. announced an increase of trade tariffs for Chinese goods, foreign investors rushed to exchange renminbi for more reliable assets — e.g., gold and other currencies, including Bitcoin (BTC), which grew by $3,000 to almost $12,000 at the beginning of August.
The media also attributes China’s decision to create its state digital money to the active promotion of Facebook’s Libra cryptocurrency. In July, Wang Xin, head of the PBoC Research Bureau, said that Libra threatens the international monetary system and countries should develop their digital currency to prevent the negative economic consequences. Other authorities expressed the need to strengthen the national currency through the issuance of digital money.
It is also known that local commercial institutions and corporations such as Alibaba, Huawei and Tencent, may be involved in the process. Some of them have already agreed to participate in the project. As follows from the patents, individuals and entrepreneurs will be able to downloadmobile wallets and exchange their yuan for digital currency, and then make payments with it. At the same time, the Chinese central bank will take full control over all operations.
New cryptocurrency won’t be decentralized
Hot debates caused by the Chinese government’s announcement regarding the development of its own cryptocurrency have resulted in even more questions arising. Most of all, users were interested in how soon they would see a new currency in action and how China would be able to create a whole decentralized system necessary for its functioning at a short notice.
As it turned out, the emission of the future cryptocurrency will be carried out through a two-level system, with the People’s Bank of China being at the top level. The second level will be taken by commercial banks, as Mu emphasized during a speech at China Finance 40:
“This two-tier system is suitable for our national conditions. It can use existing resources to support and develop commercial banks and smoothly promote digital currency.”
At the same time, blockchain will be used only partially. He made three arguments in favor of this decision based on the following reasons:
China is a complex economy with a vast territory and large population, which implies possible difficulties in the mass transition to the new technology. China’s central bank also proposes the two-tier operating structure to improve the accessibility of the proposed cryptocurrency and the smoother commissioning of future digital assets. Secondly, a two-tier structure will fully engage the resources, talents and technological advantages of commercial organizations, promote innovation and aid in the fight for technological superiority.
Thirdly, the use of a single-tier operating architecture may reduce the role of banks in the financial services chain. Mu added that within such a framework, China’s central bank will directly interact with the population on issues related to digital currency, which will negatively affect the ability of commercial banks to lend and will reduce their competitiveness. This may lead to increased prices and social financing costs, as well as damage to the real economy.
Negative public sentiment has seemingly continued to worsen as new details leaked on the internet. Many entrepreneurs, bloggers and crypto enthusiasts opined that new cryptocurrency would be used for tracking user’s data or controlling their funds. Mati Greenspan, senior analyst at eToro, expressed a similar view on China central bank’s new initiative:
“They want a greater level of control and surveillance. This will give them a bit more hands-on authority. This currency is not designed to give people financial freedom, like other forms of crypto, but rather to provide the Chinese government with a way to monitor transactions.”
The blogger Ben Yorke devoted an entire article to expose the future Chinese cryptocurrency, in which he cited five facts confirming why “China probably isn’t opening up to digital currencies.”
There is nothing public at all: In essence, the creation of a cryptocurrency implies the use of blockchain technology and, accordingly, the involvement of experienced organizations. At the same time, the Chinese central bank intends to use a private chain that will operate on fully controlled private nodes.
China already has its digital currency: Yorke refers to the payment systems Alipay and WeChatPay, which have almost completely replaced Chinese traditional payment methods. In 2018, they processed 57 billion transactions at almost 1,800 transactions per second (TPS), which is higher than the bandwidth of Bitcoin, Ethereum (ETH), Ripple (XRP) and EOS. In addition, the author notes the absolute absence of anonymity: In such systems, user information is tied to the wallet address, which means that it is controlled by the developers.
It’s all about control: As a final argument, Yorke says that the main goal of the PBoC is not “to make cross-border transactions easier,” but to restrict local banks’ access to loans and shadow-banking.
Risks will be avoided
Probably in an attempt to resolve public concerns, PBoC members said they would take measures to prevent an overrepresentation of digital currency and, as a result, the manipulations involved. To ensure that the PBoC’s digital currency isn’t overrepresented, commercial institutions will transfer the full transaction amount and 100% reserve to the People’s Bank of China. Thus, the new cryptocurrency will remain central.
Mu added that the future currency doesn’t pay interest on cash, it will not trigger financial disintermediation, and will not have a big impact on the existing real economy. In addition, all current regulations on cash management, Anti-Money Laundering and counter-terrorism financing should be observed.
To be continued
Overall, the soon to be created national cryptocurrency raises more questions and doubts in the eyes of the community over the true goals of its creation. China may be able to use its crypto to attract and deter investors affected by the U.S.-China trade war, as well as use an additional argument in its dispute with Washington. However, it is still unknown whether the currency will be able to seriously compete with decentralized coins such as Bitcoin. The question of the timelines also remains open. According to Greenspan, the central bank’s statement might be interpreted not quite correctly:
“This wouldn’t be difficult for the Chinese government to put out in a week or two. This has more to do with political power. Capital controls are very tight in China, and they want to keep a strong eye on money supply. So what they probably mean when they say ‘it’s ready to go’ is that they simply have the willpower to put it out.”
Australian tax authorities warn against investing a lot of retirement funds in cryptocurrencies
The Australian Tax office (ATO) has started to send warning letters to almost 18,000 Self Managed Super Funds (SMSFs), cautioning against hedging 90% of retirement funds in a single asset class, reported The Australian. SMSFs give an individual the power to choose how they want to invest his/her retirement funds and it currently boasts a market of $700 billion. Given the hype and popularity around cryptocurrencies recently, a majority of Australians use these SMSFs funds to invest in cryptocurrencies.
Australia’s tax authorities took notice after it found that many individuals had invested a significant potion of their retirement funds into a single asset class like cryptocurrency and real estate. Investing in a single asset class is considered highly risky, given that if a particular asset class tanks, the investor is set to lose all his savings.
The letter sent out by the ATO warns SMSFs about the potential risks, as well as the laws they are violating by hedging 90% of the retirement funds in a single asset class. The letter reads, “it is a duty to comply with legal requirements to adopt investment strategies avoiding risky investments.”
Those who fail to comply with the regulations set by the tax authorities might face fines up to $4,200. The concern of ATO is understandable, given that there have been several cases of fraud related to people investing a major portion of their savings in cryptocurrencies. In July, one couple lost a whopping $900,000 of their retirement savings in a crypto scam.
The decision to send warning letters to SMSFs came after an alarming increase in Limited Recourse Borrowing Arrangements (LRBAs), which grew 10 folds. ATO noticed that more than 40% of all SMSFs with LBRAs have 90% or more of their funds concentrated in just one asset class.
Dana Fleming, Assistant Commissioner of the ATO, said that the letter was just to remind SMSFs about their legal obligations. Fleming said,
“We will also be writing to the auditors of these SMSFs to let them know of our concerns in relation to concentration risk,”
Australian regulations are largely crypto-friendly, making it one of the most favorable destinations for crypto-operations. However, its tax authorities recently have been very pro-active about weeding out scams related to cryptocurrencies.
The U.S. OFAC is keen to regulate and provide guidelines to cryptocurrency market
- A report was released by The United States Department of Treasury’s Office of Foreign Assets Control (OFAC) on cryptocurrencies.
- The body wants to provide regulation and guidelines to the sector, but has been moving slowly compared to other entities.
The United States Department of Treasury’s Office of Foreign Assets Control (OFAC) demonstrated much interest in terms of regulating the cryptocurrency market, and providing framework/guidelines.
A report released by the body, portrays that providing regulation for the space is becoming an increased priority. They believe a strong approach on their side could be used to contribute towards sanitizing the industry.
OFAC like other U.S. financial authorities have been very much interested in cryptocurrencies, but unlike the Securities and Exchange Commission (SEC) and Department of Justice (DOJ), it has taken a much slower approach towards regulating the space, as per the report.