The Libra Project 2/3 - icoinic
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Andy Wong - Fundamental Analyst - Icoinic B.V.
Fundamental Analyst - Author
Bit Syndicate

The Libra Project 2/3

On the 23rd of October 2019, Facebook’s CEO, Mark Zuckerberg, came before the Committee of Financial Services. The talking points of the 6-hour long hearing before the congressmen and congresswomen of the committee were the “Examination of Facebook and its impacts on the Financial Services and Housing sectors.”

(De)centralized?

By design, Libra and its ecosystem are permissioned. Only appointed members can join the Association and govern the blockchain. Libra promises in the whitepaper that it plans to be more decentralized over time, which ensures that there are low barriers to entry for both building on and using the network. This in turn improves the Libra ecosystem’s resilience over the long term. However, is this promise achievable? Are decentralization and regulatory oversight compatible? Members of the Senate and Congress are skeptical about whether Libra can achieve both high regulatory standards and a permissionless system.

Inherent to a permissionless system is that the majority makes changes. If the majority want to drop regulatory standards, it could create monumental problems that could destabilize global economies. By allowing the Libra blockchain to work permissionless, the Libra Association loses control of the direction that the project is heading, which becomes a problem for regulators.

Regulations; Is it a security, currency, commodity, or a virtual asset?

Calibra calls Libra a digital currency backed by a basket of Fiat currencies and liquid government securities. However, is it a security? Libra can be dissected from different perspectives.

1. US regulations stipulate that if an asset is backed by a security, then the asset is a security as well (government securities).
2. Libra functions similar to an ETF, a basket of different currencies.
3. However, using the Howey Test. Libra does not fall under the category of a security.

On point 1, Libra does not have an answer yet to dispute whether it is a security. However, for point 2 and 3, David Marcus said that the intent of buying Libra is different than regular ETFs and “investment contracts.” By buying Libra, one isn’t expected to make a return on investment. People will use Libra as a currency. US senators and regulators are still not sure whether to classify Libra as a security. It does spur on much debate within Congress. On both sides of the House there are people for and against the creation of Libra.

Jurisdictions

In both the hearings of David Marcus and Mark Zuckerberg, it was stressed that Facebook and Calibra would not launch Libra before it addresses all regulatory concerns. The crux here, however, is that it only applies to Facebook and Calibra. If the Libra Association decided that it wants to launch the Libra, then they could. This remark was made to both David Marcus and Mark Zuckerberg, in with they both replied that they believe that if Facebook/Calibra is against a specific direction, the members of the Association will take it into consideration. Which raises more concern than that it addresses. If Facebook’s opinion matters enough that it could sway the decision of the association, how can it stay unbiased?

The question is, however, how does Libra unify two or more different sets of regulations in different jurisdictions that can directly oppose each other? A fair question to ask, for which the Libra association still does not have an answer. It would seem that Libra has to decide to put one set of regulations above another, US above EU, for example. The US has more liberty for companies that deal with personal data, while the EU has a lot of stringed rules with its new GDPR ruling. Currently, Libra is still in the talks with the regulatory bodies surrounding financial activity (FATF, FINRA, FinCEN, FINRA, OFAC).

All in all, for Facebook/Libra to make the statement that it won’t launch Libra before complying with all regulatory concerns might sound like the “right” thing to do. However, it might also kill the Libra project, for it may be impossible to address all the concerns.

Bank like secrecy

Bank secrecy act, Anti-Money Laundering, Know-Your-Customer.

During the combined 15 hours that both David Marcus and Mark Zuckerberg sat before Congress, many questions were regarding AML, BS, and KYC. How will Libra handle criminal transactions? Will people be able to transact privately and anonymously? Will Facebook have the financial data of its users? Are there particular groups excluded from using the Libra network? Will Calibra comply with OFAC’s sanction program?

All valid questions. Bitcoin has had a negative connotation for a long time. People believed, and for a period rightfully so, that it only was used for criminal activity because of its pseudonymous nature. However, with the rise of transaction analysis and the crackdown of the Silk Road, criminal activity via Bitcoin has subsided.

Calibra stated that its wallet would fully comply with the US regulations surround BSA, AML, KYC. Users can not make a wallet with their Facebook account. Users of the Calibra wallet have to create a separate account outside the Facebook ecosystem. It would also require a government-issued ID. By requiring the users to have a valid government ID, Calibra can adequately identify each wallet and in doing so, could comply with the relevant regulations around financial transactions.

While Calibra has said that it will comply with all regulatory hurdles, it is still just one wallet provider in the Libra ecosystem. It is also rumored that there will be entirely anonymous wallets, which means that it will lack regulatory oversight, which will be a problem. How Facebook/Calibra plans to solve this problem is yet to be seen. In the next part we will discuss the controversy around Libra and it’s association.

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