By: Krishna Pathak
On October 23, 2019, Mark Zuckerberg, Facebook CEO, testified before Congress on a variety of issues, including Libra, Facebook’s cryptocurrency.[1] Libra and Calibra, Facebook’s Wallet, have been under scrutiny since the social media company’s June 2019 announcement.[2] Libra is intended to constitute a combination of global currencies, primarily U.S. Dollars.[3] Zuckerberg hopes Libra will fill a need for financial infrastructure that is accessible across borders and poverty lines.[4] Partners such as Visa, Mastercard, eBay and Paypal distanced themselves from Libra due to concerns regarding the platforms ability to comply with regulatory expectations.[5] However, during Zuckerberg’s testimony he assured Congress that he would not move forward with light Libra without approval from U.S. regulators, but did not provide a list of the regulators.[6]
It seems likely that Libra would be regulated as a security. The night before the hearing, Congresswoman Sylvia Garcia published a draft bill, the Stablecoins are Securities Act of 2019, classifying Libra as a security under the 1933 Securities Act.[7] Earlier this year, the U.S. Securities and Exchange Commission released an advisory letter,[8]explaining the Howey test is a key in determining whether digital assets are securities.[9] Under Howey, it seems likely that Libra and other digital currency could be regulated as investment contracts.[10] “[A]n investment contract for purposes of the Securities Act means a contract, transaction, or scheme whereby a person 1) invests his money in 2) a common enterprise and is led to 3) expect profits 4) solely from the efforts of the promotor or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”[11] Libra is funded by investors, it is likely to yield profits as it is bought and sold, and the efforts of the Libra Association in managing the reserve of low-volatility assets, seem to satisfy the first, third, and fourth prongs.[12]
However, the second prong, the “common enterprise” is dependent on the level of centralization of the digital assets.[13] Libra, which will be controlled by the Libra Association, with increasing decentralization overtime, may satisfy the “common enterprise” prong at Libra’s initial offering.[14] If Libra were to be regulated as a security, the U.S. Securities and Exchange Commission would have jurisdiction over stablecoins and their issuers.[15] However, as Libra evolves to be less centralized, legislation clarifying stablecoins as securities, such as Congresswoman Garcia’s Stablecoins are Securities Act, would provide much needed clarity on the regulation of Libra.
While Zuckerberg continually asserts Libra and Calibra’s independence from Facebook, it seems likely that Libra could get caught up in Facebook’s crossfire.[16] Even if Libra manages to get approval from the U.S. Securities and Exchange Commission and other U.S. regulators, Facebook also faces an antitrust case, joined by forty-six Attorneys General.[17] Zuckerberg himself said that Facebook may not be the best messenger for Libra, and Financial Services Chairwoman Maxine Waters and other Congressmembers seem to agree.[18]
If enacted, legislation classifying stablecoins as securities will clarify much speculation and will hold the Libra Association accountable to the Securities and Exchange Commission With eyes on Facebook and the cryptocurrency landscape, any regulation of Libra will be fraught, given its expansive mission.
[1]Makena Kelly, Congress Isn’t Buying Mark Zuckerberg’s Pitch for Libra, The Verge(Oct. 23, 2019), https://www.theverge.com/2019/10/23/20929313/mark-zuckerberg-hearing-congress-libra-calibra-facebook-maxine-waters.
[2] See id.
[3]See Libra Association, An Introduction to Libra 4 (2019), https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf.
[4]Id.
[5]See Erin Griffith & Nathaniel Popper, Facebook’s Libra Cryptocurrency Faces Exodus of Partners, N.Y. Times(Oct. 11, 2019), https://www.nytimes.com/2019/10/11/technology/facebook-libra-partners.html?module=inline&login=email&auth=login-email.
[6]See Makena Kelly, supra note 1.
[7]See Stablecoins are Securities Act of 2019, https://financialservices.house.gov/uploadedfiles/bills-116pih-ssa.pdf
[8]Framework for “Investment Contract” Analysis of Digital Assets, U.S. Securities and Exchange Commission, https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
[9]Id.
[10]See SEC v. W. J. Howey Co., 328 U.S. 293 (1946); Nikhilesh De, Facebook’s LibraShould Be Regulated Like a Security, Says Former CFTC Chair, CoinDesk (Jul. 16, 2019), https://www.coindesk.com/facebooks-libra-should-be-regulated-like-a-security-says-former-cftc-chair.
[11]W. J. Howey Co.,328 U.S. at 299.
[12] SeeLibra Association, An Introduction to Libra 8-9 (2019), https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf.
[13]Peter Van Valkenburgh, Framework for Securities Regulation of Cryptocurrencies: Version 2, Coin Center (Jul. 9, 2019, 3:32 PM), https://coincenter.org/entry/framework-for-securities-regulation-of-cryptocurrencies.
[14]See Libra Association, An Introduction to Libra 9 (2019), https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf.
[15]See Philip Rosenstein, Bill Pegs Libra As Security Ahead of Zuckerberg Testimony, Law 360(Oct. 22, 2019), https://www.law360.com/banking/articles/1212292/bill-pegs-libra-as-security-ahead-of-zuckerberg-testimony.
[16]See Benjamin Pirus, Former Facebook Manager Turned Bitcoin Founder Shares Insights Into Libra, Forbes(Oct. 26, 2019), https://www.forbes.com/sites/benjaminpirus/2019/10/26/former-facebook-manager-turned-bitcoin-founder-shares-insights-into-libra/#2be68460281d.
[17]See Tony Romm, Forty Six Attorneys General Have Joined New York Led Antitrust Investigation Into Facebook, Wash. Post(Oct. 22, 2019), https://www.washingtonpost.com/technology/2019/10/22/forty-six-attorneys-general-have-joined-new-york-led-antitrust-investigation-into-facebook/.
[18]See Makena Kelly, supra note 1. See also Andrew Rossow, Congress Must Step Up To Regulate Social Media Giant,Law 360 (Oct. 25, 2016), https://www.law360.com/articles/1213710/congress-must-step-up-to-regulate-social-media-giants.
