The Libra Coin & Risks Associated with Stateless Money

By: Samson Williams, Board Member, Crowdfunding Professionals Association (CfPA) 

The purpose of this article is two-fold:

— In follow up to the CfPA’s memo on Acknowledging Risk of Stablecoins in April 2019, the CfPA continues to urge Congress and our regulators to gain a greater understanding of the realities of so-called stablecoins, the financial and economic risks stablecoins may create, and to determine to what extent multi-national, global corporations have the legal standing to create money out of thin code.

— Highlighting the potential risk of global corporations “printing” their own money and how that capacity may negatively impact not only the USD but also potentially undermine US global economic policy and the funding of startups and entrepreneurial businesses domestically.

Like any technology, blockchain can and may be used to improve a variety of operational, identity, security and technology challenges that the future of digital banking, businesses and society face. Blockchain technology is also poised to create new and increasingly clever methods and economies for value, commodities, assets, securities and a slew of yet-to-be-discovered financial instruments and products.

However, no leap in technology and finance is ever made without risk. The risks are even more emphasized when dealing with rules that are built for previous-gen technologies.  As policymakers and stewards of the current and future digital economy and ecosystem, we have an obligation to our constituents and the global banking and finance community to guide the growth and adoption of emerging Fintech in a safe and sound manner.

To that end, three areas that have the potential for regulatory and compliance issues arise from Facebook’s Libra Coin:

What is the Libra Coin? Based on the concept of a “stablecoin,” Facebook proposes to launch a “global currency.” However, with no standard definition or regulatory framework for defining what a “stablecoin” is, many questions arise, such as:

— What risks are associated with stablecoins?

— Who will bear those risks?

— What happens in the event that Facebook’s stablecoin turns out to suffer the same volatility of traditional fiat currencies?

— Most importantly, is Facebook’s Libra Coin a currency…just because Facebook says so?

— How does Libra coin intend to generate returns on the reserves?

— What are some of the tax implications that Libra will face?

Understanding the nature of so-called stablecoins and the associated risks should be a priority for regulators. In addition to a clear definition of stablecoins and what “qualifies” to be classified as a stablecoin, consumers also need to understand the implications of using stablecoins and the Libra Coin.

— Is the Libra Coin a commodity?

— Is it an asset?

— Is the Libra Coin property, on par with other cryptocurrencies such as Bitcoin?

— How is the Libra Coin treated from a tax perspective?

— Will Libra Coins be FDIC insurable?

We urge regulators and lawmakers to take the time to understand the potential implications if even a small percentage of the three billion Facebook users, adopt Libra Coin as a currency.

What is the Libra Reserve? According to Facebook’s Libra White Paper, the Libra Reserve is a Swiss-based entity who will issue the Libra Coin. This entity and concept creates a very simple question,

— “Does a foreign-based corporation have the standing to create its own sovereign currency?”

This is a simple question which will have serious ramifications as the creation and use of digital currencies and cryptocurrencies created by stateless, multinational corporations increase in frequency and use. Today, it is Facebook. Tomorrow, could it be Huawei?

Facebook’s take on Crowdfunding and Access to Capital.  We believe that many more people should have access to financial services and to cheap capital. (Page 2 of Libra White Paper). How will the Libra Coin and a global audience impact equity and debt crowdfunding in the USA? This is to be seen. However, in Facebook’s own words, Know Your Customer checks will not be required to hold Libra Coin.

Again, we encourage further exploration and discovery to allow regulators, industry partners and consumers to better understand the full potential impact of allowing a private corporation to mint money, under its own direction. We specifically encourage the U.S. Securities & Exchange Commission, as well as the Commodity Futures Trading Commission to take an active leadership role in understanding the full implications of the Libra Coin on regulated crowdfunding in the USA and globally.

Conclusion

Facebook is pushing the envelope of stateless money, blockchain technology and emerging financial instruments. As Facebook and other private organizations seek to innovate, we implore regulators and lawmakers to enable innovation in as safe, sound and responsible manner as possible.

To do this, consumers, industry stakeholders and regulators must have the fundamental questions posed above answered. Unlike Pandora’s box, regulators have the means of intervening for the benefit of the global community and getting these fundamental questions answered before it’s too late. We encourage you to do so now and without delay.

Special thanks to the following individuals for providing their expertise and insights into drafting this memo:

Maureen Murat, Esq., Of Counsel, Cogent Law Group, mmurat@cogentlaw.co

Olta Andoni, Esq., Head of Blockchain Practice at Ziliak Law, LLC, Oandoni@ziliak.com

Samson Williams, Adjunct Professor, UNH School of Law, samson.williams@law.unh.edu

Anne (Adamson) Veerpalu, Estonia Legal Hackers, anne@veerpalu.ee

Crowdfunding Professionals Association (CfPA.org)