Libra needs regulatory clarity, not a congressional blessing, lawmakers say

Facebook CEO and founder Mark Zuckerberg met with severe scrutiny on all aspects of his business practices during Thursday's Libra hearing, but reaffirmed his commitment to wait for regulatory clarity before launching the stablecoin and payment service. If he were to break that promise it is unclear what legal recourse Congress would have, but lawmakers say their concerns are focused on regulatory clarity rather than Libra’s activities.

Party lines

While there is continued scrutiny of Libra on both sides of the aisle, an industry source pointed out that partisan cracks may be forming, particularly after U.S. Senator Brian Schatz (D-HI) and U.S. Senator Sherrod Brown (D-OH) sent letters to the leaders of Libra Association members Visa, MasterCard and Stripe urging the companies to reconsider their involvement with the project. All three companies would later leave the Libra Association.

“I don’t think it is strictly along party lines, but in July it was universal skepticism,” said the industry source. “There has been a small divide. Democrats mostly continue to be skeptical. A lot of Republicans thought [the letter] went a step too far. In a way, it gave Facebook some support among Republicans, some sympathy.”

In a conversation with The Block, U.S. Rep. Warren Davidson pointed out that some lawmakers took an alarmist approach to the hearing, including U.S. Rep. Brad Sherman. However, he said he didn’t see alarmism as partisan given that he’s seen some Republicans align with Sherman’s fears, while other pro-crypto bills like the Token Taxonomy Act continue to enjoy bipartisan support.

“Personally, I think it's [lawmaker opinion on Libra] more based on an understanding of what is represented by tokens,” he said. “Not all of them represent a currency. Certainly not all of them represent a security. And do we have a legal framework there? I think the alarmists either don't understand it or they only understand the straw man that they're arguing against.”

This, according to Davidson, is creating a barrier to market progress. This has shifted the legislative conversation to hinge less on Libra and more on procuring regulatory clarity for projects like Libra to operate safely and compliantly, he said.

Questions and Answers

Zuckerberg faced hours of questions from lawmakers, many more concerned with Big Tech and data privacy issues rather than probing the mechanisms of a Libra launch. Davidson said while he felt only a fraction of the conversation focused on the topic of digital currencies, he was encouraged by the number of lawmakers who thoughtfully contributed to the Libra dialogue, particularly those who were able to differentiate between Libra and other cryptocurrencies.

“Any time we can make progress on ‘everything proposed is not a currency, not a cryptocurrency,’ I think we’re making progress,” he said.

U.S. Rep. Ted Budd told The Block that much of lawmaker sentiment surrounding Libra grew out of this misunderstanding, with many in Congress failing to distinguish between the centralized nature of Libra and other cryptocurrencies like bitcoin, ethereum and XRP. 

Libra continues to be met with skepticism, especially as key players dropped out earlier this month. All payment processors initially game for the project have since left the Libra Association, with the exodus including Visa, PayPal, and Stripe among others. This has ramped up anti-money laundering (AML) concerns for Budd.

“I still have some concerns about Libra’s ability to prevent money laundering and terrorism, given the fact that there are no major U.S. payment processors left in the Libra Association,” he said.

However, Davidson said AML concerns would be handled at the wallet level rather than the association level, meaning the Calibra wallet stands up to any AML or anti-terrorism financing scrutiny since it has been registered as a money transmission service. Having a payment processor in the Association is less of a concern.

What if it launched?

Facebook has continually affirmed that it won't launch Libra without regulatory clarity – a line that Zuckerberg stuck to during Thursday's hearing. But as the industry source pointed out, it’s unclear how much power Congress could leverage in the case of a Libra launch, sans regulatory guidance.

“I don’t know where [Congress] goes from here,” they said. “There are a few legislative ideas, [such as] the Keep Big Tech Out of Finance Act, but I get the sense that they know they can’t actually stop this...It will be really hard for them to come together to stop this.”

But Davidson said he was confident Congress won’t have to. While Facebook could find a legal path to launch and has the funds to litigate for a long time as some have argued, Davidson said it wouldn’t behoove the project to do so. 

“Why would they want to get involved with something that could potentially be seen as illicit finance?” he said. “They don’t want that, and they’re not going to risk the enterprise for something that down the road somebody is going to say is part of an illicit finance scheme. So as long as they’re a U.S. company, they’re not going to do that.”

Additionally, he said many of the bills brought up during the hearing came from the same so-called alarmist actors. 

“I was concerned about some of the bills that were noticed as part of the hearing, and some of them were, I would say placed there by the alarmists, and they don't wind up on the agenda without the chairwoman's blessing,” he said. 

The larger concern, according to Davidson, is keeping startup businesses and blockchain innovation stateside, since he’s seeing many skirt U.S. regulatory uncertainty by moving to a new home base, often Switzerland. To this end, he said he hopes to see hearings surrounding Libra and digital assets that focus on testimony from industry actors, including venture capital investors and early stage innovators, in order to gain more clarity for setting regulatory framework.