Facebook’s Libra may come under the purview of the SEC; Game over for Facebook?

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Not a peep has been heard from the Libra camp, and things are likely to stay that way.

Facebook’s cryptocurrency project has hit what looks to be a ‘prolonged pit-stop.’ Libra, since being unveiled in June, has been met with mixed reactions. Crypto-fanatics dismissed it as yet another centralized cryptocurrency, aging regulators were running helter-skelter, calling for an outright ban, economists mulled the possibility of the ‘death of the foreign dollar,’ and bankers concealed their concern in stoic surrender. In the midst of all this drama, one key figure, causing much angst to the cryptocurrency community, was quiet.

The Securities and Exchange Commission [SEC] has not [yet] weighed-in on the question of Facebook’s digital assets foray. Sitting on two key ETF applications, the Federal agency has been, for the most part, quite oppositional to cryptocurrencies and one would think a spillover effect into Libra would be more than likely.

CASH or SECURITY

It seems that David Marcus, the lead at Calibra, and the rest of Libra were aware of the SEC’s stance, and positioned Libra as a “cash system,” as revealed in Congressional testimonies. Placing Libra out of the guise of the SEC, by not likening it to a ‘security,’ was the obvious move, but as the cryptocurrency community has learnt, it is not quite easy to sideline the financial watchdog.

Libra’s regulatory situation is in dire straits at the moment. Lawmakers have called out the latest Facebook product on the question of money laundering, terrorist financing, monetary policy manipulation, and privacy. From the Federal Reserve Chair, Jerome Powell, to President Trump himself, everyone holding an office of prominence has attacked Libra, but SEC commissioner Jay Clayton has been rather quiet on the topic.

Hence, the question of where does Libra lie on the ‘definition’ scale bears significance.

Wilful admission by Marcus likens it to ‘cash,’ but not fiat currency, or more specifically ‘one fiat currency,’ but a basket of fiat currencies and short-term government deposits. This ‘Libra Reserve’ will contain government liabilities from the strongest sovereign nations, leading to the value of Libra remaining relatively stable, especially during times of political turmoil.

The question of Libra being a “security” owing to the investment nature of its reserve was immediately dismissed by the Calibra Lead during the Congressional hearing, vehemently leveling that the need for a reserve was simply to maintain stability and the same would be overseen by Facebook and 28 other companies of the Switzerland-based Libra consortium.

ETF in all but name

One definition that has caught wind of hedge fund managers and regulators alike is that of Libra being a ‘latent-ETF.’ While the association of the letters “E,” “T” and “F” are met with anticipatory eyes, with the SEC delaying its decision on the Bitcoin ETF every quarter, many experts have equated Libra to a publicly traded fund, backed by fiat currencies and government deposits. Noted quite starkingly is the absence of the “E” in ETF, with the cryptocurrency primed to be pedaled organically via individuals and businesses, rather than on an exchange. Interest payments will not be rolled out to investors as well.

As per Libra’s whitepaper, the Libra ‘reserve’ will be,

“Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.”

Facebook has carefully plied its stance on Libra, stating that users will not “directly” interact with the reserve. Alternatively, “authorized resellers” will “integrate” with exchanges that trade digital assets, providing liquidity. Dave Nadig, CEO of ETF.com, likened this very fallacy of Libra to the “creation and redemption in an ETF.” In the ETF veteran’s opinion, Facebook is well aware that it is outlining an ETF, if not underlining it with red ink. In his explainer, Nadig stated that the

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