What Happened: US Committee Hearing with the SEC on Crypto and Libra
The United States House of Representatives Financial Services Committee held a hearing on Sept. 24 with the Securities and Exchange Commission’s (SEC) five commissioners. Vital topics covered in the hearing include the consideration of cryptocurrencies as securities, regulation of Facebook’s Libra and Calibra, and insider trading.
The kick-off
Starting off the hearing with Financial Services Chairwoman, Maxine Waters stated:
“I’m very concerned about Facebook’s plan to create a digital currency, Libra, and digital wallet, Calibra. It appears that Facebook is working to create a new global financial system that is intended to rival the US Dollar. I and other Democrats on the committee have called for Facebook to halt their plans until regulators in congress have an opportunity to examine these issues and take action. I hope to hear what steps the SEC is taking to ensure Libra is appropriately rigorously regulated.”
Photo: US Representative Financial Services Chairwoman, Maxine Waters. Source: time.com
Ranking Member of the committee from North Carolina, Patrick McHenry made his opening statement. He suggested that the SEC should “reduce regulatory barriers” and said that “you will hear a lot of doom and gloom today, it’s not all doom and gloom.”
Opening statements from the SEC Commissioners
The SEC has a three-part mission: to protect investors, maintain fair and orderly and efficient markets, and facilitate capital formation.
Chairman Clayton made an administrative statement: “We are also sensitive to the potential appearance of prejudgment, this means although we may offer our views, and share our concerns about general issues, we will avoid making a determination during this hearing about the course of action that the commission should or will take about any particular matter.”
Photo: SEC Chairman Jay Clayton. Source: pionline.com
Having lifted a hiring freeze in the fiscal year of 2019, the SEC made new hires in critical areas including cybersecurity. Significant upgrades included IT infrastructure and cybersecurity; however, Clayton added, “our IT needs and related risks are ever-changing, let there be no doubt, substantial work remains.”
Commissioner Robert J. Jackson Jr, from New York University School of Law, stated, “we should consider giving investors much more transparency into how public companies spend their money on politics.” A significant amount of corporate political spending is not disclosed under the current legal system.
Commission Hester M. Peirce mentioned three core principles, investor protection, enforcement, and regulatory humility. “Investor protection means more than protecting investors from fraud, also protecting their opportunities. While enforcement is important for our mission, regulation is the key part of what we do; it’s the first step, not our last step. We, as regulators, can’t and don’t know everything.”
“Enforcement is a poor way to announce policies. Regulatory humility, we can’t know and don’t know everything. Rely on advisory committees, fellow regulators for their expertise, working closely with the Commodity Futures Trading Commission (CFTC).”
Commissioner Elad L. Roisman: “The SEC office of compliance and examinations has been instrumental in conducting exams in high-risk areas across the industries to regulate.”
Moving on – Libra and Calibra and the American financial system
Chairwoman Waters expressed concerns to Chairman Clayton about Libra and Calibra and their potential impacts on potential investors and consumers and the American financial system.
“Treasury Secretary Mnuchin, Federal Reserve Chairman Powell, and even President Trump have raised similar concerns. Just this month, regulators from France and Germany both agreed to block Libra from their countries in a joint statement. The two governments stated that no private company could claim monetary power which is inherent to the sovereignty of nations,” stated Waters.
When asked about the systemic risks to investors of Libra as currently described would pose, Clayton responded by saying that cryptos can present a “great deal of risk,” as they are not regulated in the same way. Waters questioned the extent of research and understanding of cryptocurrencies. Clayton responded that there is a committee looking into the development of digital assets and Libra.
The ‘Zuck Buck’
Rep. Brad Sherman commented on cryptocurrencies and mentioned that the US Dollar is an “extremely good currency,” that prevents tax evasion, sanctions evaders and being used for illicit activities; hence there is a need for an alternative – cryptocurrencies.
Libra, Mark Zuckerberg. Source: techstartups.com
He explained that it is not in the public interest to facilitate the creation of a device chiefly used by tax evaders and terrorists. “It will be called Libra by them; I call it the Zuck Buck.” He told the SEC Commissioners to “do what you can to stop this,” as it contradicts the law.
Congressman AL Green from Texas asked Chairman Clayton about whether there are two different products, Libra Coin and the Libra Investment Token. When asked about Clayton’s opinion if a coin does not produce a return on investment, it is not subject to SEC security regulation; Clayton answered, “I think statements like ‘if it doesn’t produce a return, it’s not a security’ - I think that’s a bit of an oversimplification.”
What about the entire blockchain phenomenon?
Waters asked about looking at Libra and looking at all of blockchain, Clayton responded, “I’d be happy to do that.”
Rep. McHenry asked Chairman Clayton regarding whether Libra is a security, Clayton was not prepared to make a statement regarding the issue.
Commissioner Peirce believes that she would like to see the SEC to be more “forward-thinking” to accommodate unique aspects of digital assets. Creating a “safe harbor” was recommended by Commissioner Peirce, as the current securities laws may not be able to be applied to cryptos.
The doors are open, ‘go faster’
Entered into the record, Rep. Emanuel Cleaver cited a letter from Facebook agreeing to address US regulatory concerns before launching. Cleaver asked whether Clayton had any concerns regarding Libra; Clayton mentioned that there is a group within the SEC to look into digital assets and has its doors open.
Rep. Anthony Gonzalez mentioned, “blockchain is here, it’s a technology being developed, folks are moving to the UK, Singapore, Switzerland because of the clarity. My concern is, before we see it operate, we don’t know if it is a security or not. When can we expect more concrete guidance from the SEC and what are you doing to get there?” Gonzalez concluded, “I just want to encourage you to go faster.”