Facebook’s Reputation Proves to Be a Roadblock for Libra

The focus of the hearing between Facebook’s David Marcus and the Senate on the Libra cryptocurrency was trust—or the lack thereof.

David Marcus, the head of the blockchain division at Facebook, testified before the Senate Committee on Banking, Housing, and Urban Affairs to clarify issues around Libra, the cryptocurrency Facebook revealed last month.

Libra Under Fire

Marcus’ testimony was arranged after Libra attracted national scrutiny from several divisions of the United States government. The Federal Reserve Chairman, Jerome Powell, stated that Facebook should halt development until major concerns around privacy and money laundering are addressed.

The committee has been unrelenting in criticizing Facebook for its previous scandals. Incidents such as the Russian election meddling and Cambridge Analytica dominated the hearing. Making matters worse, this week the FTC approved a $5 billion fine on Facebook for mishandling users’ data. Senators have clearly stated that Facebook is hard to trust right now.

“I don’t trust Facebook, and it’s because of the repeated violations of user privacy and repeated deceit, and I am not alone,” stressed Arizona Republican Martha McSally. “The core issue here is trust.”

Marcus tried to address the claims, noting that Facebook is not the sole member of the so-called Libra Association backing the cryptocurrency and that other members — including the likes of PayPal and Visa — would minimize the company’s influence over the network.

“Facebook is just one vote among many,” he told the Committee.

Facebook Has Trust Issues

The Senators were not convinced. Facebook’s market power, vast resources, 2 billion user base, and founding role in Libra would make it trivial for the company to heavily influence the payment system.

Unlike other hearings, those on the Committee appeared relatively knowledgeable about the potential of distributed ledger technology. Senator Thom Tillis, a Florida Republican, added to the positive sentiment towards crypto, saying the United States should take a leading role in setting cryptocurrency regulation.

However, there is still uncertainty around the securities classifications, tax treatment, and legal status of cryptocurrencies in the United States. This allows other jurisdictions such as Malta and Switzerland to be at the forefront of the cryptocurrency industry.

Nevertheless, the Senate Committee was more concerned about the trustworthiness of Facebook over the threat that Bitcoin, or any other payment network, poses to the U.S. financial system.

As Senator Brown effectively summarized:

“Why with all of your problems should we trust [Facebook] with something as important as a worldwide currency and the damage that can come from it.”

Singapore Reveals Draft to Remove Tax on Cryptocurrencies

The Singapore government’s taxation agency has put forward a proposal to remove goods and services tax (GST) from cryptocurrency transactions that function or are aimed to function as a medium of exchange.

The news was published in a draft e-tax guide by the Inland Revenue Authority of Singapore (IRAS) stating that the supply of digital payment tokens in exchange for fiat currency or other digital payment tokens will be exempt from GST. Therefore, the supply of such tokens will not contribute to annual taxable turnover for the determination of liability for GST registration.

The agency has stated that the effort to end GST liabilities on cryptocurrencies follows worldwide development and growth within the crypto space, which has in turn led various jurisdictions to have reviewed their stance. Similarly, the IRAS has decided to review its GST stance to keep up to date with these developments.

Under the current legal framework, the supply of digital payment tokens is still seen as a taxable supply of services.

“Therefore, the sale, issue or transfer of such tokens for consideration by a GST-registered business is subject to GST. When the tokens are used as payment for the purchase of goods or services, a barter trade resulting in two separate supplies arises — a taxable supply of the tokens and a supply of the goods or services.”

The proposed exemption, if approved, will come into effect on January 1, 2020. The IRAS is currently receiving public comments from crypto-related businesses, which need to be submitted by July 26th.

According to the proposal, the following changes to taxation rules will take effect once it is approved:

  • (i) The use of digital payment tokens as payment for goods or services will not give rise to a supply of those tokens
  • (ii) The exchange of digital payment tokens for fiat currency or other digital payment tokens will be exempt from GST.

The draft further defines digital payment tokens as having the following characteristics:

“(a) it is expressed as a unit; (b) it is fungible; (c) it is not denominated in any currency, and is not pegged by its issuer to any currency; and (d) it is, or is intended to be, a medium of exchange accepted by the public, without any substantial restrictions on its uses as consideration.”

The agency cites Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Dash, Monero (XMR), XRP and Zcash (ZEC) as examples of digital payment tokens. Notably, IRAS excludes fiat-pegged crypto assets such as stablecoins from its definition of a digital payment token and will continue to be taxed under GST after January 2020.

Meanwhile, Singapore is not the only country considering exempting cryptocurrencies from GST taxes. In October 2017, lawmakers in Australia passed a piece of legislation to end what was called double taxation, exempting the liability for paying goods and services tax (GST) on cryptocurrency purchases.

UK Financial Watchdog Proposes Ban on Crypto Derivatives

U.K.’s financial watchdog, the Financial Conduct Authority (FCA), has announced its rule proposal to ban the sale of cryptocurrency derivatives and exchange-traded notes (ETNs) to retail investors.

In a press release the Financial Conduct Authority (FCA) said it is consulting over an outright ban on the sale, marketing and distribution to all retail consumers of derivatives such as CFDs, options and futures, as well as exchange-traded notes (ETNs) linked to unregulated cryptoassets by firms operating or based in the U.K.

The FCA stated that financial products are “ill-suited” to retail investors due to the volatile nature of the underlying assets and the lack of reliable valuation possibilities. Furthermore, the inherent risk of cybertheft is also prevalent in cryptocurrency markets.

While the FCA states that there is no clear need for derivative products, the authority estimates the potential benefit to retail consumers from banning these products to be in a range from £75 million to £234.3 million a year.

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:

“As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.”

The initiative follows their public commitment within the UK Cryptoasset Taskforce Final Report, which was published in July 2018, and updated in October 2018. The FCA emphasized that the new rules will replace the final regulation of crypto-based contracts.

A plan to consult on a ban of cryptocurrency derivatives was previously announced by the FCA last November. Christopher Woolard said at the time that the watchdog has concerns that retail investors are being sold complex, volatile and often leveraged derivatives products based on cryptocurrencies with underlying market integrity issues.

On Monday, the FCA also announced in a policy document that it has finalized rules restricting the sale of CFDs and CFD-like options to retail clients. The rules include limiting leverage to 2:1 on CFDs that reference cryptocurrencies.

The FCA said that it also expects to publish its final “Guidance on Cryptoassets” later this year after a period reviewing which crypto assets fall in this category.

Upcoming Crypto Exchange ErisX Receives CFTC Approval for Bitcoin Futures

The U.S. Commodity Futures Trading Commission (CFTC) has granted upcoming cryptocurrency exchange ErisX a license approval to offer futures contracts.

ErisX – backed by U.S. brokerage TD Ameritrade – announced that the CFTC has granted a derivatives clearing organization (DCO) license, serving as a secondary approval on top of an existing designated contract market (DCM) license, which the exchange had already held.

“Under the DCO order, Eris will be authorized to provide clearing services for fully-collateralized virtual currency futures. Eris’ indirect parent company, Eris Exchange, LLC, is registered with the CFTC as a designated contract market,” reported a CFTC press release.

Following the announcement, the company can now launch crypto futures products under the authority of the U.S. regulator.

Although no definite timeline has been provided, the news further reports that it will launch its futures contracts later this year. The future contracts will be physically-settled, meaning customers receive real Bitcoin and not the cash equivalent. In addition to that, ErisX will also certify its futures contract market participant rules prior to launch.

CEO Thomas Chippas has stated that the company is unique because it divided the trading and settlement functions using traditional DCM (exchange) and DCO (clearing) models.

He further added that it reflected the structure that institutional investors expect from other asset classes and will help drive these markets toward greater relevance and accessibility.

Apart from its DCO approval, ErisX received no-action relief from the CFTC for certain aspects of its offering. Primarily, the CFTC Division of Clearing and Risk granted ErisX relief from aspects of Part 39 of the Code of Federal Regulations Title 17.

Companies apply for no-action relief when they believe their product can fit the spirit of the law, but not necessarily the letter. When no-action letters are granted, the applicants must adhere strictly to the list of requirements laid out within.

Meanwhile, ErisX’s approval comes a week after competitor LedgerX received its own DCM license. Likewise, LedgerX has yet to announce a definite timeline for the launch of its bitcoin futures contracts.

Other exchanges such Bakkt – subsidiary of NYSE parent firm ICE – and Seed CX, a US crypto derivatives provider, are planning as well launching their own physically-settled bitcoin futures soon. Bakkt is currently awaiting a trust company license from the New York Department of Financial Services.

LINE Set to Receive Crypto Exchange License in Japan

Japanese messaging giant LINE will likely soon launch a cryptocurrency exchange for users based in the country, according to a report from Bloomberg.

According to people familiar with the matter, the messaging giant is close to being granted a crypto exchange license from the Japanese Financial Services Agency (FSA), which could happen as early as this month.

If it gets regulatory approval, the forthcoming exchange – BitMax, will reportedly start operations a few weeks after receiving the license. The exchange will offer its cryptocurrency trading services to 80 million users, including Bitcoin (BTC) and the social media app’s own token Link.

Line accounts for 187 million global users monthly, with an estimated 50 million users registered its mobile payment service, Line Pay. This would be LINE’s second crypto exchange, having launched Bitbox in Singapore in July 2018. However the platform remains inaccessible for Japanese users due to lack of regulatory clearance.

The license has been mandatory for all crypto exchanges operating within Japan since the amendment of the country’s Payment Services Act back in April 2017, and the FSA has since then continued to have stringent requirements for applicants.

As of March this year, only 19 cryptocurrency exchanges in Japan had received a license from the FSA as the agency had tightened up its scrutiny following the $530 million Coincheck hack in January 2018. Coincheck obtained a license from the FSA earlier this year.

The report further notes that the company has currently another banking license pending in Japan, which is unlikely to be issued until next year. Under such a banking license, LINE would be able to allow deeper integration of cryptocurrencies with its other services, including e-commerce. Subsequently, LINE reportedly aims to enter into stock brokerage and banking services in the near future.

Meanwhile, the firm initially started as a messaging app but has been gradually moving into the fintech space to turn profitable.

Earlier this month, LINE’s digital wallet LINE Pay partnered with Visa to create new financial services for their app customers, including blockchain-based solutions, cross-border payments, and “alternative currency payments.”