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.”

Credit Card Company Shinhan Card Wins Patent for Blockchain-Based Payment System

South Korea’s leading credit card firm – Shinhan Card – has been granted a patent for a blockchain payment system, according to local news outlet The Korea Times reported on July 15th.

According to the news, Shinhan Card has developed – with the newly patented technology – a blockchain-powered credit transaction process, which allows for setting spending limits as well as paying in monthly installments and carrying out payments.

The Korea Times cited an official from the company, who stated that “services using those key functions of credit cards will be extended to the blockchain-based system, a notable advancement from the status quo whereby most of the blockchain-based services available are limited to cash wiring or user identification for online transactions.”

The official from Shinhan Card further added that the patent had been obtained about a year and a half after the company commenced a feasibility study including technology reviews. At the moment, the company is working on acquiring patents in European countries, the U.S., Japan, China, Vietnam and Indonesia.

The patent-winning technology could also allow for card-less transactions, allowing customers to make payments via app-to-app transactions using mobile devices. Subsequently, this has the potential to get rid of three intermediaries, including credit card firms, a value-added network (VAN) service provider and a Payment Gate (PG). Value-added networks are service providers connecting credit card companies and member stores to verify and approve transactions, while the payment gate is tasked with carrying out the payment.

The patent filing, which is currently available on the website of the Korea Intellectual Property Rights Information Service (Kipris) gives an overview of the invention as follows:

“A blockchain generating unit for generating a blockchain including a virtual currency generated according to a credit limit of a consumer and updating the blockchain according to payment details, and a transaction generating unit for storing transaction conditions corresponding to each of the plurality of accounts and for making settlement using the blockchain according to the transaction conditions.”

Earlier in May, Shinhan Financial Group (Shinhan Bank), the parent company of Shinhan Card, revealed a blockchain-based platform which aimed to speed up the approval process for loan products. Particularly, the bank would use the blockchain platform to verify the items of proof required for credit lending, such as qualification or certification documents.

Shinhan Bank has sought to expand the use of blockchain technology in its processes since last year. It fully embraced blockchain technology with transactions that involve Interest Rate Swap (IRS) and smart contracts. Most recently, several reports have alluded that the bank is planning to impose tougher regulations on accounts linked to cryptocurrencies.

Trump Shares Critical View Towards Cryptocurrencies and Facebook’s Libra

Donald Trump tweeted on Thursday that he is “not a fan” of cryptocurrencies, marking this as his first public comment on cryptocurrencies since becoming president of the United States.

He criticised Facebook’s proposed Libra, demanding that companies seek a banking charter and make themselves subject to US and global regulations if they wanted to “become a bank”.

“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” Trump wrote on Twitter.

He continued to criticize Facebook’s Libra cryptocurrency project in subsequent tweets, stating that it “will have little standing or dependability” and hinting that U.S. regulators would subject the social media platform to regulation:

“If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International.”

Trump further highlighted the potential of cryptocurrencies being used in illicit activities and facilitating illicit activities, in particular drug trade. He concluded by strongly stating that there’s only one real currency in the USA, which is the U.S. dollar.

“We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!”

U.S. regulators and lawmakers have taken notice of the Libra project, with both the U.S. Senate Banking Committee and the House Financial Services Committee having scheduled hearings next week with Facebook’s blockchain lead David Marcus.

Previously, the Senate committee has expressed concerns about Facebook’s track record with user data and privacy, writing an open letter to the company in May. In response to that, Marcus stated that Facebook would not itself collect any personal financial credentials.

Trump’s comments follow after the Federal Reserve chairman, Jerome Powell, stated on Wednesday that Facebook’s Libra project cannot move forward until it addresses concerns over privacy, money laundering as well as consumer protection and financial stability.

Meanwhile, Facebook announced last month that it would launch its global cryptocurrency in 2020. The new coin would be regulated by the Libra Association, which comprises of Facebook and 28 partners, including Mastercard Inc, PayPal Holdings Inc and Uber Technologies Inc. At the moment, no other banks are part of the association. JPMorgan Chase & Co, the largest US bank by assets, has recently announced its plans to launch its own digital coins.

Blockstack is the First SEC-Approved Token Offering Under Reg A+

The United States Securities and Exchange Commission (SEC) has granted blockchain-based startup Blockstack clearance to run a $28 million public token offering under Regulation A+, according to an official blog post from Blockstack.

According to news, Blockstack will launch its token offering online on Thursday, July 11th.  It will be open to any purchaser in the U.S. and globally, who would like to take part in the Blockstack next-generation computing network.

Blockstack is a blockchain builder that has raised $47 million through a previous token offering under Regulation D, which is a different provision that does not require SEC approval but is only limited to accredited investors. In comparison, Regulation A+ is open to all companies and individuals and serves as an initial public offering (IPO) alternative for smaller companies to publicly raise money with less strenuous accounting and disclosure standards than a regular IPO requires.

Although previously companies have taken advantage of Regulation A+ funding, this marks the first time that investors will receive a token, rather than shares in the company. This development has the potential to be a game-changer for other crypto startups that are looking to sell tokens but not equity in their companies whilst also remaining SEC-compliant.

Blockstack founder Muneeb Ali has shared his enthusiasm, however stated that the process has very long and costly since the SEC had to devise a brand new protocol for token offerings under Reg A+, something the regulator had never done before.

Accordingly, the startup has spent 10 months and approx. $2 million to gain approval from the SEC. Ali apparently said that Blockstack had to develop a protocol for running what is essentially a regulated ICO through Regulation A+ from the ground up.

This is possibly a precedent-setting moment for the crypto space, according to reports. Initial coin offerings (ICOs) have lost much of their appeal ever since they became the target of an SEC crackdown. According to WSJ data, ICOs attracted less than $120 million to their coffers in Q1 2019 in comparison nearly $7 billion in the year-ago period.

Meanwhile, recent poor performances and fraud concerns surrounding some of the Reg A+ IPOs have discouraged Nasdaq and the New York Stock Exchange from Reg A+ listings. Against this backdrop, having the SEC’s approval on a Reg A+ token offering may shed light on a new path for blockchain companies to raise funds under regulation, according to the startup.

Now that Blockstack has successfully created this new path for blockchain companies to raise funds, certainly more companies will now be encouraged to seek SEC approval for their token offerings rather than argue with the regulator that their tokens are not securities.

SEC and FINRA Share Outstanding Issues with Crypto Custodians

The United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued a joint statement on July 8th, in which they outlined regulatory compliance issues for cryptocurrency custodians.

Both agencies believe that there are a number of questions they need to address before they can approve crypto companies’ applications to become broker-dealers.

The statement outlined important criteria for both institutions’ approach to broker-dealer regulation, investor protection including when assets are deemed as securities under the 1970 Securities Investor Protection Act (SIPA), as well as various factors related to many of these questions such as when to consider approving a broker-dealer application of crypto-related companies.

The statement reads:

“The requirements of the Customer Protection Rule have produced a nearly 50-year track record of recovery for investors when their broker-dealers have failed. […] This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers robust protection of customer assets, including [cryptocurrency] securities.”

Broker-dealers in the U.S. are registered and regulated to buy and sell securities for themselves or their clients. And some firms use digital assets such as securities, thus allowing them to cater to institutional investors that cannot hold or directly buy assets.

“Put simply, the Customer Protection Rule requires broker-dealers to safeguard customer assets and to keep customer assets separate from the firm’s assets, thus increasing the likelihood that customers’ securities and cash can be returned to them in the event of the broker-dealer’s failure,” notes the report.

Apparently, the agencies claim that a crypto custody service may not be able to sufficiently prove that it actually controls the assets it supposedly holds. For instance, although a broker can verify that it has private keys to a crypto wallet, the challenge is to prove that no other individuals or institutions hold a copy of the private key, which could allow them to transfer digital asset security without obtaining permission from the broker-dealer.

In addition to that, if the transaction is made successfully, the custodian has no power to reverse it. This is applicable to all transactions a custodian wants to cancel or reverse.

Apart from custodial services, the regulators have suggested in the statement that they consider over-the-counter (OTC) trading, where brokers do not have custody of the digital asset securities, as lower-risk. This would mean such OTC trading would not require high levels of scrutiny. The report further tackles issues such as non-custodial service registration, bookkeeping policies, and liquidation following SIPA’s protocol.

Meanwhile, the SEC requested feedback back in March on how it might regulate crypto settlements. The agency showed further interest in the role of custodians in non-delivery versus payment trading as well as what safeguards are currently in place.