How Libra forces politicians to scale crypto’s steep learning curve
As Congress and the SEC were taking steps to regulate alternative currencies, they required a deep knowledge of the cryptocurrency market and technologies. For those who put off their crypto education, Facebook’s Libra is a wake-up call. The main bill that would create U.S. policy regarding Libra, the Token […]
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As Congress and the SEC were taking steps to regulate alternative currencies, they required a deep knowledge of the cryptocurrency market and technologies. For those who put off their crypto education, Facebook's Libra is a wake-up call.
The main bill that would create U.S. policy regarding Libra, the Token Taxonomy Act of 2019 (TTA), was introduced in late 2018 and reintroduced in April 2019 with added sponsors. The bill would exclude certain currencies from a definition of “security” that dates to the New Deal, creating a new form of “currency” and take a step toward much-needed regulatory clarity for merchants and consumers when using cryptocurrencies such as Libra for retail payments.
But the underlying issues remain complex, and members of Congress are still getting up to speed on how the cryptocurrency market operates, according to Mike Minihan, a partner and tax specialist at BX3 Capital, an advisory firm.
“When we discussed the Token Taxonomy Act with [Congressional staff] around the December introduction, one issue they said they were having was members of Congress didn’t have an educational foundation to pass the Token Taxonomy Act,” Minhan said. “One thing Libra will do is force the issue. It will get the Taxonomy Act to the head of the line.”
While still a work in progress, the TTA attempts to distinguish tokens that are in decentralized networks as being exempt from securities regulations, while the SEC, which has been wrestling for more than a year with how to regulate Initial Coin Offerings, would retain oversight over token sales with a centralized structure and an expectation of an investment and profit.
The specific lines between the two currency types, and how Libra fits in, are yet to be determined. But the TTA is likely a more workable blueprint for regulating Libra than the dramatic, politically infused unenforceable calls for a “halt” to Facebook’s plans that have come from some leaders. The TTA provides a “baseline guidance that will help builders and investors in blockchain and crypto," Minihan said.
TTA will likely be discussed at the upcoming Libra Congressional hearings, though most of the public statements from members of Congress and politicians outside the U.S. has focused on more broad criticisms of Facebook, such as the social network's stance on privacy.
TTA digs into the legal definition of a digital currency and how it’s formed and used. How Libra falls under these definitions will go a long way toward how it’s regulated in the U.S., and likely in other markets by extension. Facebook did not return a request for comment.
“Libra is being set up as a stablecoin backed by a basket of fiat currencies," Minihan said, adding TTA is set up to scrutinize ICOs and token sales for greater regulation. "As you read through the definition of the taxonomy act, Libra won’t be a security.”
Although Facebook has not provided much guidance about its regulatory approach, some of the features of the TTA would help adoption, according to Dror Futter, a partner at Rimon Law. The April version of the TTA adds federal preemption language that allows issuers, purchases and sellers to avoid many of the differing state cryptocurrency regulations.
The TTA was introduced by Rep Warren Davidson, R-Ohio and Darren Soto, D-Fla., and is a bipartisan bill in the sense there isn’t a move to shield Facebook from regulation that’s easily assignable to one party.
Soto and Davidson did not return requests for comment. In a Financial Services Committee hearing June 20, Davidson said TTA addresses an industry “desperately in need of clarity is it pertains to securities laws.”
In his testimony, Davidson added “one of the main reasons for having disclosure and security laws is the reduction in information asymmetry between the investor and promoter of an investment…there’s no headquarters for bitcoin. It has always left the quandary of how do you [regulate]?"
Even if the TTA passes, it will likely be changed as part of the process, and there will still be lingering regulatory questions related to Libra. TTA is a U.S. bill, so it doesn't directly apply to other countries. Also, while Minihan said Libra and a potential TTA would make it easier for merchants to accept cryptocurrency for payment, it doesn't address all currency issues for those merchants, such as how to handle a mix of Libra and traditional currency.
Most cryptocurrency payment projects are half-steps, with cryptocurrency exchanged for traditional currency at some point before the point of sale.
Even if a merchant accepts Libra for payment it's unlikely that merchant will do all of its own business in Libra, creating potential tax issues, Minihan said.
“What if you’re a merchant that accepts Libra but pays rent in dollars? You need to convert from Libra back to dollars,” Minihan said. “Because Libra is backed by a basket of traditional currencies rather than U.S. dollars, it will be impossible to get a one-to-one ratio.”
The transaction from Libra to U.S. dollars could be taxable, Minihan said.
“Facebook or Libra or Calibra won’t solve for that,” he said of taxable transfers from Libra to dollars. “Every merchant will have to maintain a Libra wallet. It’s up to the merchant to transact out of the wallet. The taxonomy act doesn’t give relief from that unless you’re transacting [from Libra to dollars] in very small amounts, and for most merchants that wouldn’t apply.”
The TTA creates a $600 exemption on gains when cryptocurrencies are sold that could help with some of these tax issues, Futter said. “Right now if you use bitcoin to buy a cup of coffee you need to report gains or losses based on the appreciation or depreciation of the bitcoin since you bought it. In addition to the tax burden this is also a reporting nightmare. If the bill is approved it would remove significant obstacles to the use of cryptocurrencies for ordinary purchases.
Facebook’s size and the recognition of its high-profile investors will likely push added regulations to provide more clarity.
"Libra is no small endeavor. It will take a significant amount of work to build the infrastructure for every consumer transaction...the reintroduction of the Token Taxonomy Act to exclude cryptocurrency from being classified as a security is the first hurdle,” said Marwan Forzley, CEO of Veem. "Libra will need to consider regulatory and government responses to address international backlash on money laundering, its potential to become a sovereign currency, and processing the infrastructure necessary to provide a fully-functioning crypto experience.”