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tv   Facebooks David Marcus Testifies Before House Financial Services Hearing...  CSPAN  July 22, 2019 2:00pm-4:01pm EDT

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yield back the balance of my time. >> the gentleman from texas mr. gooding is recognized for five minutes. >> thank you madam chairman thank you for being here today. mark zuckerberg came in front of congress in april of 2018 and facebook established its block chaining in 2018 per does that sound accurate? >> yes we started it in may of 2018. >> usurp an abortive direct or is for coin base which is a digital currency exchange from december 2017 tips august the 2018. his accurate -- is that accurate? so you understand how this works and how the exchanges of bitcoin blockchain etc. etc. many of these that were not proficient on you are proficient. going down that line you would also say you know how profitable this can be, right? that congressman yes i believe
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we have a good opportunity if we enable more people to participate to offer services that can generate revenue. >> this is supposed to be a nonprofit organization, is in the? >> i'm talking about the calibra wallop which will directly impact facebook. >> is it going to be a nonprofit? >> no, calibra is a for-profit entity and the entity that will dold the wallet that will be offered to facebook consumers. >> is digital currency illegal in some parts of the world quick skinny touch on that? >> gets congressman there are an number of countries that prohibit buying selling or using digital currencies. >> i also want to mention privacy violation concerns things that americans have been concerned with. the american consumer, do they trust facebook and do they feel comfortable with your company? >> congressman i believe we have
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a lot of work to do to earn people's trust and we have two definitely make though strong commitments when it comes to privacy and make good on those commitments for long periods of time. >> i guess one a mic concerns by sharon i think it's bipartisan we are a little concerned. i don't object to innovation in this sounds very exciting potentially but there's a level of mistrust of facebook just because of some of the things that have taken place over the last year. would you be able to tell us that the ceo plans to come and testify before us as this thing goes down the road? >> congressman i can't speak to that but i'm leading this project and i'm here today and i plan to continue to engage appropriately. >> thank you. i yield back. >> the gentlewoman from california is recognized for
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five minutes. >> hello mr. marcus. thank you for your patience during long testimony today but i want to look back at the history and try to understand what might become our future with libra. are you familiar with the term wildcat tanker the free banking era? >> i am congresswoman. >> i want to open the ice concept that wildcat banks was chartered under state law before banks were federally regulated from 1836 to the mid-1860s and they were called wildcat banks according to them. because they were in locations they were so remote you may see wildcats. the wildcat banks world and reliable. they became known for distributing worthless currency and putting customers at risk and as a result of that in 1853 we enacted in congress the banking act. how is the basic concept of the single currency is a stable coin
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such as lieber will take dollars and vice versa fundamentally different from wildcat banks where they took u.s. back to dollar coins in exchange for their own paper money which could and often did become worthless? it. >> congressman i believe a very important distinction here is that the reserve will be a one-for-one reserve. i understand the banks and the issues that arose from the wildcat banks are actually that they wanted to fractional reserves and as a result had inappropriate reserves to back the value of the currency they were shooting. >> a good point mr. marcus. which regulated will be responsible for ensuring that the association maintains that one-to-one reserve? will be the fdic? >> congressman this is a conservative as well and will they believe the association will need to have the right oversight and meet the bar for oversight and guarantee that it
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cannot deviate from a full one-to-one reserve. sam will it be self-regulation? that's what the wildcat banks were doing that so victor tune into factual reserve. people put their money in the wildcat banks because they believe perhaps wrongly that their money was saved but without the fdic guarantee isn't this exposing -- aren't you creating a problem tomorrow again? >> we are not congresswoman but i do share your concerns and that's what i believe having the proper oversight and self-regulation of the association level notably under the reserve is important and i want to go further. what i would like is for any consumer at any given point in time when they hold a libra to have full transparency of the value of the reserve backing the
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libra at any given point in time. >> essentially that's always what we believe about banks. that's where we go to get her money and it will be there but that's precisely why we have banking regulations on fact the expectation is true. i wonder if i could ask you, i know that libra is going to be pegged to 50% dollar i believe i heard my colleague say and 50% currency from a few different of the country so it sounded like what's in my daughter's bank which is kind of a mix of u.s. dollars in money she's been giving friends -- from. to come back from other countries. what's the association so to say 100% is that the state exchange rate and i would have the effect of the libra currency? >> congressman that is why we
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believe we need the right oversight for the reserve. >> what is the right oversight? >> proper regulation. >> lycoming? >> to be determined by the g7 working group. >> fdic? >> congresswoman we will not engage in banking it to these. >> you are going to take people's u.s. dollars, give them something that you're going to call currency and you don't call that banking activity? he bucolic money changing to the because we have laws. >> congresswoman you have my commitment that we will have the proper oversight and regulatory oversight of the association notably on the key issue of the reserve. >> respectfully mr. marcus this is not a personal thing at all but i have had a commitment to so many people who would do the right thing but i have to have better than now. i suggest you check out u.s. code 46 which makes it a crime
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to create private money that is a metallic point. i don't see why that statute doesn't relate to digital coin. >> mr. clay whose the chair of the subcommittee on housing development and insurance is recognized for five minutes. sad yankee manager. mr. marcus could you discuss what you believe libra's ranks is akin to facebook come e-mail or so nearly a new way to move money similar to paypal or square? >> congressman at this point it's an idea and a concept. i hope it's very successful because if it is many people benefit from it and i hope it's going to be a big success for the very people that we hope to serve. >> think you. will libra holders be subject to
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counterparty risk if the reserves are mismanaged? >> congressman that reserve will be one-for-one and we need to find a proper oversight so that it remains one-for-one. >> under what circumstances could a holder of libra lose their money? >> congressman for instance if they use a wallet that does not have consumer protections we will offer full consumer protection in such a way that if you encounter fraud or have issues we will make you whole. >> so that would be some kind of an insurance for the customer? >> correct. it's going to be something that is part of our consumer protection program when it comes to the calibra wallet. see that my colleagues have already discussed systemic risks
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but i would like to dig a little further. what are your thoughts about having a separate regulator to would only regulate digital currencies such as libra? >> congressman it's not for me to say who should regulate us but my commitment is that we will meet all regulations and worked with and consult with regulators and lawmakers to ensure we do this right. >> and of course the customer would pay a premium for the regulation. is that how you envision that? >> i'm not sure i understand your question congressman congressman. >> well someone would have to stand up and fund the regulator. how would that be paid for? do you have any ideas or thoughts on that? >> congressman this is not my province. >> okay let's go to another subject.
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what guardrails would be in place to prevent the a run on the libra currency? >> we have a one-for-one reserve congressman. they run on the bank would be impossible provided the reserve and we hope to have the right oversight to make sure that it remains that way. >> with portfolio managers be incentivized to seek higher returns on their investments for libra association members? >> are you talking about the libra currency itself because the libra currency is designed to be stable and as a result it will not have appreciation. it's designed to stay stable. >> can -- and the association members are the investors. >> corrects the association members invest in the ecosystem in order to kickstart the libra
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network. >> and so they would make a return on their money how? >> congressman my apologies for not understanding your question the first time around. >> the way that investors make their money back is by having it portion of the income that is generated by the reserve after it is paid all of the costs for the libra association. >> i see. thank you for your responses and i will yield back the balance of my time. >> thank you. the committee will now take a five-minute recess to set up for the second panel. i would like to thank, i am so sorry it should have thank you first mr. marcus. i apologize. i would like to thank you so much for coming before this committee and again we will take a five-minute recess to set up for the second panel.
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.. >> our next witness is the honorable who is currently professor of the practice of global school of.t. sloan management senior advisor, m.i.t. media lab
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-- and codirector of mit. next witness will be robert weissmann, president, public citizen, and our final witness will be melton dumeers, chief strategy officer. welcome to all of you. without objection, your written statements will be made part of the record. each of you will have five minutes to summarize your testimony with one minute remaining, a yellow light will appear. at that time, i would ask that you wrap up your testimony so that we can be respectful of both witnesses and the committee members' time. you are recognized for five minutes to present your oral testimony. >> thank you so much. members of the committee, thank
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you for inviting me to testify at this hearing. my name is chris bremmer. i'm a law professor at georgetown university law center. i'm here today solely in my academic capacity. it is an honor to be before this committee again. white papers like the one we're struggling to understand today have emerged as a common tool through which digital asset companies communicate with potential consumers and investors about new projects and ventures. however, white papers have faced mounting criticism for their hyperbolic language, false promises, and omissions of material information consumers would need before purchasing a digital asset. indeed the last time i was here to share my views before many members of the committee, we discussed precisely these challenges. but today we have a twist. criticisms of white paper disclosures have focused on early stage cash-strapped start-ups. rarely have they been directed at a multinational technology
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company with the resources to marshall top flight legal as well as technological talent. yet this time it is different. the libra white paper is peppered with big promises and few details and the project involves risk to purchasers and at least potentially the financial system that are not disclosed. indeed, even for me, a staunch supporter of innovation and upgrades to our financial system, this is at a minimum disappointing. the white paper is no mere public brainstorming exercise or technical exposition, but it is instead intended to condition the market for the adoption of a product that facebook wishes to sell to billions of people around the world. and the lapses are all the more problematic given the security like features of libra coins and possible implications of u.s. security laws. given the limited time available, i want to focus on some of the most problematic red flags. first, it fails to inform people
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in unambiguous terms that they can lose their money, and that runs on the coin are possible. instead the white paper routinely suggests and doubles down on the idea that libra will virtually always provide stability in terms of the purchasing power of the new currency. but that's not necessarily the case. the libra is subject to foreign currency risk, something the white paper does not clearly acknowledge, and indeed the coin could cost their holders money in the form of lost purchasing power should there be a run on any one of the underlying currencies in the basket. moreover, runs on the libra itself could be catalyzed for reasons that have nothing to do with the underlying basket, including a hack, or revelations that sensitive consumer data had been shared with facebook or other libra association members. second, the white paper fails to clearly explain that libra holders will be exposed to counterparty risk, should the
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reserve investment strategy prove to be mismanaged or poorly executed. although, quote, the goal will always be value preservation, end quote, any money raised from interest earnings ultimately go after operational and developmental expenses are going to fund dividends to early investors and the libra investment token for their initial contributions. as a result, the fund is structured in a way that creates incentives for the portfolio manager to accumulate over time higher yielding investments. finally, the white paper fails to disclose its promise or how its promise of a secure scalable and reliable block chain could be compromised by whatever is the weakest link in its ecosystem including exchanges in wallets operating in jurisdictions without kyc rules. this is obviously just the tip of the iceberg. with a host of critical questions about the rights,
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duties, and selection criteria for authorized resellers and libra association members, not to mention how the folks are intending to manage potential conflicts of interest. in my written testimony, i show how these kinds of disclosure issues populate the document and are especially problematic since this offering has again securities-like features including the fact among other things that it appears to operate nearly identically to etfs. critically these kinds of omissions are more than just a matter of technicality. they indicate varying ways in which potential libra coin purchasers, every day people, are far from fully informed and are not on a level playing field vis-a-vis libra sponsors. there are 99 problems and this white paper is one. >> thank you, mr. brummer.
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you are recognized for five minutes. >> thank you very much, chairman clay and ranking member mchenry. thank you to the other members of the committee. thank you for the opportunity to participate in this hearing and examine facebook's proposed global currency, the libra. i'm a professor at a law school where i have taught for the past 18 years, mostly in the field of corporate law and finance, comparative law, and law and development. i'm also the director of the law school's center on global legal transformation. based on my own research, an analysis of the libra white paper and related documents that have been released so far and a close reading of other comments and analysis of libra, i have come to the following conclusion. facebook's libra is designed to become a new global currency that will complement existing currencies. it is designed as a for profit currency of currencies. the libra white paper promises
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to create a global safe and inclusive payment system based on modern digital technology. libra is labelled a stable coin and as such aims at delivering low volatility and high liquidity to its customers, the holder of libra coins who shall be able to exchange their libra against local currencies without suffering major hair cuts. to this end, libra is backed by assets. the safe assets of choice are bank deposits and liquid debt of reputable sovereigns. these assets owe their safety to public backstopping mechanism in the form of deposit insurance and a full faith and credit of the issuing sovereign. in effect, the sponsors of libra and their profit earning beneficiaries will be free riding on a public safety net for which they are not paying and are extending the safety net
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to users around the globe. the main governance architecture of libra resembles currency boards employed by some countries that use currency baskets to back their currencies such as singapore and kuwait with the importance that libra shall deliver profits for its beneficiari beneficiaries. all interest and dividends will be allocated to the members of the libra association and are investors in the libra tokens which are distinct from libra coins, the holders of the libra and i would suspect in the event of an insolvency of the reserve, there will be no money transferred to the users of the libra. essential note of what will become an ecology -- [inaudible] -- is the libra association based in switzerland. it will exercise control of admission of future members, manage the libra reserve, determine asset managebility for the reserve, decide the protocol for which libra runs and will
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determine how the architecture will evolve to a permission led system. this concentration of power is unmatched by any meaningful accountability to anyone. the choice of the legal structure means that the members of the libra association will be insulated from liability and accountable only to themselves. they will not be accountable to holders of the libra coins nor to the citizens of countries that create the safe assets used to backstop the libra. facebook plays an essential role in the creation of libra, the first 28 prospect tor members of the association have been recruited by facebook and given facebook control over the start up phase and it is reasonable to assume most if not the other 100 original founding members will be hand-picked by facebook as would be the management team which would be put in place after the first five members only have signed up. existing legal regulatory frameworks in the united states
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and elsewhere are highly incomplete and leave ample room for legal as well as digital arbitrage. they were not designed to govern digital currencies. regulators are currently using a case by case approach to extend their reach which is no match for the fast-moving technological change. libra's global reach exacerbates these problems. many of the activities associated with managing libra and its reserves will be beyond the reach of regulators in the united states or any other country for that matter. the current level of national regulatory corporation does not match the versatility of a private actor such as facebook to pick and choose from legal systems around the globe which laws and regulations best suit its needs. thank you very much. i cede the rest of my time. >> thank you. mr. gensler, you are recognized for five minutes to present your
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oral testimony. >> chairwoman, tlaib, ranking member mchenry, members of the committee thank you for inviting me here to testify. it is so good to be back with you here again. i began my finance career in the private sector with goldman sac sachs, later as a treasury official when i first testified in this room, i also was a witness of the sudden asian financial crisis. it was later in advisory the sarbanes and oxley act with chairman oxley right there and after the crisis i helped reform a 400 trillion dollars swaps market and i'm now honored to be a professor of the practice at mit teaching about digital currency. these experiences have taught me some lessons i bring to consideration of facebook.
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first, all of finance has one foundation, and it's trust, for hundreds of years. unfortunately, for facebook, for some unexplained reason, they chose to make these bold proposals when trust in their company is not in good supply. second, though facebook's libra proposal may seem unprecedented, if not just for its sheer breadth and scale, we've seen this show before. trust us to innovate. trust us to revolutionize finance. enron, trust us to set up sophisticated unregulated electronic energy trading. what did we get? accounting scandals, manipulated electricity markets and bankruptcy follows. long-term capital management, trust us to set up a new type of hedge fund with 1 trillion dollars derivatives, systemic risk followed. libor, trust us to set up the
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world's most relevant interest rate. what followed, manipulated rates on trillions of home mortgages and consumer loans followed. these all hurt millions of americans. they were also personal for me. as i lived each one of these in the official sector trying to clean up the mess. third observation, tech has already made big strides, think paypal, square, transfer, leapfrog, big finance and now dominate chinese payments. there's amazon pay, google wallet. amazon coin, apple pay. and recently apple announced with goldman sachs a mastercard apple card. you see the truth of the matter is there's a lot of innovation going on and facebook has tried as well. three times with limited success. facebook credits closed in 2013. facebook messenger payments closed their peer to peer in
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europe just this month. facebook's whats app pay pilot has stalled in india. fourth, facebook's ambitious proposal needs significant regulatory guardrails. first, the libra reserve, where the money is, needs to be regulated by the sec for what it is, an essence of pulled investment, multicurrency etf. if for some reason technically the law doesn't cover it, then congress can step in and ensure it is covered or regulate it as a bank, like congresswoman porter mentioned. regulating the libra reserve like western union under 49 state money transmission laws as facebook suggested here today, forgets tough lessons of failed shadow banking, it just doesn't make sense. there needs to be tight investment restrictions including prohibiting loans. i was glad to hear that today, but guarding custody of funds. that's what china and kenya did when big tech came in. they said it was very restricted. second, the libra association's manager should be registered as
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an investment advisor. third, customers libra custody in colibra needs to be tightly regulated for custody protection ensuring facebook doesn't use, lose, or abuse customers' libra. i think that's part of the economics they want to use those libra coins. they also need to protect the data by true firewalls, not just by protecting customer consent clauses. first the accounting of the payment system, the libra block chain should adopt payment infrastructure rules consistent with federal reserve poll sis and lastly -- policies and lastly, libra will have the same challenges as bitcoin guarding against activity. being registered won't stop the rest of the libra network, the broad global network. there's no easy solutions. so trust, so important to finance and innovation, easy to lose. best to verify as both members on the republican and democratic
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side said and critical to be responsibly regulated. i look forward to your questions >> thank you, mr. gensler. mr. weissmann, you are now recognized for five minutes to present your oral testimony. >> thank you very much madame chair and both you and mr. mchenry for holding this hearing so quickly after the facebook announcement and treating this issue with the seriousness and thoughtfulness and care that it deserves. facebook is not making this proposal because it is interested in competing with western union. facebook is making this proposal because it wants to be in the middle of as many transactions that occur across the planet as possible. if you can get all of them, it will take that. that is a serious business this committee absolutely must be paying attention to. i want to raise three particular concerns with facebook's proposal that i think could be ameliorated with extremely aggressive regulation but not
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cured. before i do that, i want to make a point that follows on from what mr. gensler just said. facebook as a company cannot be trusted. i mean that in two senses. first, facebook has repeatedly -- not that people don't like facebook, facebook has repeatedly violated its own privacy policies. not an external thing that was imposed on them. they adopted their own policies, and they violated them, not once, not twice, but over and over and over and over and over again. look at the last consent decree, see the listing, wait till we see this consent decree, see the listing. this is a company that can't be trusted. it's worse than that, and this is the second point. even as facebook maintains its promises, they are unilateral voluntary and subject to change at any time. key features of facebook's libra proposal are completely up for grabs and change over time.
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for example, the one to one reserve, that would make a difference, but they could unilaterally alter that commitment. the idea that the money will be invested in stable currencies, would make a difference but a promise that could unilaterally be invested. the idea there would be a fire wal between colibra and facebook, a unilateral promise that could be vested, and you would be a fool to think they wouldn't change that one because they change their privacy policy almost every year. three particular considerations i want to raise, first the competition policy and monopolistic implications of this proposal. as we've heard today from facebook, immediately upon adoption, of colibra, it would be available to 2.7 billion users around the world. so it is a certainty that facebook will dominate the market, for libra and perhaps for all digital financial transactions.
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there may or may not be other wallet competitors in libra, but no one is ever going to compete with that. we're going to see facebook immediately extending its dominance in social media to now the dominance in the payment transfer business. libra association itself has the makings of a cartel. there's already talk about giving discounts among the libra members, for sure going to be used to advantage those that are inside and disadvantage those who are on the outside, under the leadership of the dominant member of the cartel, facebook. we have a long tradition in the united states of separating banking and commerce under the bank holding company act. that is expressed a lot of wisdom, protected us from a lot worse financial crises, and we need to apply those principles going forward. second, big concerns about consumer protection. inherent in the libra proposal, the idea that you are going to make no interest loans as a use tore facebook. -- user to facebook. the idea you can adopt foreign
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exchange currency risk, big problems. new facebook libra ecosystem, massive consumer protection problems as you have a global privatized orderless currency. what happens when you get that payday loans they are bragging about, you just didn't realize it was from ukraine. the choice of law became ukrainian law. third problem, privacy. again, as i say, no reason to believe there will be a separation between colibra and facebook, but even if there is, facebook will understand what is going on based on user's use of facebook. they will gather all this data. whether or not they do what they say they are going to do, if this process proceeds, we are likely to see the creation of a corporate surveillance with no precedent in world history and only imagined in science fiction novels. it is a matter of them commercializing our lives. it is a matter of them leveraging the data to crush
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their competitors. it is a matter of overall less innovation, not more innovation, both in the digital economy and in the rest of the world economy. finally a last point i want to say this committee is floating the idea of the finance act, we think that is the right approach going forward. this is far too dangerous of a proposal to permit to proceed. that is one way to shut it down. i hope in committee does in fact do that. thank you very much. >> thank you. now i would like to recognize ms. dumeer. you are recognized for five minutes to present your oral testimony. >> thank you. good afternoon, chairwoman tlaib, ranking mchenry and ranking members of committee. i'm chief strategy officer of coin shares a firm that operates across four jurisdictions including the united states and eu. as of today we manage 800 million dollars in assets on
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behalf of thousands of investors. i'm also here to share my insights as a business owner, an investor, an advocate for and user of crypto current sis. today i would like to discuss crypto currencies, mainly bitcoin, emphasize why bitcoin is different from libra and outline what that means for innovation here in the united states. so let's start with bitcoin. bitcoin is the best known, most valuable and most established crypto currency. it is three things. it is a technology. it is a network. bit bitcoin is also a crypto currency. bitcoin as a technology is not regulated. much like the internet, the bitcoin network could be considered a public good. however, the companies being built to provide products and services on top of the bitcoin network are subject to regulation in their respective jurisdiction. over the last few years -- five years i've built three investment firms and invested in
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over 150 crypt toe currency focused companies in over 30 countries. fully over half of those companies have been incorporated in and operated from the united states of america. the united states enjoys a robust well developed capital market and boasts a long track record as a place where innovators can build businesses. these 150 companies now employ nearly 5,000 people in cities like san francisco, charlotte, new york, boulder, austin, atlanta, but also london, singapore, zurich and berlin just to name some. crypto currency has reached a point of inevitable. it is inevitable that the bitcoin ecosystem will continue to grow and contribute to the digital economy. the question is where. the traditional approach of drawing a regulatory permitter which has been used in the past to establish jurisdiction is challenging to apply in this digital world that is not constrained by the physical
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borders of the past. we're seeing a wave of interest in crypto currencies and countless imitators which borrow some features of but are decidedly not crypto currencies. libra is not a crypto currency. i'm not here to pass judgment on facebook or its efforts and i commend their altruistic aspirations but they are just that, aspiration. first bitcoin is decentralized which mean nos entity or the group has the power to block or censor the use of the network. second, bitcoin is its own asset, backed by its own scarcity and the demand for it. there is no entity that hold assets that give bitcoin value. libra in contrast is backed by a pool of assets that are domiciled abroad. asset management is a regulated activity. lastly, bitcoin is permissionless, meaning anyone
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in any part of the world has the ability to enter and exit the network without requiring permission. libra is permissioned. the libra network is controlled by a private group who will determine who has permission to access this network. the bitcoin network supports thousands of companies around the world. libra supports one entity, facebook. facebook is not a public entity. it is a privately owned for profit company. libra should not be compared to bitcoin. like the internet, it is critical that bitcoin remains open for permissionless innovation. companies here in the united states serve tens of millions of customers, service billions of dollars of regulated legal commercial activity, and employ thousands of meme who are building on -- thousands of people who are building on bitcoin and crypto currency networks. while the bitcoin community is global, we should endeavor to
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keep companies here in the united states, regulated under our laws, where benefits accrue to the american people and the economy, not to foreign jurisdictions. the decisions you weigh now will determine the future of these open permissionless technology networks and capital formation. that future is not five or ten years away. it is here and it is now. i urge you to view bitcoin as open public network that enable innovation and growth and to treat libra and its future imitators and there will be many in the context of the staff, private efforts led by corporations holding billions of dollars of the public's money. these things are not bitcoin and are not crypto currencies. i thank you for your time and look forward to your questions. >> thank you. i now recognize the gentleman from missouri, mr. clay who is also the chair of the subcommittee on housing community development and insurance. he's recognized for five minutes. >> thank you, madame chair. let me thank the panel for your testimony today.
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let me start with mr. weissman. currently many people believe that crypto currency can coexist within our current monetary system, given that crypto currencies only constitute a very small fraction of the economy's financial assets. however, if an entity, like facebook, with 2.5 billion users decides to go ahead and bring libra to market, this can change rather quickly. how can this pose a threat to the u.s. central banking system, if the majority of facebook users in the u.s. in a few years use libra as a vehicle -- as a viable currency? >> i think there are a whole series of potential risks, mr. clay. one has to do with the systemic risk created by libra itself. the possibility that there's a
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run on the libra, if it gets up to scale, will require massive intervention by the public. on a scale that would dwarf tarp. or the alternative is to let the whole thing go under which seems almost impossible to imagine. a second problem is that libra itself would encourage runs on foreign currencies, maybe not the dollar at first, maybe eventually the dollar. if you lose confidence in a national currency, the ability to move immediately into this allegedly stable alternative currency can create a perpetual -- self-perpetuating cycle that would create itself another kind of financial crisis. i think that the risks -- you know, i think the scale of this proposal is such that you have to run these scenarios that are very hard to get your head around and take them seriously. you're right to ask the question. >> thank you for that. and professor brummer or mr. weissman, regarding sa inin
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sanctions, can you please explain how the libra association and the companies that grow out of the libra construct can ensure that international u.s. sanctions regimes will be followed? mr. brummer >> thank you, mr. clay, for that question. i think one of the challenges that pertain to the libra ecosystem, it is not just a problem with sanctions, but it's a problem with anti-money laundering and really the way in which it's being set up is that ultimately the weakest link in the network can become a gateway for all kinds of wrong doers. now, the promise that facebook is making right now is to say that our infrastructure that we're developing, like colibra will be subject to all relevant u.s. rules. now, the challenge is that it's creating a platform that will allow others to develop infrastructure outside of the
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united states and indeed outside of internationally well supervised regimes. and they are making the promise that they will develop certain kinds of codes of conduct and standards for on boarding those applications into the ecosystem, but they've failed to explain -- >> how would they prevent sanctioned person from getting on that platform and exchanging? >> well, if there is the kind of anonymity that they are claiming, i mean, and they exclusively state in the white paper that they will allow clients to quote hold one or more addresses that are not linked to the real world identity which by the way seems to -- [inaudible] -- the bank secrecy travel rule which requires customer information including the name and address of the transmitter, it seems to certainly enable in the absence of further elaboration exactly
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how they plan to prevent threats to u.s. national security. >> let me ask anyone else in the remaining time on the panel. how specifically what does libra association need to do to vet those who wish to join it or build on its block chain? anybody? >> if i could just say, there's not currently a way that you could actually foreclose somebody on the sanctions list from getting this coin and transacting. the onramps and off ramps, the only way you could do that is if you literally put in the computer code what they call libra core, to put in there the prohibitions and so forth, and they are not going to plan to do that. to your second question, i think the libra association, because it could control for particularly developing countries, the monetary policy, it needs to have wide open
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governance, and right now it's just largely -- large corporations and a handful of nonprofit. >> thank you -- >> my time's expired. >> the gentleman from north carolina, the ranking member. >> my question for you is about the outline you've given in your testimony. so you make the distinction between libra and crypto currencies. so let's talk about crypto currency. okay? because in my respects when you have the president of the united states -- because in many respects when you have the president of the united states -- when you have the president of the united states, the secretary of the treasury, in the same week they talk about crypto currencies, a decade after the white paper, probably a decent thing to draw attention to the industry; right? how long have you been in the wider crypto or digital currency space? >> i have been working in the digital currency space professionally for the last five years and individually as a member of this open source global community for the last seven years. >> okay.
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so let's talk about the opportunities of crypto currency. innovation is happening. it's happening across the globe. >> absolutely. >> so you mentioned, though, that there are challenges working in the united states. what are those challenges right now? >> the primary challenge the lack of jurisdictional and regulatory clarity. i do commend many of the regulators here in the united states that companies interact with. i personally have interacted with the cftc, ftc, irs, law enforcement, state banking regulators and a host of other policy making bodies and enforcement agencies. but even in the characterization of crypto currencies, there are key differences. the sec has long deliberated whether crypto currencies are securities or not and have reached the conclusion that bitcoin is not a security. the cftc treats the coin and some of the products around bitcoin as a digital commodity, if you will. and contrast the irs treats the bitcoin and digital currencies as property. so there's inconsistent treatment makes it very
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challenging for companies to determine how to operate within the existing regulatory frameworks here in the united states. it costs a tremendous amount of capital for these early stage companies to hire lawyers, to find experts and to come here to d.c. to speak with their representatives on these important topics. so this is a big concern to me as an investor. >> what's the key take away as a policymaker? how do we ensure that that innovation is going to happen here in the united states as opposed to some foreign regime? >> we need clear guidance, much as switzerland laid out in 2018. they established a very clear set of policies and a regulatory framework that has been applied consistently. >> okay. so permissionless versus permissioned networks. let's talk about the distinction between decentralization, permissionless versus what is libra. >> sure. so the whole idea that makes bitcoin so compelling and so exciting is this idea that started with the internet, of open source software development, where you had code that anyone could use to build
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anything they wanted, but that a group of people chose to run, which established the foundations of the internet. similarly, the bitcoin network, which is operated by individuals and entities that run computers with a bitcoin code around the world is open and accessible to anyone. anyone can make proposals to change the code. anyone can audit the code. but most importantly, anyone can build a business on top of the bitcoin network and use the network to drive innovation, whether that's in enabling new types of value transfer or whether it's in enabling all sorts of other services we can't get imagine. >> okay. so why is that important? why is that an important distinction in architecture, decentralization, permissionless. >> absolutely. as the other experts in this panel have discussed, there is a tremendous anticompetitive component to what facebook is proposing to do. this is a private group of 100 corporations who have ties to facebook and its executives in various ways who will be
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responsible for determining what the code supporting the libra network is, who gets to run those and participate in the network and what transactions and applications and products and services are allowed and disallowed. this is in sharp contrast to what bitcoin and other open distributed crypto currencies are. they are open for anyone to build on. libra is a private for profit enterprise that benefits large corporations and for profit entities who already have a tremendous amount of power. >> okay. so what's your take on libra? the currency as another competitor force in digital payments? >> my position is this, facebook should be allowed to innovate just as anyone else in this country is allowed to innovate, but it should not be allowed to pursue this path under the guise of being an open crypto currency like bitcoin. that analogy is very dangerous and it is factually incorrect. it represents something entirely
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different. it's been categorized as an etf. i would say it is a mutual fund that represents two classes of interest. it is a for profit, anticompetitive effort that makes it much harder for small start-ups and innovators to build businesses serving that same audience and enabling digital value transfer. >> at the same time, a distributed ledger and crypto currency and digital assets are a wave of the future. >> absolutely. >> yield back. >> thank you. the gentle woman from new york is recognized for five minutes. >> thank you, chairwoman. earlier today, i told mr. marcus this is not silicon valley and that all problems with the libra and the association need to be worked out before the launch date. he wasn't clear on whether or not libra was willing to delay its launch date. by a show of hands, do you agree libra should delay its launch date until legal and regulatory concerns have been addressed and
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approvals have been granted? okay. professor, many of us question mr. marcus this morning on the libra association's decision to place its headquarters in switzerland. why do you think that the libra association chose switzerland for its headquarters? what advantages could the swiss regulatory system offer libra that the u.s. system doesn't? and what problem does this present? >> so i do not want to deny the fact that switzer land has the signalling effect of being the home for many international institutions. but that's also interesting because it is a national organization, actually public nonprofit organization. in terms of the regulatory benefits, i think the set up of the association itself is an interesting benefit because they can set up an association that is supposed to be nonprofit
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organization and yet use it to plow back these profits to its members. i also think that switzerland is trying to position itself right now as a major hub, jurisdictional hub for crypto currencies and has issued a number of papers where they are trying to do so. so they have the benefit of trying to be less fragmented than the united states system, but i think they also have a long history of having lax financial regulation. >> i think that switzerland offered them all the things that the professor just said, but i also think that they think under swiss law it is probably a little less likely that it is a security than under u.s. law. what we used to call regulatory arbitrage that's going on as well. and the tax law arbitrage that the professor mentioned that you could have a nonprofit and yet still pay dividends which is kind of foreign the to the way we think here. i think it is also a signalling
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effect to all of their users that they are less controlled by the u.s., and when this libra reserve gets big at some point in time, if any developed country is going to use the libra instead of the u.s. dollar and libraize instead of dollarize, i think it signals in the future hey we're not under the control whatever future u.s. president and sanctions regime in the future. >> thank you. professor, earlier today i asked mr. marcus if the libra association will be willing to submit to enhanced oversight if it was designated -- [inaudible]. he initially responded by saying the libra association has no plans to engage in banking activities. however, as you both know, we gave specific authority to designate nonbanks in order to increase their oversight so they
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do not threaten the financial system. in each of your opinions, what type of systemic issues could libra and the association pose and should they investigate this issue? >> so thank you for that question. it's very important. number one, to the extent to which there is a run on any of the currencies in the basket, there could be an incentive to ultimately liquidate the libra holdings. that destabilizes the coin. secondly, as i mentioned, if there's some kind of operational failure, people can decide, hey, someone can hack into this wallet, why should i keep it? in which case again you decide to liquidate your libra holdings. if you scale up and i want to add that that's entirely possible in part because of it's facebook, but it is not just facebook. what would happen if uber and lyft all decided to either require the use of libra for their services or to offer some of their consumers benefits?
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then you can imagine it becoming quickly systemically important and as a result that's a huge challenge. the last thing is banks -- people are saying regulate facebook like a bank perhaps. well one of the questions i think is worthwhile considering is would facebook even be eligible for a banking license? a de novo review would require an investigation of say facebook's earlier violations. >> i think because the united states essentially with its own sovereign debt and with its bank deposits that might be used backstopping the currency probably will be the country that will have to backstop any uncertainties or run on the libra even if it emanates from elsewhere in the world. >> thank you. >> yield back. >> the gentleman from arkansas is recognized for five minutes. >> thank you, madame chair. thank you for this panel. hope you have found the day is interesting as we have. mr. weissman, thanks for your watchdog work on behalf of
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americans. you know, one thing listening almost to all the questions on and off today, there's a burden hanging over the room which is that it's facebook in here testifying, so a question to you, if this were general electric and they were proposing this innovation, you'd still have your same questions, but -- and we'd still be month monitoring -- we'd still be monitoring trust but verify ronald reagan style but you would be downshifted a level of alert if it were -- again, we could say morgan chase or ge, just a personal view on that question. >> absolutely, correct. for a couple reasons -- >> you would say with logical reasons and the majority have talked many reasons and many americans are frustrated -- >> the history of privacy violations obviously implicated by this, two the anticompetitive effects.
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no other company can do what facebook can do and suddenly magically make appear this new product inside your phone, inside your life, inside your mind for 2 billion people. >> yeah, good, thank you for that. and on the issue of the business of banking, i mean traditionally yes we have separated commerce from banking and we have a long legislative history on that, but the business of banking in those laws, talking about the bank holding company act or any other is taking deposits and the important and making loans. if you are not in both, you're not as a general statement legally in the business of banking. so when you think about what you've seen, would you say that that remains to be seen, and that's why we're having this hearing to find out what is the business mission here? what are the businesses? do you agree that we -- you suggested they be regulated like a bank, but they've not yet said they are a bank.
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>> i spent 18 years at goldman sachs and my whole life has been about finance and money. >> right. >> i think when you take somebody's money, and then you invest it, in this case, they want to invest it very tightly and narrowly, it has a banking function and we have this term shadow banking for banking functions that are not regulated like banks. i think it's just would be mal practice to leave it to 49 states -- >> that's a good point. thank you. >> that's what i think. >> i think that's what this hearing is about is trying to decide what is the best oversight. i think mr. marcus was fairly open to say yeah we're interested in what the right oversight is too. you have your views. we have ours. thank you for that. ms. dumers, i was very intrigued and thank you for your conversation about all the business you have. one thing that concerns me, i mean, i think a lot of international people fly on boeing aircraft. i think of them own apple phones. i think a lot of them attend the
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world bank meetings in washington, d.c. a lot of people are satisfied that the united nations is headquartered in new york. i'm shocked that we have to go to a neutral country in order to have global acceptance of a product. you seem to take the other side, that you're happy to have these businesses in america. can't the u.s. be a reasonably good location for the association to be headquartered? why would we not put it here in the united states? >> absolutely. i think there are two fundamental issues here. first is in the u.s. there are a number of different agencies, regulators, policymakers that have oversight of the various functions that the libra association would like to perform. switzerland on the other hand where the association is headquartered has a different track record. it's been a place that's been very open to crypto currency projects and other similar innovators and it has a clear regulatory framework that is more permissive. in my view, part of the effort to locate the association in switzerland is to provide that
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clearer, simpler regulatory framework to the libra association and its members. that should be here. >> thank you. i appreciate you doing your business in the u.s. i'm just asking it -- you raised it in your testimony. my view would be that mr. weissman would be happy and you might be happy if, you know, they were domiciled here, and if that compelled the u.s. to have that better operating environment, regulatorily and legally for this kind of activity, which i don't think we're putting the genie back in the bottle, and therefore the use of block chain and the use of tokenization is going to be around the world as we watch it, and so i would like to see that innovation take here under the right regulatory framework. so thank you all for being here. i yield back my time. >> the gentleman from new york, mr. meeks who is also the chair of the subcommittee on consumer protection and financial services is recognized for five minutes. >> thank you, madame chair.
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i like that, madame chair. [laughter] >> thank you all for your testimony today. and mr. gensler of course it's good to see you here today. you were with us in the depths of the financial crises, and i suspect that you may agree with my earlier statement in fact in listening to your opening statement that no large company sets out to willingly break the financial system, but through a combination of moral hazards and regulatory loopholes have allowed major systemic crises over the past decades. what i want to do is ask all of you some questions that i asked mr. marcus this morning. before i do that, i want to point out an intellectual slight of hand, if you will, that mr. marcus did in answering my
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questions. and to my colleagues. he states that they seek to build a system for money transfer. the comparison is consistently made to paypal or vnmo or western union, but to the best of my knowledge, users don't hold wallets on those platforms, don't store money until it is used in a western union account, rather, customer accounts, which are held at banks, are deducted when a payment is made. so now, let me then ask a question because i'm worried about systemic risks, and i asked mr. marcus this morning that if facebook managed just 10% of its current user base, to the facebook libra wallet, would you agree that they would be a systemically risky financial
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institution? and should they be designated as such by -- [inaudible] -- and even do the regulators have the capacity to develop dedicated enhanced oversight regimes for facebook in such event? i will start with mr. brummer and this mr. gensler. >> that is an excellent question, and certainly if facebook was managing those kinds of assets, given its customer base, i think it would certainly be systemically important. and the question about the expertise at the federal government level, you know, is precisely the fact that you have to think about coordinating an appropriate response, not just in terms of the banking and financial stability level, but also with all those consumers and all the frailties that we've been discussing all day long is how exactly do you protect every
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day americans from those particular risks. and i think that it would have to be elevated to a matter of prudential, systemic, and also just customer and investor protection. >> i will give a bit of a technical answer, but quick, having helped you all work through that dodd frank bill. title 8 of dodd frank had two systemic provisions. one is as companies -- payment infrastructures are clearinghouses. there was actually a third one, activities. it depends on the size that this would get to, and even if it was 10% of their user base, if it only had small balances, i think congress rightly made sure that they couldn't just designate anybody systemic. if the balances were really small, it might be a little challenges for those to be designated systemic. i think the balances were large, i think yes. i think on the payment infrastructure side, is it a
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systemic importantly clear payment system? if it was 10% and embedded in the world that way, i think it is quite likely that they would be able to do it. but it would depend on facts and circumstances. >> let me ask this question because i don't know given that when we were asking the questions whether they were talk about a security or commodity, you know, that's a question, and who would then be the regulator, who would be the appropriate regulatory authority? would you say that they should be listed so that all of the regulators at some point would be regulating them, or should congress look at creating a new regulatory authority that just looked and specialized over crypto currency and bitcoin, etc. -- >> i would just say i don't think we need another regulator in washington. i will say that. >> i agree. >> i think if it impinges on investor protection which this feels like -- a great indiana
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poet, poet riley said if it quacks like a duck, it waddles like a duck, it's a duck. this thing looks like an exchange trade fund and i'm using common sense here. if congress needs to fill a gap to make sure it is under securities laws, i would do that. >> thank you. the gentleman from ohio, mr. davidson is recognized for five minutes. >> thank you, madame chair. thank you to our witnesses and to my colleagues who are here on this really important topic. mr. gensler, you mentioned regulatory arbitrage. certainly in this space, we have seen a fair bit of it. you know, the sec's cracked down some of the big fraudsters that were essentially launching securities in violation of u.s. securities law. however, that regulatory framework as has been pointed out has driven a lot of companies to find certainty in places like switzerland or singapore. you know, would a bright line test that says if it meets this test right here, we know that
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it's a security, and if it falls on the other side of that, we know it is not. would that provide the certainty the market needs? >> i think that it could, but it could also provide certainty for ways for good lawyers to cleverly work around it. so i think whether it's the supreme court test or just in the last few weeks the sec put out a lot of guidance in this area. it's been slower than i think we want. i will agree with that. but i think they are slowly under chairman clayton trying to give some certainty to this area. >> right, so a lot of that has been provided and unfortunately that's not really -- i appreciate their efforts, but frankly, that's congress's job to provide that srn certainty -- that certainty. if we live with a court decision, if you are swinging an orange grove hammer, a lot of things like an orange grove. talking to one other principle that you are talking about, so we have provided that and a group of bipartisan folks in an
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act. it lays out a four part test that if it meets this, then you can know. you don't have to go on a case by case basis and preclear your idea with the sec and maybe you talk to the right person and maybe you didn't or maybe you could spend as much on lawyers as facebook did. maybe you've got two years before you need to launch, but maybe you don't. and a lot of companies have sat down and talked to me and say look, no offense, we don't trust you guys. we're going to launch this in switzerland or singapore. we're trying to provide that certainty for the market. i want to ask one question specific to libra. their association would be governed by a board. their association has central control in its proposal, and those seats i think would be considered assets. right? they would be presumably able to be sold. they say they will be governed in a different way. the underlying proposal is not just a bundle of currencies but short-term securities. under securities law right now i
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think as you point out, you don't have to do arbitrage. you just have to apply existing laws that would be treated as a security; correct? >> the members of the board would get something called a libra investment token and that's unambiguously security. i think facebook has agreed to that. >> thank you. >> you have highlighted a lot of background information about bitcoin and about the, you know, distributed ledge and benefits of that -- ledger and benefits of that, decentralization versus centralization. a lot of people will use the phrase there's bitcoin and then there's coin. are you familiar with that phrase? >> i am. >> could you elaborate on how people would differentiate the two? >> i think the idea here is bitcoin has had a long track record. the network has been operating for ten years. the bitcoin network has been tested. the decentralized nature of the
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bitcoin protocol has been tested. people have tried to co-opt control of bitcoin source code and push it in certain directions that benefit their business models and the network and the protocol and its open source governance have withstood that test. it's robust. it has been tested. it has had the benefit frankly of spending its first five years in sort of operating in innovation and not having a lot of regulatory attention >> is there a central authority that would dilute the value of bitcoin? >> no. >> is there a central authority that could filter transactions at bitcoin? >> no that can only be done through products and services that people utilize to access the network. >> like coin base for example? >> absolutely, that's a u.s. company regulated on the facts of what its business model is. >> just like the u.s., the federal reserve or the treasury doesn't change the dollar. the people at the edges, the banks generally do that. with bitcoin you can still
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engage in peer to peer transactions like cash; correct? >> absolutely. >> open source code, you could have a wallet; correct? >> absolutely. >> all these features are different than many of the things that people call -- coin. people do really have their assets at risk, we absolutely need the certainty that legislation can provide in this space. i hope we have a hearing specific to the act soon. i appreciate the time. i yield back. >> the gentleman from georgia mr. scott is recognized for five minutes. >> thank you, chair lady. first let me say what an excellent panel we have. very knowledgeable. thank you. mr. gensler, it's great having you here. my good friend. we did a lot of work, with the cftc, myself as chairman of our
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committee on derivative, swaps the whole nine yards -- derivative swaps, the whole nine yards. good to see you again. let me tell you what i think is the achilles heel in libra right now. :: >> and the globally one one.7 billion remain outside of the financial system.
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with no access to traditional banks. and then to assure me that to do what libra wanted then to know your customer who is in place including a government issued identification. and even when you are dealing with online activity. and when you are dealing online one of the big reasons in order to access the financial services with
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identifiable proof of identification. so how do you see libra expanding access to financial services for the un- banked or under banked, one.7 billion adults across the world is specially on the online platform when you cannot hand over the id card. and while at the same time to navigate and verify a customer's identification who may not have a government issued id how do you mesh this with online cracks that is the
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achilles' heel there. we are moving faster than technology but the id card cracks. >> sub-saharan africa half is un- banked but half of those so that's the good news. but the sad news is you are absolutely right about government id but the libra wallet they are promoting is inside the money laundering there will also be providers. so they will be in the last jurisdiction that may not take the necessary precaution to get the government id.
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and that there is leakage or libra tokens just like the bit coin that is floating around outside of the banks. that will just happen. >> it is an solvable conundrum. and then to walk up to a convenience store anywhere in the world to hand money but they also say the libra wallet is interconnected with other wallets. even if libra does know your customer a different wallet that doesn't still puts the money back into libra that is the possibility for money laundering or tax evasion is unlimited. >> so that opportunity there will be exploited.
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>> yes. >> many have expressed concern facebook could outcompete bank to be financial services monopoly i understand facebook has dominated social media but i want to understand that it is makeup of 28 founding members those of which are in the payment processing space. visa and mastercard in a process trillions of dollars some have argued this association eventually attempts to create a bank. it may or may not be that
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started in the 19 fifties and sixties and the bank card payment networks and then those that create networks for the consumers or merchants and issuing banks. and with those independent companies i'm not saying libra or bankcard network innovation is the same thing but it does strike me there is similarities and it might be helpful to look at previous case studies to inform how we look at new innovations. if we were to look at libra like a payment innovation can you talk about the potential similarities between card payment in the early stages and what libra is over eventually might be quick. >> i don't think any of us are saying it doesn't have that
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identity we are seeing a wave of financial technology. but what we are seeing here is the ability to compete should be possible regardless of the institution the balance sheet or political power. but also from having a card payment network facebook is already in the hands of two.7 billion users it is already on everybody's phone and laptop and has committed repeated violation of users privacy what they are attempting to do is not just have a new payment network but tap off the idea of a cryptocurrency. it is regulatory cover to get away with doing something of asset management. that is fundamentally different to. >> so differentiate the consumer protection concern
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with what libra is in a true cryptocurrency. >> my fundamental concern is related to stability if we look at the risk investors take for purchasing financial products we experience this in the united states ten years ago you take inherent risk when somebody purchases libra they are giving up their real-world assets, and then they received tokens these assets are placed in depository banks and institutions around the world. this is a core banking function that provides risk from counterparties and to retrieve the principle and present systemic risk in the context of the broader financial system. >> why are their permission this block chain quick. >> with a bit coin assembly makes the decision to purchase
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bit coin they are not buying a pool of assets or exchanging principle for financial instruments it is digital commodity backed by its own scarcity and its demand so there are no assets or banks that have to create an instrument that backs the value of bit coin it is fundamentally different. >> so as we move forward there comes a time when one would surmise the participants might want to monetize their interest in the association. you nod your head but how does that work quick. >> particularly if it is associated with the interests coming off of the reserve that would be very attractive. they are monetizing that up front calling libra investment
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token. i don't know if facebook will be successful this is the fourth attempt of payments but in china those that dominate payments over 90 percent. >> the gentleman from illinois. >> i would like to talk about the regulation not only for libra but the cryptoexchanges in general. first off do you agree that the cryptowallets should be subject to segregation requirements? >> yes. and the custody of coin based and gemini exchanges is for profit one - - theft and cybersecurity risk and
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congress could step in and also the future congress to give clear authority rather cfc or cftc but clear authority to regulate a bit coin exchange which could be put into the token. >> i would like to make a distinction. cryptocurrency is fundamentally different exchanging cryptocurrency has been activity over the last five years. 's i want to distinguish that libra and cryptocurrency should not be. >> but not with the fraud that can take place of the fraud of cast one - - customer asset is if you don't have segregation. >> i think that's right and libra will control the wallet and ultimately custody is the functional activity. even regardless as to what digital asset you are ultimately dealing with, if it
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has custodial rules of what they try to regulate so certain types of questions or what happens if there is a fork in those type of question should be answered and it is not at all clear as what those answers will be in actuality. >> can you say a little bit about this abuse of trading practices that are possible with the current cryptoexchanges and also with libra like front running in wall street? >> it is all possible. >> is it taking place quick. >> it is a feeling it is well documented. you may remember a filing with the sec that most exchanges around the globe are not regulated. other than the custody issue for money laundering. it is rare they are regulated.
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>> anything anonymous to prevent things like launch trades quick. >> it's not about the technology. around the globe the world is exchanging are not regulated by the sec. >> or similar security exchanges. >> but i have to point out we are regulated where they operate and by the customers that they serve. this is the case now being tried in new york looking at a number of exchanges the second distinction since 2016 all of these exchanges here in the united states are under the purview of us regulators including the cftc have voluntarily joined to create a market oversight committee that put the practices and accusations leveled around the
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trading there is an effort to self regulate an absence of clear guidance but i will say this activity is not happening here in the united states because the exchanges here are regulated as any other exchange. >> i agree it's not regulated for market for manipulation but custody of funds. >> if they are truly anonymous it's hard to identify trading if you don't know who is participating. >> but there are no explicit ways to have a conflict of interest or any other activity so from that regulatory perspective as it pertains to libra there are no obvious solutions. >> so that relies not on the anonymity or the pseudo- anonymity but that is a fundamental design problem and absent some way of going for
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the regulator to find out the same person was on both sides of the trade and unless there's a way to pull the mask off to see who was there , there is no way to even detect that. that is the unsolvable problem as far as i can tell. thank you for your input on this very important subject and i yelled back. >> the gentleman from kentucky. >> thank you. thank you for your testimony and your expertise today. an excellent panel and an interesting topic. we are all learning and we have a lot to learn about this. as i was saying earlier, i think the presumption should always be on the side of financial innovation especially when there is the promise of greater financial inclusion of reduction of transaction cost.
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so i do think this will result in a very positive impact on society. but i do think we should ask questions and also offering healthy skepticism one point or another. so i will start with the basics. you made the comment that libra is not the same thing as cryptocurrency. can you elaborate and explain that to me? >> there are three fundamental differences that are also in my written testimony. number one like a bit coin are decentralized. no individual can block that transaction but libra has an entity of these 100 members that could block or censor transactions and manage the network.
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>> but only for five years? >> that is the claim i do not know how they plan to decentralize this they have decentralization is a word that is used off and. it is fairly esoteric rate i am not sure how they will achieve it. my second point is that bitcoin is only act by its own demands. asset. digitally scarce it is a new type of asset which introduces challenges in trying to fit it into a box. it is not backed by anything. no bank holds funds that are at risk. in contrast, libra is the opposite read it is backed by a basket of currencies and other securities that are held by -- >> stable coin. >> yes, that is what they like to call it. stability is relative, as we have learned through a history of financial crises. but they hold assets that substantiate the value of their token. the security of those are tantamount to securing the
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principle. of last point is the point control. anybody can build a network. anybody can access these things, the code is open source, the code is open source just like the internet. it can be considered a public good. people can compete and build businesses in contrast, i do not know how the libra network will be opened when it is controlled by 100 for profit corporation s that are closely affiliated with facebook. what i'm asking for and would like to point out is competitiveness and the ability to level the playing field for all types of organizations in -- to be able to compete in the same market is important. cryptocurrencies are an open market. libra is proposing a closed control market. >> so let me switch to the stable coin idea and the fact that libra is tethered to the reserve. innovationa positive to reduce volatility?
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this is awe think positive development? >> i am not commenting on whether libra is positive or negative. i am commenting on it libra is not a cryptocurrency. it is backed by assets. i am not arguing [indiscernible] it is not a body shield. >> i think it is an interesting innovation. it has raised about five or ten public policy issues, but the idea there may be a stable value coin backed by a basket of multicurrency risk in sub-saharan africa or latin asia,a or in sdis, -- there might be a demand for it die would not counted out. >> what about the under bank problem? for would be the incentive a bank person or the holder of a fiat currency?
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>> it is very simple. just like in many countries there is a lot of transaction dollars. they don't feel comfortable with their central bank, their monetary authority. it could be countries like venezuela, or ecuador adopted the dollar as the official policy. or it could be that a lot of things happened. >> someone addressed the risks of disruption to central banking and a monetary policy. >> it definitely disrupted in developing countries if they libra-ise instead of dollar-ize. influence the four or five or six currencies they have underneath so the dollar is half of this. it is the transitions. >> i have a lot more questions i'm sure as this develops. yield back.
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the gentlewoman from california is recognized for five minutes. my way in thatn coming to give praise to the panel was not my style, but i am here to just thank you in part in being herece and explaining things to the committee. i want to pick up on the difference between libra and cryptocurrency. a lot of concerns i have about libra i do not have about crypto. there are issues with the cryptocurrency and many of you have eliminated them. but i think your testimony is important. i want to pick up on the point you made about libra being "backed" in a way bitcoin and traditional crypto is not. we heard mr. marcus talk about how libra is backed. i was wondering if any of you,
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mr. gensler, can talk about what do you think he means by backed and how should we have confidence in that and how is this kind of a backed stable coin different than a peso? >> i will agree with my colleague. this is very different than bitcoin for the three reasons she said and other reasons as well. , but similar and an important way. heldnya they said anything by the phone company safaricom had to be in trust but not loaned and 100% had to go into the backing. in china they made it even more restricted. 100% had to go to the central bank. it is different because this is multicurrency and currently it is very different because they are saying do not treat us like a bank, do not treat us like a
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narrow bank and your exposition wildcat banking era of the 19th century was very helpful. >> others? >> yes, i think that can mean different things. it is not that customers have a direct claim against the reserve, but the idea is that the reserve will provide liquidity. the important thing i am trying to make in my testimony is that the safety comes from public backstopping in the countries that provide these safe assets. it is ultimately a public service invited to private companies. >> we talked it to him about the corresponding approaches with fdic. -- with fdic. i asked mr. marcus if libra would be subject to fdic's or some type of -- fdic or some type of insurance? so consumers know what type of
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backstop security they get. he did not take me up on that offer to have the fdic's regulate libra. he was happy to run through the alper -- alphabet soup. he could try one of the weaker ones. ones.weaker which regulators do you think are appropriate for libra? >> one common observation facebookether or not is to become a bank, whether would survive the review process. it is entirely uncertainty of they would receive a license. the ambiguity with the term backed is in the white paper. on one hand you describe yourself as a currency board. what they are really doing, the structure, is creating an etf. languagere using the of the monetary world and that
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type of obfuscation is not helpful to the individual purchaser. at a base level infrastructure level, you have to go with .ecurities level oversight and looking at what differentiates in terms of other characteristics and systemic implications. >> this is a full committee hearing, it is not clear how this is a problem for my investment or consumer subcommittees. >> many of our categories do not easily fit. things that do not fit existing structures. that is how you get comparative advantage. they are using language in a discriminant way to avoid the regulatory framework we have. let me add one more thing. we talked about the market regulatory approach needed. even if you figured out the u.s.
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we need to think about complementary software. >> i would welcome each of you to follow up with your thoughts. i am very interested. >> thank you. i will recognize myself for five minutes. the panel.k -- thank you spent long hours. our members have taken opportunity to ask questions of mr. marcus. i appreciate your participation here today. you for helping to unfold and make transparent some of the information we should have had access to that we did not get in the white paper. let me ask you this, because i have listened to many of the questions you have asked and you have covered an awful lot. i have been thinking about the association and the fact the
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association includes about 28 people, 29 companies, rather. mr. marcus said they targeted about 100. but do you think it will go well number, because what are we looking at? are we looking at big companies with big databases to supply whatever goods and services? and with it libra, libra will be the currency that you have to have in order to get these goods and services? or am i just daydreaming about this? what do you think? >> they have not disclosed exactly what the selection criteria would be for ramping up even to 100 members. given the resources available to existing members, the entry point and expectations would be large.
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there is no clear path to andhing decentralization decentralized infrastructure mr. marcus is promising in terms of bitcoin into a coin -- -like infrastructure. like you, i have doubts as to how quickly they would be able to ramp up let alone become a permission list system. system.ssionless >> do think there will be beyond 100 members? he said there will be a smaller beerning group that will making these decisions for everybody. could there possibly be thousands of companies in this association? >> there is nothing that forbids it. if it helps the distribution of a product, economic rationale would be to help distribute the libra. >> if i may, what we have seen
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historically in attempts by multinational many member consortia of thousands to govern something that does not involve profit and distribution of returns. we are speaking about the largest consumer base in the world, 2.7 billion users. that will quickly become contentious. if we look at smaller organizations comprised of smaller membership, they have many governance challenges. my concern is in the libra paper this government structure is not clearly laid out where the balance of power will be or if -- anys anyone over r ding party or entity. >> i think it is clear. they intend to have an older oly that theyoligop
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dominate. >> it is possible all these companies with big data could end up with this data being humongous amount of individuals in this database that they could be merchandising to, marketing to? is that part of what is going on here? >> until there is more transparency about how they make money, the organizations that join have to have over $1 billion of assets and contribute $10 million to join. not anyone can join the association. in fact, no one was asked to join. i was not invited. none of the firms i work forward invited. for me that is the fundamental question. open,ebook creates this permission-lists consortium that everyone can benefit from, why is it opaque and only involve
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affiliates of facebook and their executives? that is my question. not a criticism, but more transparency is required. to iot is my question, defined this as,. the billion-dollar boys have taken over. thank you very much. now we are going to hear from the gentleman from california, mr. sherman. you are recognized for five minutes. >> thank you. we heard from facebook they are dedicated to adhering to the anti-money laundering and know your customer rules. if they were that dedicated, why would they hire as the head of the operation someone who was head of paypal when they were fined $8 million for violating anti-money laundering laws? i could not answer that question. >> none of us can.
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will our anti-money laundering laws be binding on an intitution headquartered switzerland and made up of international businesses? >> certainly u.s. rules would not apply. >> that is what i am talking about, yes. >> [laughter] u.s. rules would not comply. the bigger risk lies with those so weaklyons regulated they are falling outside international agreements like the one recently agreed to in june. certainly swiss rules relate to both privacy and financial regulation are not just different, but historically have been considerably weaker. real questions do arise as to the ability to enforce and
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promote the norms and safeguards we have here in the united states. the history of currency -- i -buck behinda zuck you. the history of the dollar, first was based on how much gold we had in reserves. then, only when we got an ounce of gold did we print $35. then we started printing more and we added reserves. then we got to the point where we made it non-redeemable. now the dollar is valuable. gold is an interesting thing, a nobodying to have, but says "i am not interested in having u.s. dollars because they are not tied to gold." if zuckerberg can replicate that, he can do what only the u.s. government can do, and that is, print a reserve currency.
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they promise they will not do that. but it will always be 1-1. is that promise from facebook committee?the libra with aassociation could majority change that. >> if they change that that means they get to print money? that would be quite an incentive to change it. >> i would think a private organization has a problem with doing what the u.s. did in the 1970's. they cannot unilaterally put the productivity of an entire country on the line. >> that is true. >> they could try. >> people are creatures of habit. if i can go on amazon and buy a bunch of neat stuff for 1000 as long asck-bucks,
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i can do that, they are valuable things to have. how is this -- when i address to we have a. gensler, problem in that people in los angeles are sending money to their grandparents in guatemala and they are being charged 7%, 8% sometimes, to do that. how is a guatemalan grandmother supposed to buy a bag of food zuck buck zuck buck for a bunch of zuck buck?unch is one thing we are disadvantaging that grandmother, but is cryptocurrency really a solution for her? >> what we found is, bitcoin,
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is not usedvation, much in retail transactions for the reason you're mentioning. >> and certainly not in rural guatemala. >> some service provider would provide the technology so behind-the-scenes libra or the zuck buck as you reference, would be traded for the local currency so the store owner could get the local currency. there would be some crypto exchange or hedge funds -- >> sounds every bit as expensive as what is going on now. i will yield back. >> thank you. the gentlewoman from michigan, misses tlaib. >> thank you for being here. i have to tell you i am learning a tremendous amount. the younger people on my team who have been watching this closely and teaching me a lot. the more i listen and am forced
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to stay here a little bit longer , which is ok, i was able to hear a lot more and learn more. one of the things that comes to mind and we will talk about this, is the idea around systematically important financial institutions. do you feel how about a private company issuing currency? what ramification? it.talked about historically have you ever seen -- >> we have. what a private company does with money is import it. when you use other peoples's money, then you should normally expect that the government or some kind of regulatory regime is going to want to know what you're doing with it and have you rightfully access or receive that money.
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whether or not it would be an example of wildcat banking where you are not keeping it entirely in reserve but lending it on to the challenge is that when you have a private institution not just lending its own money, but lending with and whenple's money, they are trying to do that without offering commerce safeguards or disclosures to relevant stakeholders and investors, that is when the red flags are raised. >> this question goes to everyone on the panel. in thinking of how to protect my residents at home, they will need to understand it just like i did before i came here. libra'sibility of failure. if anyone on this panel can explain the systematically important financial institutions as they get labeled as too big
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to fail, how is this connected to what we are talking about now? could this be a possibility? >> can i mention one thing that is buried in their white paper documents? they are trying to negotiate central banks around the globe that it counts as central banks. communitiests and count on local banks. an account at a central bank is different. it means you get access to the discount, the lender is last resort. i hope chairman powell and others at the federal reserve would not give that to this association, but if it was very large, that would go to answer your question. theree point in time -- were decisions made by good men and women trying to stop this country from going into crisis and they made decisions many of -- that is not the right thing to bail something out.
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libra is already negotiating with central banks to get access to central banks money or accounts. that is what would happen if it was systemic. >> do you have something? >> there is something else we are not focusing on enough that relates to everyone's constituents. facebook wants that transactions occur in libra, that people sell and provide things in libra. borderlessve a privatized currency, you create a global market with no reasonable regulation. you were talking about payday lending, providing financial services in libra. all the problems we know now with abusive financial lending, figure that orders of magnitude worse because you have jurisdictional problems and secrecy problems that have no plausible answer. >> i will also add if i made the disclosure aspect is very important as many of us on this panel have mentioned. libra represents an investment
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product that would typically be regulated under the 40 act. it is important people who receive libra who may not know what they are getting are educated as to what they are receiving. financial education has been problematic across a number of different asset classes in this country's history. the disclosure component is important in ensuring people understand the risks they are taking when they choose to take their dollars and turn them into libra. >> thank you. i will put the questions into the record as permitted. one of the things i told mr. marcus was about the monopoly. this small group of friends that have been created with -- the facta member could vote contrary to a position advocated for facebook, what would happen, what retaliation? this idea needs to be fleshed out. we need another hearing for that. thank you. >> the gentleman from illinois,
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mr. garcia, recognized for five minutes. >> thank you, madam chair. i would like to thank the panel for bearing with us in all the questions. a question on banking commerce for mr. wiseman -- weissman. you mentioned it may run aoful of banking companies requirements which enshrine the historic separation between banking and commerce. framework was established between banking and commerce for a long time that in principle, banks should engage in impartial credit allocation helps guard against market manipulation, conflict of interest and anticompetitive behavior. when the lines are blurred, problems have emerged such as during the gilded age, jp morgan monopolized railroads and manipulated. more recently in 2013 goldman sachs bought up more than 1/4 of
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the aluminum market and used aluminumrship of warehouses to inflate prices of aluminum, costing consumers $5 billion. would you please share why this principle is so important and what implications does libra have for the erosion of this principle? question illustrates many key examples. the problem is that banks get a lot of money and a lot of information. they are incentivized to use their money in risky ways to capitalize on special information they have. think about facebook. if facebook becomes both social media monopolist and a major financial services provider, all of a sudden -- let's set aside their claim they will prevent -- protect privacy with firewalls, they can combine financial
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information with their social media platform. they can advertise to you based on what you are buying. they can go into business providing goods and services to give you a discount in libra. that is part of the plan, within the association. so the possibility both for unjust competition squeezing out any rifle not part of the facebook ecosystem, part of the ability to manipulate and misuse information they get from the financial side and nonfinancial side. there are problems that do not lend themselves to regulatory solution. there is a reason we had that wall. it served us well. we pay the price if we breach the principles here, we are certain to pay the price down the line. >> switching gears. that have been reports president trump intends to nominate judy schultz to the federal reserve bird -- board of
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governors. she has come out in favor of private currencies. she speech last year proposed a new monetary system saying an approach "that permits the issuance of virtual currencies in tandem with government-issued currencies, adopting legal tender laws to permit healthy competition, should be put forward." loses controlent of the money supply, what challenges might that create? can will go first and you give the better answer. [laughter] they are endless. that means the fed cannot create -- we lose control of public influence over the direction of the economy and we are guaranteeing systemic risk in situations where you will have itsive ale outs because when
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fails, and it will, it will be -- it will need massive bailout from the public. crypto andthe bitcoin movement have formed one thing. it is a private form of money, even bitcoin. it is putting competition on central banks around the globe to take their legacy payment systems and move them into the 21st century more fully. i say there is a balance that bitcoin and the crypto movement have created competition for this public good. to the second part of the question, some central banks like sweden are looking at issuing a central bank currency which would still be government currency. the public would have access directly to the central bank reserve. in sweden you would not just rely on the commercial banks. that would be competition. >> [indiscernible] >> exactly the point. we should think about the form which is crypto. >> you can find the last few
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minutes of this hearing online by going to and searching facebook currency. we had to the u.s. for a brief session in the house. [captions copyright national cable satellite corp. 2019] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit] the speaker pro tempore the hou. the speakers rooms, washington, d.c. july 22, 2019. i hereby appoint the honorable jonathan as buyer to speak x temporary on this day, signed nancy pelosi, speaker of the house of representatives. >> their prayer will be offered by our chaplain jonathan conley. pray. us lord our god thank you for giving us a another day. as they are returning to the capital, please be with the members of


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