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Facebook Crypto Project Targeted by New House Democratic Bill

July 14, 2019, 11:31 AM

Facebook and other big tech companies would be prohibited from acting as financial institutions or issuing cryptocurrencies under draft legislation circulated by the House Financial Services Committee’s Democratic majority.

Tech giants with $25 billion or more in revenue would be barred from offering banking or other financial services, including lending, taking deposits, operating alternative trading systems, or acting as investment companies under the draft bill. Violations would be subject to $1 million in daily penalties, according to the discussion draft circulated in advance of the committee’s July 17 hearing on Facebook’s proposed Libra project.

The draft bill could hit existing products like Amazon Pay, Apple Pay and Google Pay, although those products aren’t the intended target of the legislation, dubbed the “Keep Big Tech Out of Finance Act.”

“The draft bill appears to prohibit digital payment products offered by large tech companies that hold, or control companies that hold, state money transmitter licenses in connection with offering those payment products,” James Kim, a partner and fintech practice co-lead at Ballard Spahr LLP, said by email.

Federal regulators, including the Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission and the Securities and Exchange Commission, would be able to issue rules carrying out the prohibition, under the draft bill.

The committee also circulated a majority staff memo in advance of the July 17 Libra hearing outlining concerns about consumer protections, privacy and the potential systemic risk of an entity that could function like a central bank.

Libra Project

Facebook announced the Libra project June 18, including the creation of a new subsidiary, Calibra, and a non-profit Libra Association based in Switzerland to oversee aspects of the new business.

The Libra Association currently has 28 members, including payments industry heavyweights Visa, Mastercard and PayPal, blockchain and cryptocurrency companies Coinbase and Xapo, transportation companies Uber and Lyft, venture capital funds Andreessen Horowitz and Union Square, and non-profit Mercy Corps. The list is expected to grow to at least 100 members.

Facebook almost immediately faced blowback from skeptical Democratic lawmakers, including House Financial Services Committee Chairwoman Maxine Waters (D-Calif.), who has called for a moratorium on the project. The project is expected to launch as soon as 2020.

It’s unclear whether the bill is intended as more than a warning to tech giants to steer clear of becoming banks. The financial services sector has long viewed the possibility of large tech companies obtaining bank charters as a serious competitive threat. Facebook’s proposed cryptocurrency project has drawn numerous parallels to central bank operations.

Facebook, Libra Association and Calibra spokespeople didn’t immediately respond to requests for comment.

Senate Questioning

David Marcus, the Facebook and former PayPal executive leading the Libra project, is set to testify before the Senate Banking Committee on July 16, the day before his House appearance. Lawmakers on both panels are expected to press Marcus for more information about the Libra project.

On July 10, Senate Banking ranking member Sherrod Brown (D-Ohio) said Facebook had failed to provide enough information about the project in a July 8 letter it sent to the committee.

“I want real answers during next week’s hearing and I’m calling on our financial watchdogs to scrutinize Libra closely to ensure users are protected,” Brown said in a statement.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com