Financial industry watchdogs have asked federal officials to stop the Facebook cryptocurrency pilot program. They point out that the U.S. government has power to criminally prosecute executives who operate the venture.
The Open Markets Institute sent a note on November 23 to numerous regulatory agencies and the U.S. Department of Justice (DOJ), saying the omnipresent tech conglomerate may be “in the illegal business of receiving deposits without a bank charter.”
“There are several legal and regulatory implications for Facebook’s pilot that warrant particular attention by the agencies,” the Open Markets Institute letter stated.
Other financial industry analysts share the Open Markets Institute’s opinion. Americans for Financial Reform and Demand Progress issued joint statements in response to this pilot. urging “relevant regulators and lawmakers with jurisdiction over banking, consumer protection, and antitrust to intervene to put this project on hold.”
Facebook has not responded from a request TruthoutComment on the claim that it may be illegally taking bank deposit.
Financial institutions in the United States that seek to operate as a bank by lending money and accepting deposits — the latter of which Facebook’s pilot appears to be doing — must firstHave a bank charter approved and issued by the Office of the Comptroller of the Currency. The OCC is one of the country’s federal bank regulators and an agency within the Department of Treasury. Bank charters how firms will operateAs a bank and include plans to complySafety and soundness regulations
Open Markets Institute also noted that regulators have recently stated that stablecoins (the type of cryptocurrency at heart of the Facebook pilot) should be regulated as banks.
Cryptocurrencies consist of publicly available records that demonstrate an entity’s ownership of tokens by using public databases to cryptographically link the tokens to the digital wallet of their owner and past transactions. Many cryptocurrencies’ exchange-value fluctuates wildly. Bitcoin lost around 20% in the last month, but is still worth 35% more than it was six years ago. Stablecoins are, however, marketed as being tied to the value of another asset like the U.S. Dollar.
Stablecoins have a constant value that has been compared to banks by legal observers and some U.S officials. In a report on tokens published by the Federal regulators, they determined that stablecoin enterprises should be regulated as banks. November 1 by the President’s Working Group on Financial Markets, a multi-agency executive branch panel that seeks to uphold market orderliness.
Janet Yellen, Treasury Secretary, convened the working party to examine stablecoins because of concernsAbout the practices of Tether, the company behind one the most popular stablecoins and because of Facebook’s interest in cryptocurrencyThe website boasts billions of monthly users, and this predates its recently launched pilot programme.
Facebook announced Novi, its cryptocurrency pilot programme, on October 19The initiative was based on remittances from Guatemala to the U.S., which were facilitated by a stablecoin called Pax Dollar. The company had already announced its intention to announce the announcement nine days prior. rebranding itself as “Meta”This is a preparation move to prepare consumers for future releases of virtual reality products for entertainment and work.
The Meta rebranding was rolled outAfter Facebook came under intense scrutiny by federal policymakers. A whistleblower revealed that he had spoken out about Facebook in September. The Wall Street Journal that the company was aware of the negative impact of one of its products, Instagram, on the mental health of teenage girls, while doing nothing to address the problem and simultaneously considering the launch of an Instagram for kids — the latest in a long historyCritics claim that Facebook is not concerned about the well-being and scandals of its users. Instagram for kids was created. put on holdIn the wake the revelations.
Tether problems were raised earlier in the year. two regulatory enforcement actionsThe U.S. dollar Tether was frequently short of cash reserves to maintain its one-to-1 peg. This raised concerns that the global $3 trillion cryptocurrency market could collapse if too many people tried to redeem their U.S. dollar Tethers for U.S. money at the same time. Stablecoins such as the U.S. dollar Tether are used mainly to speculate on the value cryptocurrencies like Bitcoin or Ethereum.
The U.S. Dollar Tendency redemption problem is reminiscent a bank run, supporting the argument that stablecoins are similar to traditional banking deposits. Bank runs are when a critical mass attempts to withdraw their money simultaneously. This phenomenon can lead to the collapse and loss of customers and businesses that have partnerships.
Though the President’s Working Group report said Congress should pass legislation in order to regulate stablecoins like banks, much to the delight of the cryptocurrency industry, it also noted that existing authorities could be used by officials to regulate the market. The working group concluded, as the Open Markets Institute remarked, that “the Department of Justice, may consider whether or how section 21(a)(2) of the Glass-Steagall Act may apply to certain stablecoin arrangements.”
The Glass-Steagall Act, which was passed during the Great Depression in 1933, is best known for creating a firewall between retail and investment banking. Although it was repealed in large part by the banking deregulation legislation passed during Clinton’s final months, certain sections of Glass-Steagall are still on the books, including section 21,(a)(2). which says that any entity “in the business of receiving deposits subject to check or to repayment…upon request of the depositor” must be licensed by the federal government or state governments. Stablecoins can be repaid upon request by those who purchased them.
Punishments for violating the law include a maximum of five years’ imprisonment. Facebook’s pilot, which is called Novi, is only licensed on the federal level as a “Money Services Business” with the arm of the Treasury Department tasked with detecting money laundering and other financial crimes. It is licensed as a money transmitterIn 38 states, Puerto Rico, and the District of Columbia.
Five Democratic senators blasted Facebook’s decisionWhile they allowed Facebook to proceed with its Novi pilot in the money transmission framework, they did not accuse it of violating criminal law. They also noted that Facebook CEO Mark Zuckerberg had promised Congress in 2019 that the company would wait for regulatory approval before launching its own cryptocurrency payment system.
“To be clear, your ability to secure state-issued money transmitter licenses is not equivalent to obtaining the blessing of ‘all U.S. regulators,’ as you said in your testimony two years ago,” the lawmakers said in an October 19 letter to the company, written in response to the launch of Novi. They urged the firm to “immediately discontinue your Novi pilot.”
Arthur Wilmarth, a law professor at George Washington University who has helped pioneer the theory that the Justice Department could prosecute stablecoin issuers, said that the agency “should probably send a letter of warning to Novi: either cease and desist or you can anticipate that we will bring a criminal indictment.”
“Anyone who knowingly partakes is liable,” he told Truthout, adding that the DOJ could send a message to the cryptocurrency industry by going after Facebook executives or those involved with “one of the other stablecoin issuers like Tether.”
Still, Wilmarth and other supporters of this theory aren’t confident that federal prosecutors will exercise their power.
“Is DOJ prepared to do anything? At least the President’s Working Group mentioned the possibility,” Wilmarth said. He noted that the legal theory isn’t as “ironclad” as it used to be because it allows companies to take deposits if they are licensed under state law. In recent years, Wyoming and Nebraska have allowed deposits. special bank charters without deposit insuranceAs a way to attract cryptocurrency ventures, there are requirements. (Novi doesn’t have any Wyoming license, and the company is only licensed in Nebraska as a money transmitter.)
Renita Marcellin is a senior policy analyst for Americans for Financial Reform. has also pointed to the Justice Department’s powers when urging the Biden administration to take a tougher stance on cryptocurrencies, said that she doesn’t “expect DOJ to say much here.”
“For market participants and industry people, I am assuming that they feel so empowered to do this because DOJ has been really lacking in this space,” Marcellin said. “Unfortunately, that’s not Mark Zuckerberg’s problem, that’s DOJ’s problem. They need to be very clear about what this law means.”
Even if Novi is in compliance with federal law there are many other criticisms. These include concerns about its environmental impact and fears that Novi could push Guatemala to pass laws favorable to the cryptocurrency industry. There are also concerns about Novi’s viability and the likelihood of Facebook using the venture as a means of engaging in predatory behavior.
“Facebook’s pilot is likely another attempt by the firm to further grow its dominance in digital advertising, and monetize its users’ private data,” said Alexis GoldsteinDirector of financial policy at the Open Markets Institute.
In its letter to regulators, the organization enumerated its concerns with the operation’s safety and soundness. Paxos, which issues the Pax Dollar claims that its stablecoin has been backed by banked cash. “cash equivalents,”These are highly liquid, short-term investments. The federal government usually insures only up to $250,000 in customer deposits per bank, it’s unclearHow Paxos cash deposit are distributed. The firm is managed by New York state regulatorsA limited purpose trust company is a special type of financial firm established by New York in 2015Facebook has not made public its plans for contingency in the event of a Pax Dollar run or if the token loses it peg. This is to provide oversight over cryptocurrency ventures. Moreover, it’s not clear what would happen if Coinbase, the cryptocurrency exchange that has been hired by Facebook to provide custody services for Pax Dollars, is hacked.
“They mentioned that Coinbase has an insurance program, but they don’t really say what type of losses the insurance covers,” Marcellin said. “How are you taking deposits when you don’t have any backstops for people’s money?”
As for the environmental impact, the Pax Dollar is based on an energy-intensive security feature to validate transactions: algorithmic problem-solving called “proof of work” crypto mining. The Open Markets Institute said this “creates a number of extensive climate harms, which include annual energy consumption akin to that of entire nations, 30,700 tons of electronic waste (computer hardware is notoriously difficult to recycle) annually, [and] higher electricity bills for residents of states with crypto mining.”
There’s also the issue of Facebook claiming that Novi offers poor people access to financial services “with no fees” because the Pax Dollar operates on the Ethereum network which requires users to pay validation transaction fees, which tend to spike when there’s an uptick in transactional activity. For now, Facebook isn’t passing these costs onto Novi users. But the company could put the burden on its customers after capturing market share — a common “predatory pricing” practice employed by numerous tech firms such as Uber, Lyft and Amazon, as the Open Markets Institute remarked. The lack of Novi transaction fees also obscures the fact that users in Guatemala would still need to exchange their Pax Dollars with the Quetzal, Guatemala’s national currency.
“They’re free-riding off the banking system. If people want to transfer it to physical cash, they have to use a bank, so then they have to be subject to transfer fees,” Marcellin said. “This completely undermines the whole idea that this is [offering]services for the underbanked If you don’t have a bank account, you can’t use it.”
If the experience of another Central American country is any indication, there is a possible solution to this problem. The government of El Salvador, Guatemala’s neighbor to the southeast, made Bitcoin legal tender in September much to the chagrin of Salvadorans who protested the moveAmong other aspects, they lament the wild swings of Bitcoin’s prices. A poll published in August found that 65 percent of SalvadoransThey were against the law that made Bitcoin legal.
“The only alternative to leveraging the existing banking system is if Facebook is planning to work with the government of Guatemala to change the laws of that sovereign nation to mandate the acceptance of Pax Dollars as legal tender,” the Open Markets Institute warned.
Finally, there’s the nontrivial matter of how Facebook has treated its users. In addition to the scandalous Instagram, the company hasConducting psychological tests on unwitting customers; allowing the data of 87,000,000 users to be exploited by Cambridge Analytica in 2016. This hardline right-wing political consulting company used the data to push fearmongering ads for Donald Trump and his Brexit campaign. around the world.
Considering “Facebook’s track record of violating user privacy, and Facebook’s ongoing need to find new profit centers,” the Open Markets Institute warned, “there is absolutely no reason to believe its promises today that it will not find a way to monetize its digital assets pilot project.”
“If anything, an effort to monetize the data of users who take part in this project seems not merely plausible, but likely,” the organization said. This is unless the federal government defies all expectations and uses its power to stop the tech giant.