Captioning performed by vitac many have expressed concern that facebook could outcompete banks and nondepository Financial Institutions and become some sort of Financial Services monopoly. I understand facebook has demonstrated a dominance in the social media space but i want to better understand this Financial Services monopoly idea. The Libra Association is made up of 28 pounding members, more to come, many of which have played in the Payment Processing space for a long time. Some of these firms are very large, visa and mastercard have billions of cardholders and process trillions of dollars worth of transactions. Some have argued that this association is a thinly veiled attempt at facebook eventually attempting to create a bank. It may or may not be, but i am more reminded of another Payment Innovation that started in the 1950s and 1960s as associations of likeminded companies, the Bank Card Payment networks. Banks issued their own cards, but banded together as Regional Bank card associations to create networks that worked for the consumers, merchants and issuing banks. Eventually those associations were spun off as independent companies that we have and use today. Im not saying that libra and bank card Network Innovation are the same thing, but it does strike me that there are similarities and it might be helpful to look at previous case studies to inform how we look at new innovations. Ms. Da mirrors, if western to think of libra like a Payment Innovation can you talk a little about the potential similarities between card payment in its early stages and what libra is or eventually might be . I dont think any of us are saying that facebook doesnt have the right to innovate. After all, the u. S. Is the birthplace of many innovations and we are seeing a wave of Financial Technology innovations in different areas. I think what we are seeing here is that the ability to compete and to create Innovative NewFinancial Products and services should be possible regardless of an institutions size, Balance Sheet or political power. I think what facebook is attempting to do is fundamentally different from creating a card payment network. Facebook is already in the hands of 2. 7 billion users. It already is on everyones phones, on everyones laptops and has committed repeated violations of these users privacy and what they are attempting to do is not to create a new payment network, what they are attempting to do is pass off this idea as a cryptocurrency, which it is not. They are attempting to use regulatory cover to get away with doing something that would typically be regulated, which is asset management. Its fundamentally different. So differentiate go further and differentiate between the Consumer Protection concerns with what libra is and what a true cryptocurrency is. My fundamental concern is related to stability. If we think about the various type of risk that investors take when they custody of their assets or purchase Financial Products from an institution, we experience this in the United States ten years ago, you are taking inherent risk. When someone purchases a libra they are giving up their real world assets, they are giving up fiat, giving it to the Libra Association to receive tokens. These assets are placed in depository banks and institutions around the world. This is a core banking function. This presents risk from counterparties, it presents risk in consumers being able to retrieve the principal that they have used to obtain the libra tokens and it presents Systemic Risk in the context of the broader financial system. And why are permission list block chains better for consumers . When you buy bitcoin, when somebody makes the decision to purchase bitcoin they are not buying a pool of assets, they are not exchanging their principal for financial instruments, they are buying what is essentially a digital commodity that is backed by its own scarcity and the demand for it. It is not a pooled fund, there are no assets or banks that have to create an instrument that backs the value of bitcoin. This is fundamentally different. So as we as we move forward and we think about this independent association, there comes a time when one would surmise that the participants might want to monetize their interest in the association. Im curious, mr. Gensler, you nod your head, paint that picture for me. How does that work . Well, i think particularly if the association is associated with the float, the interest thats coming off of this reserve, that would be very attractive. They are monetizing that really up front called libra investment token, theres two tokens here. I think to your earlier question if i could just say, i dont know if facebook will be successful. This is their fourth attempt in payments, but we do know in china the two Big Companies, ali pay and we chat pay dominate payments, over 90 of payments. I think thats what they want to do. I yield back. The gentleman from illinois, mr. Foster, is recognized for five minutes. Thank you, madam chair and thanks to our witnesses. Id like to talk a little bit about what the regulation requirements ought to be for not only calibra but Crypto Exchanges in general. Do you think, first off, that calibra and other crypto wallets should be subject to custody and segregation requirements . Mr. Gensler, anyone else wants i would say yes and i think that the custody at coin base and gemini and the exchanges has been a honey pot for theft and cybersecurity risk and that if congress could step in, maybe not this congress, but future congress to give Clear Authority, whether its the sec or cftc, but Clear Authority to regulate even a Bitcoin Exchange which maybe could be put into this token. Id like to make a factual distinction. Libra is not a cryptocurrency. Cryptocurrencies are fundamentally different. The business of exchanging cryptocurrencies is a regulated activity and has been for the last five years in this country. I want to distinguish and draw a clear line that line bra they dont differ in terms of the sort of frauds that can take place, frauds, theft of customer assets, everything bad that can happen if you dont have segregation requirements. I think thats right and calibra is going to control the calibra wallet funds because its a custody fund. Ultimately custody is a functional activity. Even regardless as to what kind of Digital Asset youre ultimately dealing with, you have to ask and tailor custodial rules to the nature of what youre trying to regulate. So certain kinds of questions as to what happens to the custodial responsibilities of a bank when there is a fork in that cryptocurrency, those kinds of questions obviously have to be answered and its not at all clear as to what those answers in actuality will be. Okay. And could you say a little bit about the sort of sort of abuse of trading practices that are possible with current Crypto Exchanges and might be possible also with libra, things like front running, you know, wash trades, all this sort of its all possible. Is it taking place . It is a feeling, its well documented by a Company Called i think it was bit wise, but you might remember a filing at the sec about a fake trading, but most exchanges around the globe are not regulated, other than this custody issue, and for money laundering, but its rare that they are regulated for man blah testify behavior. So any anonymously held thing, is there any way to prevent things like wash trades if they are anonymously held. Its not even about the technology. Around the globe the largest exchanges are not regulated by the sec or similar securities regulators for front running. I have to point out, though, many exchanges are, in fact, regulated by the jurisdictional regulator where they operate and by the customers that they serve. This is a case that is now being tried via new york dfs that is looking at a number of exchanges. The second distinction i would make here since 2016 all of the exchanges here in the United States that are under the purview of u. S. Regulators, including the cftc, have voluntarily joined the cftc in creating a Market Oversight Committee that looks at these practices and these accusations that have been leveled around wash trading and there is effort within the industry to selfregulate in absence of clear guidance, but i will say that this wash trading activity is not happening here in the United States because exchanges here are regulated, as any other exchange would be. I differ with my fellow witness at the table, the wash trading is absolutely having it seems like not for market manipulation, they are regulated for custody of the funds and antimoney laundering. It seems like if they are truly anonymous its very hard to even identify wash trading if you just dont know who is actually participating in it. And its notable in the governance rules there are no explicit potential conflicts of interest or any other kinds of activities. Even from a selfregulatory perspective as it pertains to libra there are no Obvious Solutions to the problem. It relies on the anonymity or the pseudo anonymity of it, in fact, the fundamental design problem in that absent some way of going for the regulator to going through and finding out that the same person was on both sides, the Beneficial Owner on both sides of a trade, unless there is a way to pull the mask off and look and see who is there, just there is no way of even detecting it. Thats sort of an unsolvable problem as far as i can tell. I have eight seconds so i want to thank you for this you know, your input on this very important subject. Yield back. The gentleman from kentucky, mr. Barr, is recognized for five minutes. Thank you, madam chairwoman. Thank you for your testimony and your expertise today. Excellent panel and interesting topic. We are all learning. We have a lot to learn about this. As i was saying earlier to mr. Marcus, i think the presumption should always be on the side of financial innovation, especially when there is the promise of greater financial inclusion, reduction of transaction cost and friction. So i do i do hope that this will result in a very positive impact on our society, but i do think we should ask probing questions and i appreciate the panel for offering some healthy skepticism on one point or another. Let me just kind of start with the basics, i think i want to go back to ms. Demirors. You made the comment that libra is not the same thing as cryptocurrency. Can you elaborate and explain that to me . Yes. There are three fundamental differences i would like to point out that are also recorded in my written system i submitted. Number one is cryptocurrency is like bitcoin are decentralized, no one entity or individual can block or censor transactions. Libra by contrast has an entity of these 100 members that is able to block, censor transactions and manage the network. Secondly but only for five years, right . That is the claim. I do not know how they plan to decentralize this and they have offered no solid plans. Decentralization is a word that is used often, but it doesnt really have a tangible measure, its fairly esoteric. Im not sure how they will achieve it. The second point i will make is that bitcoin is not backed by anything but the demand for it. It is its own asset, it is a digitally scarce asset that could be likened to digital commodity. It is a new type of asset which introduces challenges in trying to fit it into a box, but it isnt backed by anything. Theres no bank that holds funds, there is no entity that holds funds that are at risk n contrast libra is the opposite, 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 history of financial crises, but libra does hold a number of assets that substantiate the value of its token and so the security of those assets in question are tantamount to securing the principal that users post to obtain libra. The last point i will make is the point of control. Anyone can build on top of the Bitcoin Network or most cryptocurrency networks, anyone can access these things, the code is open source, the network is open, just like the internet, it could be considered a public good and people can compete and build businesses. In contrast, i dont know how the Libra Network will be open when its controlled by 100 forprofit corporations that are closely affiliated with facebook. What im asking for here and what id like to just point out is competitiveness and the ability to level the Playing Field for all types of organizations to be able to compete in the same market is important. Cryptocurrencys are an open market, libra is proposing a closed controlled market. Let me switch to the table coin idea and the fact that libra is tethered to this reserve. Isnt that a positive innovation to reduce volatility . Shouldnt we think that this is a positive development . I am not commenting on whether libra is positive or negative, i am commenting on the fact that libra is not a cryptocurrency, libra is an etf for a mutual fund that is backed by assets and i am not arguing that the banks dont deserve access but its not a body shield. Mr. Gensler. I think its a very interesting innovation. It has raised 5 to 10 really important Public Policy issues, but the idea that there might be a stable value coin backed by a basket of multicurrency risk in Subsaharan Africa or in latin america or in asia, there might be a demand for it. I wouldnt count it out. What is the incentive besides this underbanked problem, what would be the incentive for a bank person or the holder of a fiat currency to exchange it for a libra . Its very simple. Just like in many countries sometimes there is a lot of transaction in dollars because they dont feel comfortable with their central bank, with their money tear authority, it could be countries in very really extremes like venezuela or ecuador adopted the dollar as an official policy or it could just be a lot of things happen. Someone addressed the risk of disruption to central banking and the disruption to traditional Monetary Policy. It would definitely disrupt the central banking and Monetary Policy in these developing countries if they libra lies instead of dollar eyes and it if it got very significant it could start to influence the four or five or six currencies they have underneath it. So the dollar is going to be half of this, but if the association said its only going to be 30 , you see, its the transitions. Thank you. I will have lots more questions im sure as this develops. Yield back. The gentlewoman from california, ms. Porter, is recognized for five minutes. Hi. I was told on my way in that im coming to give praise to the panelists was not my style, but im really here to just thank you in part for your service in being here and explaining things to the committee. I wanted to pick up on something that ms. Demirors said about the differences between libra and cryptocurrency and a lot of the concerns that i have about libra i do not have about crypto. There are issues with cryptocurrency and many of you have eliminated them, but i think your testimony is incredibly important. I wanted to pick up on the point you made about libra being, quote unquote, backed in a way that bitcoin and traditional crypto is not. So i wanted to ask, we heard mr. Marcus talk about how libra is backed and so i wondered if any of you, mr. Gensler, or professor pistor could talk about what is 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 Something Like in pesa in kenya, for example . Im going to agree with my colleague here this is very different from bitcoin for the three conditions that she said and for other reasons as well. I think it is very different than empesa but similar in this important way, the Central Banks and authorities in kenya said anything in that fund which was held by the phone company had to be in trust, could not be loaned and 100 of it had to be into the kenyan Banking System as deposits. Similarly in china they made it even more restricted, 100 had to go to the central bank. So thats where the similarities are. Its different because this is multicurrency and currently its very different because theyre saying dont treatise like a bank. Dont treatise like a narrow bank and your exposition about the wild cat banking era of the 19th century was very helpful. Others . Yes, i think backed can mean different things. I mean, its not that the customers have a direct claim against the reserve, but the idea is that the reserve will be held in save assets and therefore will be able to provide the kind of liquidity. Of course, the important thing that im trying to make in my testimony is that the safety comes from public backed stopping in the countries that provide these safe assets so its ultimately a Public Service provided to a private company. Right. When we talked with him about the corresponding approaches with fdic, for example, i asked mr. Marcus do you think that libra would be subject to fdic, to some kind of insurance scheme, what is the backstop so that when you tell customers that this is backed, that they know what theyre getting, what kind of backstop and security they have. I wanted to ask he didnt take me up on my offer to have the fdic regulat