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Fintech in Brief: Libra Association Releases Whitepaper Detailing its Cryptocurrency

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| Legal Update

On June 18, the Libra Association released a whitepaper describing a new global cryptocurrency and financial infrastructure named Libra. The whitepaper sparked immediate bipartisan Congressional challenges, with Congresswoman Maxine Waters (D-CA), Chairwoman of the House Financial Services Committee, calling for a halt to Libra’s development and her counterpart, Congressman Patrick McHenry (R-NC), Ranking Member of the House Financial Services Committee, calling for hearings. The whitepaper also prompted guarded statements from various central banks.

The Libra Association is a Switzerland-based nonprofit organization and comprised of a group of diverse payments, technology, telecommunications, blockchain, nonprofit, and multilateral organizations from around the world. Facebook played a major role in launching the Libra Association and, in that connection, recently created Calibra, a “regulated subsidiary,” to separate its social media activities from the Libra cryptocurrency. Calibra will develop digital wallets for users to hold and exchange the Libra cryptocurrency. The digital wallets are expected to be accessible through both a standalone app and Facebook’s existing messaging apps. Facebook anticipates that Calibra will offer free peer-to-peer payments but will charge a fee for transactions with businesses.

The Libra Association will oversee both the Libra Blockchain and Libra Reserve. The Libra Reserve is a basket of real assets, including global fiat currencies and other assets, that will be supported by a network of exchanges, designed to stabilize the cryptocurrency’s exchange value.

The whitepaper outlines Libra’s mission, blockchain technology, governance structure, and future activities. The Libra cryptocurrency is intended to be a “global, digitally native currency” that replicates the world’s most stable fiat currencies. The Libra Reserve is the mechanism used to achieve this goal.

Several critical questions about the management of the Libra Reserve and the distribution of interest earned on it have been raised by commentators. The Libra Blockchain, which supports the Libra cryptocurrency, is open source based upon a new programming language that is intended to be secure, scalable, and reliable. It also is intended to be pseudonymous and delinked from real-world identities. This feature, along with its global funds transfer abilities, creates a myriad of legal, data privacy, money laundering, and other compliance concerns.

Most importantly, the Libra cryptocurrency and Libra Reserve may present significant financial stability issues concerning its scale, scope, interconnectedness, and substitutability. The operation of the Libra exchanges and its self-regulatory governance structure also may present additional prudential and stability concerns. Both the Bank for International Settlements and the Financial Stability Board have examined the subject of cryptocurrencies. Although they generally support the development of new technologies, both caution about the financial stability and other aspects of cryptocurrencies and financial technology that can create significant risks to the financial system.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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