Facebook isn’t avoiding the U.S. to skimp on compliance, but because Switzerland is better for crypto.
Among all the issues cropping up in Facebook’s recent hearing in the United States Congress regarding its new Libra cryptocurrency, the matter of location was perhaps the thorniest. Testifying before various banking and financial committees, Libra co-creator David Marcus was repeatedly questioned as to why Facebook had decided to establish the subsidiary behind its newfangled stablecoin in Switzerland rather than good ol’ America.
Reps. Patrick McHenry, Josh Gottheimer and Bill Huizenga, for instance, all asked queries touching on the decision to set up abroad, insinuating in the process that Facebook is aiming to avoid American regulations and oversight, and inadvertently making it easier for would-be criminals to launder money using the soon-to-be-launched “cryptocurrency.” Marcus attempted to disperse those claims when speaking to the Senate Banking Committee on July 16, assuring the lawmakers that Libra would be fully compliant with the U.S. Financial Crimes Enforcement Network (FinCEN), observing all the relevant Know Your Customer (KYC) and Anti-Money Laundering (AML) laws.
However, while it has unquestionably become a fun international pastime to rag on how terrible Facebook is, how despicably megalomaniacal it’s becoming, how it’s enslaving humanity, and how Libra is a financial privacy nightmare waiting to happen, there is a more innocent explanation as to why it chose Switzerland over the U.S. As numerous cryptocurrency figures and experts affirm, the Swiss Confederation has much clearer cryptocurrency regulations than the United States, which has done little since the birth of Bitcoin (BTC) to simplify the regulatory complexities lying in wait to bite any company looking to establish a cryptocurrency or crypto-related business within its confines.
Officially announced on June 18, Facebook’s Libra will be a stablecoin running on its own blockchain-like network, overseen by the Libra Association — a not-for-profit organization comprising various internationally renowned and reviled companies, such as Uber, Facebook, Visa, eBay, Coinbase, Spotify, Mastercard, PayPal and Lyft. Headquartered in Geneva, Switzerland, it follows in the footsteps of Libra Networks, a limited liability company registered by Facebook in the Swiss canton on May 2.
Unsurprisingly, Libra’s announcement sparked waves of debate and consternation in the political sphere, with President Donald Trump tweeting on July 12 that it “will have little standing or dependability,” and with the G-7, a group of leading industrial nations, recently agreeing to undertake an undefined “plan of action” against the stablecoin, which is set for launch in 2020. And in the week following Trump’s anti-crypto diatribe, the U.S. Congress hosted representatives of Libra for a series of hearings on how the stablecoin will work and on how it will be managed.
Unsurprisingly, most representatives and senators don’t know an awful lot about cryptocurrencies, blockchains or even Facebook’s Libra. Many of the interrogators chose to forego substantive questions in favor of grandstanding invectives. “Facebook is dangerous!” hollered Sen. Sherrod Brown. He then likened Facebook to “a toddler who has gotten his hands on a book of matches” before noting that the social media giant has “burned down the house” on more than one occasion and has “called every arson a learning experience.”
Still, Brown was not to be outdone by his fellow Democrat, Rep. Brad Sherman, who shared his interesting — albeit certifiably insane — theory that terrorism is a form of innovation, and vice versa. “We’re told by some that innovation is always good,” he opined. He went on:
“The most innovative thing that’s happened this century is when Osama bin Laden came up with the innovative idea of flying two airplanes into towers. That’s the most consequential innovation, although this may do more to endanger America than even that.”
To be fair, the officials also took time to focus on specific issues thrown up by Libra, such as whether transaction data would be collected by Facebook, a question that remained unanswered. Ultimately, they returned to the aforementioned fact that Libra Networks and the Libra Association are both not located in the U.S. Replying to this second question, Marcus — the head of Libra’s wallet division, Calibra — told Rep. Josh Gottheimer, “Again, the choice of Switzerland — nothing to do with evading regulations or oversight.”
Why Switzerland is better than the United States
The use of “again” reiterates that Libra’s Swiss location was raised more than once during the proceedings, with numerous representatives and senators anxious that Libra’s headquartering in Switzerland will permit Facebook to flout U.S. regulations concerning money laundering, consumer protection, privacy and other potential bugbears. However, cryptocurrency industry commentators are generally in agreement with Facebook and Marcus, who said, “We chose Switzerland not to evade any responsibilities or oversight, but rather because it’s a well-established financial place,” which is home to the World Trade Organization, the Bank of International Settlements and other financial organizations.
Not only is Switzerland a “well-established financial place,” but as author and cryptocurrency expert Mark Jeffrey explained to Cointelegraph, it has already spent much more time than the U.S. in setting itself up as nurturing environment for crypto. According to Jeffery:
“As the Congressional testimony of Meltem Demoirs pointed out: Switzerland has done the regulatory work to make crypto innovation welcome and easy: the United States has not. In the United States, crypto classification is contradictory: it is at once a security (maybe), a commodity, money (and subject to FinCEN money transmitter licenses, AML and KYC), and revenue (and this is taxable by the IRS). The truth is crypto has elements of all of these and is yet NONE of these: it is a new species of thing, combining DNA of all of the above.”
As the founder of the decentralized emergency response network Guardian Circle, Jeffrey added that he “can personally attest to the near-impossibility of doing it in the United States at this time,” considering the U.S. to be a “regulatory mess” as far as cryptocurrencies and blockchains go. He went on:
“Many major exchanges are now geofencing the United States (and only the United States) as a ‘crypto-toxic’ jurisdiction. U.S. citizens and companies are now dead last in crypto opportunities because of this.”
By contrast, Switzerland has done the regulatory work needed to foster innovation, Jeffrey concluded. As a specific example, it’s worth pointing out that the Swiss Federal Assembly passed a motion in March 2019 requiring the Federal Council to amend existing financial legislation to accommodate cryptocurrencies, restricting the scope for money laundering, extortion and other risks.
Additionally, several Swiss cantons have taken considerable steps to attract and foster the local and national cryptocurrency industry, with Zug, most notably, launching the Crypto Valley Association in March 2017 with backing from the government. Since then, the “Crypto Valley” has become one of the fastest-growing tech hubs in Europe, underlying why Switzerland is more attractive for crypto-related firms than the U.S.
Given Switzerland’s moves to welcome crypto, it’s not surprising to find that a majority of people working in the industry believe Facebook set up Libra in the European nation mostly for practical reasons. “Switzerland is actually a quite logical choice for Libra’s jurisdictional basis,” Michael Minihan agreed, a partner with blockchain consultancy BX3 Capital. Minihan continued:
“Firstly, Switzerland has demonstrated itself to be a more crypto-friendly nation than the United States. In addition, the Swiss verein structure, which is an efficient platform for business operation when there are multiple global business partners involved, is potentially an effective way to structure something with as many founding members as Facebook currently contemplates.”
Minihan also agreed that the U.S. “is not necessarily the most regulation-efficient jurisdiction when something with a worldwide operational reach like Libra is contemplated.” And he’s not the only one, since MERJ Exchange CEO Ed Tuohy also told Cointelegraph that regulatory certainty was most likely the overriding factor in Facebook’s decision to base Libra in Switzerland:
“Facebook is currently taking the view that there is greater regulatory clarity in Switzerland relative to the U.S. I think Facebook is probably of the opinion that it will take longer for them to get going in the US. In the meantime, if they can get started and test the concept in more friendly jurisdictions around the globe, why wouldn’t they?”
It’s also clear that Facebook isn’t trying to avoid regulations by setting up Libra in the European nation. That’s because it will still need to register with the Swiss Financial Market Supervisory Authority and the Swiss Federal Data Protection and Information Commissioner (FDPIC). And as a recent Reuters report makes clear, it still has plenty of work to do on this front, as the FDPIC hasn’t yet heard from Facebook on the kind of personal data that will be processed by Libra.
Failure to launch?
Libra has sparked a minor political furore in the U.S., with the chairwoman of the House Financial Services Committee, Maxine Waters, having written to Facebook on July 2 with a request for it to halt the development of Libra until the risks it poses are properly understood. In light of this political pushback, it could be possible that Libra may not be granted permission to operate in the U.S. — and while it remains unclear right now, various experts suspect that, even if American authorities try to keep Libra away from U.S. citizens, it will be tough to stop the stablecoin in the long term.
Asked whether Facebook may have been concerned that U.S. authorities could attempt to restrict or ban Libra, cryptocurrency expert and TenX co-founder Julian Hosp replied to Cointelegraph, saying:
“Sure — let’s be honest: Who is voluntarily in the U.S. right now when it comes to Fintech, Blockchain, etc.? No one — au contraire: most crypto startups I know are actually pushing away from the U.S. as it seems to stifle growth.”
Jeffrey also acknowledged the possibility that the U.S. might try to block Libra, yet he also believes that such resistance could break down in the event that Facebook’s stablecoin becomes a worldwide sensation, saying:
“Congress does not have the power to stop a company from launching legal products, especially companies domiciled in regions other than the United States. They will simply grow it elsewhere until it becomes large and unstoppable — and the U.S. is eventually forced to let it in.”
However, as enthralling as it may be for Facebook to disregard the United States’ antipathy and launch Libra in other parts of the world, there’s also the distinct possibility that other countries and regions might attempt to restrict the stablecoin. There is, for example, the G-7’s recent threat to take joint action on regulations or guidelines relevant to Libra, with French Finance Minister Bruno Le Maire declaring that the bloc of seven leading economies “cannot accept private companies issuing their own currencies without democratic control.” Similarly, German Finance Minister Olaf Scholz seconded his French counterpart’s remarks by telling Reuters, “The issuance of a currency does not belong in the hands of a private company because this is a core element of state sovereignty.”
Related: Facebook Libra Regulatory Overview: Major Countries’ Stances on Crypto
Most experts agree that it is possible that, with so much pushpack, Libra may only launch in several small jurisdictions at first, but they also note that Facebook, being one of the largest corporations in the world, is highly motivated to make Libra a success. Minihan explained, “There seems to be a fair amount of determination on the part of Facebook with regard to this project, and the sheer magnitude of that determination, and the resources behind it, can’t be discounted.” Yet Minihan admits that “the concept of ‘new’ currency is still a radical idea,” and that countries will at least try to ban it. He concluded, saying, “I think it will get off the ground, but I think its usefulness will be quite limited, at least in the short-term.”
However, there’s is also a good deal of difference in predicting the results of a standoff between Libra and the regulators. Tuohy has the suspicion that Facebook might ultimately be required to alter the structure and characteristics of Libra in order to gain regulatory approval in certain jurisdictions, saying:
“There is a lot of power in the Libra structure, concentrated in the hands of relatively few powerful organisations. Combine this with Facebook’s huge user base and it is only right that regulators around the world take a very close look at what they are doing. I am sure the project will go live at some point but it might take a different form to the one Facebook is hoping for.”
Hosp, however, believes that Facebook could just push through with Libra: “Of course there is a chance for Libra to not take off, but I think the Libra Association has enough fire power and lobbying connections to make it a viable project. For example, the U.S. threatened to fine Facebook 1 million USD a day for Libra — so what? That’s 365 million USD fines per year on currently 22,000 million USD in profits — that’s about 2% — nothing!”
U.S. compliance despite Switzerland base
In an increasingly globalized world, a corporation such as Facebook has a large number of options available to it when launching any new project, as highlighted by the social network’s decision to base Libra in Switzerland. And in cases in which a corporation has a substantial amount of resources, it can often proceed with new projects despite substantial regulatory and governmental resistance. It’s for this reason that it would be unwise to predict that Facebook won’t launch Libra to some extent in 2020 — or that it will halt its development. Nonetheless, speaking before the House Financial Services Committee on July 17, Marcus affirmed that Libra wouldn’t be launched until Facebook had answered all relevant concerns.