President Trump is the latest politician to call for further regulation of Facebook's (FB) cryptocurrency effort Libra, including the necessity of a bank charter. But what does that mean for investors?
"I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air," Trump wrote on Twitter. "If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International."
The next logical question is: what do these regulations look like if Trump gets his wish?
"Starting a bank involves a long organization process that could take a year or more, and permission from at least two regulatory authorities," the Federal Reserve said in a note explaining the process. "Extensive information about the organizer(s), the business plan, senior management team, finances, capital adequacy, risk management infrastructure, and other relevant factors must be provided to the appropriate authorities."
The Office of the Comptroller of the Currency (OCC) has exclusive authority to issue a national bank charter to determine that the applicant bank has a reasonable chance for success and will be governed soundly.
With Facebook being the face of the project amidst its slew of scandals, this governance issue might be problematic.
Still, the office has been more accommodating of new age finance in recent years, allowing for charters to be granted to fintech companies less than one year ago.
"The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation's economy," said Comptroller of the Currency Joseph M. Otting upon the approval of fintech charters. "The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America. Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank."
The involvement of payment processors like PayPal (PYPL) , Visa (V) , and Mastercard (MA) might bolster this type of allowance as they are integrated into fintech perhaps more than any other companies in the United States.
However, none of these companies have actually received a national charter and companies like Alphabet (GOOGL) and PayPal actually walked away from the opportunity for their more traditional payment platforms.
The rationale for the entities eschewing the national regulations was related to conflicts with state regulators and the added oversight from the Federal Reserve, FDIC, and, of course, the OCC.
The federal guidelines require a bank to demonstrate it has adequate capital, can support operations, and deal with unexpected losses. Newly established banks or fintech companies are generally subject to additional criteria that remain in place until the operations become well-established.
These hurdles could prove to be an unnecessary headache as the effort seeks to get off the ground in the United States, not to mention the actions that could be taken abroad by more aggressive regulators like those in the European Union.
By What Authority?
All of this will be extremely difficult to practice given the decentralized nature of the Libra Association and its model off of cryptocurrency's popular blockchain base. Many crypto-based exchanges do not operate with charters and even more well-established custody holders like coinbase are only chartered under state laws.
The Federal Reserve Policy on Payment Risk is also a sticky issue given its governance of U.S. dollar denominated transactions on payment platforms like Square (SQ) or Venmo.
"Financial market infrastructures (FMIs) within the scope of part I include public- and private-sector payment systems that expect to settle a daily aggregate gross value of U.S. dollar-denominated transactions exceeding $5 billion on any day during the next 12 months," the policy states. "FMIs within the scope of this part also include central securities depositories, securities settlement systems, central counterparties, and trade repositories irrespective of the value or nature of the transactions processed by the system."
It is unclear how a "libra" denominated transaction might be governed in the future and it might require the creation of an entirely new oversight entity.
Senate Banking Committee Chairman Mike Crapo (R-ID) asked Fed Chair Jerome Powell if the creation of a new regulatory agency might be necessary on Thursday.
"I think that is exactly the question we need to be focused on," Powell said.