paper says that this backing separates Libra from stablecoins “pegged” to various assets or currencies. Regulatory Update The Libra Reserves will be managed by the June 24, 2019 Libra Association – an “independent” non-profit organization founded to handle In this update, we talk about Facebook’s Libra governance and operate the validator Libra whitepaper, a FINRA enforcement nodes of the Libra . Members action for undisclosed pay a $10 million membership fee that mining, and South Korean crypto exchanges changing their terms to take entitles them to one vote and liability for hacks. proportionate dividends earned from interest off the Reserves.1 Its 27 “Founding ​ Members” include Facebook through its ​ Facebook Releases Whitepaper newly-formed subsidiary Calibra (more on for its Libra Blockchain: Calibra below), Mastercard, PayPal, Visa, Regulatory Implications Stripe, Uber, Spotify, , and . It hopes to have 100 members by Facebook’s Libra Association released its mid-2020. highly-anticipated whitepaper describing its ​ plans to create “a simple global currency Will Libra Answer Gaps in Regulation?

…designed and governed as a public The paper argues that the present financial good” in order to make money transfer as system is plagued by shortfalls to which easy and cheap as sending a text message. blockchain and cryptocurrency projects According to the paper, a unit of currency have failed to provide a suitable remedy. It will be called “Libra” and built on the open asserts that many projects have attempted source Libra Blockchain (a permissioned to “bypass regulation as opposed to blockchain that may transition to a permissionless system in the future). Libra 1 Members must also meet at least 2 of the will be fully backed by a reserve of following criteria: (i) More than $1 billion USD in low-volatility assets, which it says will market value or greater than $500 million USD customer balances; (ii) Reach greater than 20 include “a basket of bank deposits and million people a year, multinationally; or (iii) Recognized as a top-100 industry leader by a short-term government securities.” The third-party sector-specific association or media company. 1

innovating on compliance and regulatory Parliament member Markus Ferber fronts to improve the effectiveness of expressed concern about Libra becoming a anti-money laundering.” To this, the paper “shadow bank.” Meanwhile, Swiss National provides that Libra will be a collaborative Bank member Thomas Moser said he feels ​ effort with regulators and industry experts “pretty relaxed” about the whole thing. to ensure the sustainability, security, and In the U.S., Congresswoman Maxine Waters trust underpinning the project. said that, through Libra, “Facebook is Though the exact extent of its regulatory continuing its unchecked expansion and consultation is unclear, Facebook’s Calibra,2 extending its reach into the lives of its which will develop wallets and other users.” Senator Sherrod Brown took to applications for Libra use, has been Twitter to express similar concerns, stating ​ registered as a “money services business” that Libra cannot proceed “without (MSB) with the Department of Treasury’s oversight.” FinCEN and has registered as a money ​ While Libra isn’t set to launch until next transmitter in seven states. The paper year, the Senate Banking Committee has asserts that Calibra intends to register as already scheduled a hearing for 10 a.m. on such in states “that treat July 16 entitled “Examining Facebook’s as the equivalent of money.” This will Proposed Digital Currency and Data Privacy require implementation of AML. KYC, and Considerations.” Similarly, the House of CTF procedures for its users. Representatives scheduled a meeting Government Backlash (“Examining Facebook’s Proposed Cryptocurrency and Its Impact on While the paper purports to describe a Consumers, Investors, and the American project developed with regulatory Financial System”) for the following day. collaboration, authorities worldwide were quick to speak out on the plans. The French FINRA Fines Ex-Merrill finance minister stated that Libra simply ​ Representative for Undisclosed cannot happen. German European Cryptocurrency Mining

2 The paper states Calibra was created “to The U.S. Financial Industry Regulatory ensure separation between social and financial data and to build and operate services on its Authority (FINRA) has begun to take notice behalf on top of the LIbra network.” 2

of activities by registered securities hardware and software to conduct mining representative associated with member activities. firms involving digital assets and potential violations of FINRA rules. Last week, it fined ​ Kim also received a one-month suspension an ex-Merrill Lynch general securities from association with any FINRA member representative (GSR), Kyung Soo Kim, firm, although Merrill had already $5,000 for allegedly operating a terminated his employment in March 2018 cryptocurrency mining business without as a result of the non-disclosure. disclosing the activity beforehand to his firm in violation of FINRA Rules 3720 and While this enforcement appeared clear-cut, 2010. other aspects of crypto assets and firms wishing to deal in them are creating a FINRA Rule 3720 requires that GSRs backlog at FINRA. Earlier this week, provide prior written notice to their firm CoinDesk reported that about 40 before engaging in any outside business ​ broker-dealer applications from firms activity for which they receive or expect interested in crypto are pending before the compensation, while Rule 2010 generally ​ self-regulatory organization. FINRA’s media requires representatives to adhere to “high relations director stated that these standards of commercial honor and just and applications pose new, complex issues for equitable principles of trade.” the agency but it is “in the process of Without admitting or denying the findings, working through them,” although some Kim entered a Letter of Acceptance, Waiver have been pending for more than a year. ​ and Consent (AWC) on May 22 that FINRA Lawyers interviewed for the article accepted on June 10 in order to settle the suggested that FINRA is waiting for SEC matter pursuant to FINRA Rule 9216 – the guidance before moving forward. ​ rule governing uncontested enforcement actions. The letter described how Kim Read more on our website incorporated an entity in December 2017, operated as its sole shareholder and director, and caused that entity to enter into a contract with another company for

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Terms of Use and Hacking? The push for more regulated cryptocurrency exchanges comes as a part Korean Crypto Exchanges Update of South Korean regulators’ initiative to Terms to Take Liability for Hacks create a safer and more regulated environment for cryptocurrency trading. Pursuant to a “corrective recommendation” issued by the South Korean Fair Trade Quick Take Commission (FTC), five Korean crypto ​ ● Jake Chervinsky: Thread on the exchanges have amended their applicable ​ Financial Action Task Force (FATF)'s Terms of Use and Service to take liability for New Crypto Guidelines future hacking incidents and cybersecurity breaches. The changes comes in the wake Other News of $X in hacks suffered by South Korean ● CoinDesk: CFTC Approves LedgerX crypto exchanges alone in 2018. ​ to Settle Futures in Real ● Cointelegraph: Ex-Employee Sues The popular crypto exchange Bithumb ​ altered its Terms of Service to include Zcash Operator in $2 Million Lawsuit ​ language imposing hacking liability on the Over Unpaid Stocks exchange after two attacks in the past year Something to Listen To where hackers made off with over $50 million in digital assets. At the time of the ● What Bitcoin Did Podcast: Brian ​ attacks, Bithumb’s terms disclaimed liability Quintenz on How the CFTC for cyberattacks or malfunctions except in Regulates Cryptocurrencies the presence of willful or gross negligence, leaving affected users with no avenue of recourse. Despite its terms at that time, the The information provided is for informational exchange promised to return lost funds to purposes only. It does not constitute legal or users amid rumors that a portion of the investment advice. Bithumb attacks could have been an inside © LGO Markets LLC job, though only a portion of the lost funds were ever reimbursed to affected users.

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