Most Interesting ETF Filing Ever: Libra

June 25, 2019

My interest in cryptocurrency and bitcoin has been tangential. It’s this thing happening on the edge of my experience, but not something I interact with much daily.

As a tech nerd, however, I’ve been drawn to the technology underneath it, and as a finance nerd, I’ve been intrigued by the whole Sartre-esque “what is money anyway?” dialogue it’s created.

I initially dismissed the filing by Facebook et al. around Libra. I skimmed some press coverage and moved on with my day.

But this weekend I dug deeper, and ran across this passage from the Libra white paper:

“Users will not directly interface with the reserve. Rather, to support higher efficiency, there will be authorized resellers who will be the only entities authorized by the association to transact large amounts of fiat and Libra in and out of the reserve. These authorized resellers will integrate with exchanges and other institutions that buy and sell cryptocurrencies to users, and will provide these entities with liquidity for users who wish to convert from cash to Libra and back again.”

Accidental ETF

“Huh,” I thought. “That sounds a lot like creation and redemption in an ETF!”

Reading further, it became clearer and clearer that that’s actually what Libra is: an actively managed ETF that will invest in a basket of currencies based on a set of investment objectives. In this sense, it’s exactly like the WisdomTree Emerging Currency Strategy Fund (CEW).

CEW does, quite literally, the exact same thing Libra is planning on doing, with a few exceptions:

  • CEW charges a 0.55% expense ratio. Libra does not have a fee embedded in its valuation peg to its basket.
  • CEW invests in short-term instruments in each currency, and holders of CEW gain that interest. Libra invests in short-term instruments in each currency, but the foundation keeps all the interest to fund operations.
  • CEW is a 1940 Act-regulated ETF, that trades on regulated exchanges, which customers access through regulated broker-dealers, and whose assets are stored with regulated custodians. Nobody has any idea what Libra is, how its exchange for goods and services (or dollars) will be regulated, how customer access points will be regulated, or how custodians will be regulated.

Knowing that I’m rarely the first one to the party on ideas like this, I started reading everything I could find. There’s a lot out there, including the obligatory Financial Times vitriol, but after some digging, I stumbled across this post from David Weisberger on Medium, in which he also got the ETF connection:

“In fact, it is so much like an ETF, I would be stunned if the SEC does not at least contemplate asserting that it has jurisdiction over the market for Libra tokens.”

Regulatory Octopus

Here, Weisberger is getting right to the heart of the matter, and it’s so blatant and obvious that I have to imagine this is intended. Facebook, PayPal and Visa are not slouches when it comes to managing regulators. I’d argue they’re consummate pros: Super Bowl contenders. They know what they’re doing.

One possibility is that Facebook et al., have already figured out the regulatory angle by which they think they will be able to dance through the securities registration minefield.

For instance, you can avoid becoming a registered investment company if you stay underneath a specific threshold of owning securities; if Libra aggressively limits its exposure to bonds and other assets, and mostly holds currencies, it could avoid (at least) the ’40 Act (although it would limit the income earned for the foundation).

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