On December 10th, 2019, Georgetown University Professor Chris Brummer pointed out subtle yet significant changes to Libra’s whitepaper. A major change involves the elimination of dividends, as a potential attempt to avoid the legal status of a security. While the theory has merit, Brummer has another idea.
The Removal of ‘Paying Dividends’ in Libra’s Whitepaper Explained
Talk of Libra first appeared in early June 2019. By the end of the month, its whitepaper was released. Initially, there were two digital assets involved: the Libra coin, which would be open to the retail public and seemed to act like something of a stablecoin, and the Libra Investment Token, a security token for initial investors who would comprise the Libra Association.
Security tokens are digital assets identified as regulated securities by the U.S. Securities and Exchange Commission (SEC). The SEC uses the Howey Test which stems from a case involving the U.S. Supreme Court to identify whether or not an asset is deemed a security. Generally speaking, an asset is deemed a security if 1) there is an investment of money with 2) an expectation of profit, where 3) the investment is in a common enterprise, and 4) profits stem from the efforts of a promotor or third-party.
As expected, Libra’s whitepaper has undergone a few changes. Initial backers — such as Mastercard and Visa — have since changed their minds. Yet there were other, fundamental changes in the project’s structure, which nonetheless happened quietly.
Initially, Libra’s whitepaper made mention of dividends. More specifically, it stated that interest on its reserve assets would go towards system maintenance, keep transaction fees low, assist with growth, and pay dividends to early investors.
Now, as Brummer has pointed out, all mention of ‘paying dividends’ has been completely removed. There are a few theories as to the reasoning behind the quiet edits.
Is Libra Trying to Avoid the Status of a Security Token?
One of those theories is that Facebook wants to avoid the regulatory classification of a financial security altogether. Facebook and its CEO Mark Zuckerberg have received significant criticism from politicians across the globe when it comes to Libra. Yet recently, a number of politicians have come forward and claimed Libra ought to be regulated as a security.
U.S. Congressman Warren Davidson (R-OH) has said that as long as a central authority is able to manipulate the value of Libra, it should indeed be treated as a security. Just last month, a bipartisan group of U.S. Senators from Texas proposed a bill entitled ‘Management Stablecoins are Securities Act of 2019’. If approved, the bill would classify ‘managed stablecoins’ — to include Libra — as securities.
The current political strife around Libra and the recent push from U.S. lawmakers to regulate the asset as a security could be connected to the discreet edits. Given the Howey Test’s criteria, the removal of talk involving dividends might indicate Facebook is trying to avoid a securities status.
Brimmer isn’t sold on this, however. He says removing such references has little impact on Libra coins, and more of an impact on the Libra Investment Token. Yet recent mention of the latter has also diminished, suggesting Facebook might be ditching the investment token altogether. He says Libra coins are stablecoins, which of itself has weight in an argument claiming Libra is not a security — an idea which seems to conflict with the aforementioned legislation proposed by two Texas Senators.
The Conflict: Libra Investment Token vs Libra Coin
In another direction, Brimmer suggests the removal of dividends stems from a problem between initial investors, i.e. those who purchase Libra Investment Tokens, and Libra coin holders, i.e. the retail public using Libra — the stablecoin.
The Libra coins — in virtue of being stablecoins — are intended as a store of value. Any store of value needs to exhibit stability, or it will simply feature too much risk to be adopted as a payment system. Following this line of thought, Libra was touted to be backed by safe, low-risk assets including the USD, Euro, Yen, Sterling, and Singapore Dollar.
Yet initial investors who purchased Libra Investment Tokens were incentivized by dividends. At least part of these dividends would stem from interest generated by the investments backing the Libra coin.
There is a critical conflict here: initial investors would favor riskier investments to back the Libra coin in order maximize their return. At the same time, the Libra coin needs stability in order to fulfill its purpose as a stablecoin.
Brimmer points out that certain situations can arise through this friction which are bad for everyone. Initial investors — which happen to comprise the Libra association — could have the power to leverage the reserve or even lend against it.
This would bring a profit to those who own the reserve, at a significant risk to those who own the Libra coin. The risk could not only burn those who purchased the Libra coin, but would likely result in instability where Libra loses adoption altogether — should it get that far.
Brimmer’s enlightening points certainly have merit. Yet if the latter theory is true, another question remains. If Libra’s initial backers will not receive dividends, what incentive do they have in backing the highly scrutinized and increasingly mysterious project in the first place?
What do you think about Facebook quietly making updates in Libra’s whitepaper? Why do you think Facebook removed all mention of ‘paying dividends’? We’d like to know what you think in the comments section below.
Image courtesy of The Conversation.