After a fiery morning on the US Senate floor yesterday, Facebook’s David Marcus (the head of the company’s Libra cryptocurrency project) will face another round of questioning from the US Congress today, July 17th.
Yesterday’s hearing focused around Facebook’s handling of data, its role in contributing to the divisive nature of American politics, and the company’s willingness to comply with US regulators and international law.
Marcus insisted again and again that Facebook was working hard to improve its handling of user data, and that the Libra Association had been set up in such a way that the company would have limited control of the network.
However, it appeared that many members of Congress were unsatisfied with Marcus’ responses, and the issue of whether or not Facebook should be trusted with the right to create a currency seems to remain unresolved in the eyes of many lawmakers.
Now, the US Congress, led by Chairwoman Maxine Waters (D-CA), will continue to pose questions on Libra, Facebook, and the cryptocurrency industry as a whole. Finance Magnates is covering the event live; please refresh the page to receive updates on the story.
The Opening Address
“I have serious concerns with Facebook’s plans with Facebook’s plans to create a digital currency and digital wallet, and its efforts to enlist partners that expand its reach, like Mastercard, Paypal, Visa, Uber, Lyft, and Spotify,” Chairwoman Waters began.
“Facebook is apparently trying to create a new global financial system that is intended to rival the US Dollar.”
“This venture is slated to be based in Switzerland, which has a history of being a monetary haven for criminals and shady corporations. Facebook’s plans raise serious privacy, trading, national security, and monetary policy concerns–not only for Facebook’s more than 2 billion users (who will have immediate access to these products), but also for consumers, investors, and the global economy.”
“In addition, Facebook has proposed backing Libra tokens with government currencies and government-guaranteed securities, and holding them in the so-called ‘Libra Reserve’ to be governed by Facebook and its partners. Ownership of government assets on such a massive scale without proper oversight threatens to concentrate influence in the hands of a few elites.”
“Ultimately, if Facebook’s plans come to fruition, the company and its partners will yield immense economic power that could destabilize currencies and governments.
“Facebook’s proposed entry into financial services is all the more troubling because it is already on a scale similar to Wells Fargo, and demonstrated a pattern of failing to keep consumer data private on a scale similar to Equifax.
“Facebook remains under a 2011 consent order from the federal trade commission for deceiving consumers and failing to keep consumer data private. In the wake of the Cambridge Analytica scandal, in which Facebook provided 50 million users’ private data to ta political consulting firm, the company reportedly paid a $5 billion fine to the FTC for its privacy failures.
In addition, Facebook has allegedly insecurely stored user passwords data back to 2012, paid unsuspecting teenagers to download spyware, experienced a hack of nearly 50 million accounts, and experienced a software bug that granted third-party access to 6.9 million users’ photos.”
Chairman Waters also pointed to the fact that Facebook has been sued by HUD and other civil rights organizations for failure to comply with the fair housing act.
Like Senator Sherrod Brown did yesterday, Waters also pointed to its role in allowing Russian influence on the American 2016 elections.
Waters also expressed concerns that minority- and women-owned businesses would be excluded from the Libra system given the lack of diversity in Facebook’s upper ranks.
“Today’s hearing is only the first step in our oversight and legislative process,” she said. “I look forward to hearing our witnesses.
Chairman Waters then handed the floor to Patrick McHenry (R-NC).
“We’re here to go beyond the headlines,” he began. “We’re here to sift through the speculation and the hearsay. Here’s just one of my favorite headlines, which asks, Is Facebook Forming a Crypto Mafia as Libra Foundation Members Boost Each Other’s Businesses?'”
“Washington must go beyond the hype and make sure that it’s not the place where innovation goes to die,” he continued, adding that just because regulators do not understand a technology proposal does not mean that they should immediately call for prohibition.
However, McHenry did say that he was “skeptical” of the proposal simply because it was being made by Facebook. He said that ultimately, he hoped for thoughtful due process and government oversight.
“The world that Satoshi Nakamoto envisioned…is unstoppable”
“The reality is that whether Facebook is involved or not, change is here…digital currencies exist. Blockchain technology is real, and Facebook’s entry in this new world is just confirmation.”
“The world that Satoshi Nakamoto, author of the Bitcoin whitepaper, envisioned… and others are building is an unstoppable force. We should not attempt to deter this innovation, and governments cannot stop this innovation. Those that have tried have already failed.”
“The question then becomes: what are American policymakers going to do to meet the challenges?
“…It’s not about advocating for a ‘break it and figure it out later approach’, but when it comes to finance, consumers and investors are protected. So, Mr. Marcus, let’s get to work.”
“I ask my colleagues on both sides of the aisle to join together in supporting innovation, ingenuity, and the entrepreneurial spirit that this nation was founded upon….this is a bipartisan approach to oversight.”
Marcus began with an address nearly identical to the one he presented before the Senate yesterday: “Chairwoman Waters, speaking on behalf of Facebook, I pledge to you that Facebook will not offer the Libra digital currency until we have fully addressed regulators’ concerns and received appropriate approvals.”
“The Libra Association will establish the rules of the road and will prioritize privacy and consumer protection, and it will implement safeguards that will require service providers on the Libra network to fight money-laundering, terrorism financing, and other financial crimes.”
“We expect these safeguards will at least meet if not exceed existing standards, and improve the integrity of the global financial system.”
He also explained the logistical aspects of how the Libra Association and Calibra will work and reiterated that “I believe that if America doesn’t lead innovation in digital currency and payments area, others will. If our country fails to act, we could soon see a digital currency controlled by others whose values are dramatically different from ours.”
Waters Fires Back
Chairwoman Waters responded to Marcus’ testimony by saying that “…Facebook has a long list of scandals, including its repeated failures to safeguard its users’ data.”
“You’ve said that we don’t need to trust Facebook because it will only by one of the 100 members that will manage this project. But that’s not entirely true, is it? the project was Facebook’s idea, Facebook is spearheading it and recruiting partners, Facebook’s subsidiary Claibra will provide consumers with a digital wallet to store Libra tokens.”
“As I understand it, no member of the Association has paid anything towards the project. So, my question is: why should we trust Facebook to do these activities?”, she asked.
“I think trust is really essential. It’s clear we’ve made mistakes, and I believe we’re owning these mistakes,” Marcus said. “As far as the Libra Association is concerned…we’ve invested everything that has been invested in Libra so far, you’re absolutely right, and we have built all of the codebases for the technology up to this point.”
“But we have also ‘given’, ‘donated’ the technology if you will, because it’s now open-source for the whole world to be able to use and leverage. As a result, we are not controlling the codebase, and by the time we launch, we will be one of 100 members with no special privilege.”
“As far as the wallet is concerned, I believe that the idea here often is that one day we will launch and suddenly 2 billion people will arrive on the Calibra wallet. This is not the approach we’re taken; people will have to open specific Calibra accounts, they will not be able to use their Facebook account,” he said, adding that KYC checks are necessary as part of this process.”
“Despite the fact that we all support innovation…we need to be on top of and understand something as massive as this project.”
“I can appreciate that you understand that there is a trust problem here,” Waters interrupted. “Given its disregard for US law, on a massive scale, I think foreign countries could find it difficult to effectively regulate Facebook, Libra, or Calibra. Is isn’t clear the Federal Reserve or other US regulators have the authority to regulate you.”
“And yesterday, the Swiss regulator that you were saying would regulate you actually said that it has never been contacted by Facebook about this project.”
Waters said that although Marcus had said that the project would continue to work with regulators before going forward. “But if the regulators lack the authority to adequately oversee you, how can you work with them to resolve concerns? Will you stop dancing around this question and commit here in this committee…to a moratorium until Congress enacts an appropriate legal framework to ensure that Libra and Calibra do what you claim that it is intended to do, which is to serve the public good?”
“We’re all in support of innovation,” she said. “It’s not one side of the aisle versus the other side of the aisle. But if you talk to any member of this committee, they will not know anything about Libra, they will nothing about Calibra, they will nothing about how it is organized, they will know nothing about the role that Facebook will play in this big association.”
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“Despite the fact that we all support innovation…we need to be on top of and understand something as massive as this project, and that does not say that we do not support innovation,” she said.”
“I agree with you that this needs to be analyzed, understood, and the proper oversight needs to be set up before Libra can launch,” he said, adding that this is why the whitepaper was launched so early.
“We will take the time to get this right,” Marcus said.
“if it’s none of the above, how do you comply with regulations?”
“What is a Libra?”, McHenry asked.
“It is a reserve-backed digital currency,” Marcus responded.
“Is that a security?”, said McHenry.
“We don’t believe it is, Congressman.”
This back-and-forth continued for a few moments. Marcus said that Libra might be a commodity, but “we see it as a payment tool.” Marcus also didn’t think that the Libra is an ETF.
“What I’m really getting at is–if it’s none of the above, how do you comply with regulations?”, McHenry asked.
Marcus responded by saying that first, Calibra was registered with Fincen and is applying (and has received) a number of state licenses.
McHenry said he was talking about Libra, and not Calibra; Marcus responded by saying that the company was working with a number of global regulators.
McHenry asked how Libra planned to comply with AML and KYC regulations after is transitions from a permissioned into a permission-less system. Marcus responded by saying that the Association will still have the power to set the rules when it comes to AML and KYC requirements on the network.
“The vast majority of validators will likely be the ones providing services, so likely larger companies,” Marcus said.
“So you’re saying in the nature of the wallet–that’s how you get to AML/KYC, not in the nature of the digital currency [network itself]. So, going from a permissioned system…to a permissionless system, you’re saying that it’s not going to be in the nature of the technology of Libra, you’re saying that it’s going to be in the nature of the wallets on either side of this?” McHenry asked.
“That is correct, congressman,” Marcus said. “But on top of that, the Libra Association will have an AML program and will still be under the supervision of Fincen.”
“Is your view that you’re going to be more like Western Union…or Paypal?”, McHenry asked. “…is it the view..of the development internally at Facebook, to be a competitor to Alipay and to WePay, and to be a competitor to Venmo and PayPal?”
“Congressman, yes. We have a number of wallets that are working with us on the network side that will compete on the wallet side.”
“Will that consumer data be kept separate or as a part of.. Facebook’s overall knowledge of consumers, or will that be kept separate and distinct?”, said McHenry.
Marcus said that the company would make a strong commitment to keeping the data separate.
McHenry asked why the company was planning on running the operation in Switzerland, and why Libra would be based on a “basket of currencies” rather than “the good old American dollar.”
Marcus said that the choice of Switzerland had nothing to do with evading regulation and that Facebook’s goal was to establish the organization as an international effort. “We would like Libra to be a digital, global currency, and as a result, to be one unit of digital currency for the whole world. This is why we believe this was the right approach.”
Representative Carolyn Maloney (R-NY) asked Marcus to commit to doing a small pilot program with one million users and overseen by the Federal Reserve and the SEC. “Will you commit to walking before you run?”
“Because if you go ahead and launch Libra without doing a pilot program first, there are too many risks. The Libra Reserve could be managing too much money, which could make it systemic; too much money could be pulled out of banks to buy Libra, which former FDIC Chair Shiela Bair has warned about. So the risks are very great.”
“Personally, I don’t think you should launch Libra at all because of the creation of a new currency is a core government function, and should be left to democratically accountable institutions that are accountable to the American people. But at the very least, you should agree to do this small pilot program first, overseen by you, and the Federal Reserve, and the SEC. I think that’s a modest request. So will you commit right now to do a small pilot program? Yes or no?”
He would not.
She responded by saying that if he would not, that “Congress should seriously consider stopping this project from moving forward.”
She also pointed out that since Calibra was the only wallet that would be allowed to be embedded into WhatsApp and Facebook Messenger, the wallet could easily dominate the network. She asked him to commit to allowing third-party wallets to be integrated into WhatsApp and Facebook Messenger.
He said that other wallets are “actually going to be interoperable” with Calibra.
“So do you believe in competition and market access?” Maloney responded. “If you believed in it, then you would allow [third-party wallets] to be embedded also.” Her time expired before Marcus could respond.
Representative Nydia Margarita Velázquez (D-NY) picked up a few moments later where Maloney left off, saying, “Mr. Marcus, we do not want to stifle innovation. But we do have a healthy dose of skepticism.”
“This is not Silicon Valley,” she continued. “You cannot work out problems as you go. So all those problems need to be resolved and worked out before you launch Libra.”
“So for the third time on this side, I pose this question to you: will you commit yourself to not launch Libra before all the concerns from the regulators and the Federal Reserve are addressed? Yes or no?”
Marcus said that he would.
“Mr. Marcus, we gave the Federal Reserve increased oversight over non-banks. We do not yet know what you are…[if necessary], would you submit to enhanced oversight?”, she asked.
Marcus responded by saying that Libra had no plans to engage in banking activities. “We will, of course, comply with all regulations,” he said.
She asked how the initial members of the Libra Association were chosen. Marcus said that there were several criteria, including the members’ ability to spread Libra’s reach and inform on how to facilitate financial inclusion.