Even though Facebook struggles to control the rampant abuse of its social media platform, the company told Congress it’s prepared to dive headlong into the financial services industry with Libra, a new cryptocurrency.
David Marcus, who leads Calibra—Facebook’s crypto wallet—testified before the US Senate Banking Committee Tuesday (July 16) and offered assurances to skeptical lawmakers about Facebook’s commitment to privacy and willingness to work with regulators as the social media giant develops its new digital money.
Facebook hopes to debut Libra next year, but much is still unknown. Libra’s price has yet to be determined—it’s widely presumed to be equivalent to $1.00—and the digital currency will be backed by a mix of cash and government bonds, managed by the Libra Association, a nonprofit organization comprised of (mostly American) corporations, but based in Switzerland (more on that later). Here are some questions that rose out of Marcus’s first day of testimony (he’s scheduled to appear before the House tomorrow):
Why Facebook?
Senator Brian Schatz, a Hawaii Democrat, said companies should work to improve the financial system, reducing transaction fees on credit cards and money transfers, but asked whether Facebook was the right company to create a global currency. Given its track record and the public’s distrust, he wondered, should Facebook be part of the solution? When he put the question to Marcus, the executive provided an underwhelming answer: Facebook should do it because it can. The company has the resources and talent, and if it doesn’t get involved, others will.
Just because a company has grown larger and larger—and now possesses the war chest to create its own money—that doesn’t mean that it’s healthy, or even beneficial to consumers, Schatz said. He alluded to Facebook’s size, suggesting that the “grandiosity” of Silicon Valley was to blame for Libra’s global currency goals.
Although Marcus repeatedly described the Libra Association as a collaboration among equals, the senators laid into him. Facebook, they said, is not an equal partner. Senator Sherrod Brown, an Ohio Democrat, invoked George Orwell’s, who wrote that some animals are created “more equal” than others. In Facebook’s case, it has access to more than two billion users, giving it significant leverage over any negotiations within the Libra Association—and potentially, a lion’s share of any activity (or revenues) derived through usage of the Libra network.
America first, but via Switzerland
Facebook is the principal developer of Libra, but the company plans to cede control over the network and reserves to the Libra Association. While Facebook and Calibra—its wallet subsidiary—are among the organization’s 28 founding members, the Libra Association’s charter hasn’t been ratified yet, leaving its management, well, uncertain.
The bizarre arrangement of the Libra Association already feels like a game of cat-and-mouse. Facebook claims it won’t control the Libra network—”You won’t have to trust Facebook,” said Marcus—yet he’s the executive appearing before Congress. It’s hard to tell which regulators will have authority over which components of the Libra network. Eventually, there could be dozens of network validators, hundreds of wallets providers, thousands of participating merchants, and billions of users.
When Senator Kyrsten Sinema asked what recourse a user would have if scammed by an international wallet provider, Marcus said it was more likely that a US user would utilize a US wallet provider. The non-answer avoided the harder question: What happens when Libra coins are stolen? Thus far, there’s no good answer for bitcoin, and there’s no good answer for Libra either. Likewise, it’s not clear whether the Libra Association will assist US regulators in censoring transactions from bad actors such as terrorists and money launderers. Even if Facebook must comply through Calibra, that doesn’t mean the rest of the network—or the rest of the world—will do so.
No third-party wallets on Facebook?
By creating its own money and wallet application, Facebook will probably have the greatest authority over how its users spend and receive Libra. When pressed by Virginia Democrat Mark Warner about whether Facebook will support third party wallets, Marcus replied that wallets will be “interoperable.” All that means is people using different wallets providers can send money to one another (like sending money from Wells Fargo to JPMorgan Chase).
What Marcus didn’t say is that Facebook will essentially own one of those wallets itself—and the company has no responsibility to ensure equal opportunity or competition among third party wallet providers. Nonetheless, Warner brought up some forthcoming legislation about data portability. And though Marcus said data portability would be the norm for Libra (it’s a public network after all), he demurred regarding Facebook’s existing services.
Another privacy mess
As if Facebook’s privacy debacles weren’t enough—the Federal Trade Commission just fined the company $5 billion—the company’s crypto plans have triggered international regulatory scrutiny. Apparently the Swiss data privacy regulator Facebook says would be responsible for oversight of the Libra Association hasn’t yet been contacted by the company, per CNBC. That’s sure to stoke additional concerns on the heels of Facebook’s Cambridge Analytica fiasco.
The mishmash of regulation and international supervisory responsibilities makes one wonder how carefully Facebook planned Libra. (Notably, the company doesn’t even control the @Libra Twitter handle. It belongs to Jason Calacanis, a Facebook investor-turned-critic.) Indeed, Libra raises a multitude of concerns, spanning from US anti-money laundering requirements to Europe’s General Data Protection Regulation. How the company expects to comply with the vast array of regulation is mystifying.
Consent and taxes
It’s unclear whether a user will need to consent to sharing Calibra transactions with Facebook in order to use Libra on the social media platform. When questioned by Arizona’s Republican Senator Martha McSally, Marcus indicated that submitting a government-issued ID and signing up for a Calibra account might include agreements to share one’s transactions with Facebook. A further wrinkle, which Facebook undoubtedly will have to work through, is how crypto transactions are taxed. When the currency is exchanged, that is a taxable event, even if the price of Libra only increased $0.00000001. That especially matters for large purchases or sales, and while the reporting requirements might seem onerous, it’s the law.
While Facebook’s Libra inspired bipartisan opposition, a few Senators held out hope for blockchain technology, the data structure used by many cryptocurrencies. Accurate or not, they recognized crypto as a tool, and expressed optimism that competition could help reduce the often-exorbitant fees charged by banks and money transfer services. Whether Libra becomes a global currency, as Facebook intends, probably remains up to these and other policymakers, but the company and the Libra Association are doing themselves no favors by failing to explain how they will manage the digital currency.
As ranking senator Brown said, “Like a toddler who has gotten his hands on a book of matches, Facebook has burned down the house over and over and called every arson a learning experience.” Hopefully, Libra won’t set the world aflame.