The Takeaway
- Congressional hearings on Facebook’s Libra project are likely to focus more on the company’s privacy failings than on unresolved policy questions for cryptocurrency.
- Lawmakers will probably also grill Facebook blockchain lead David Marcus on the company’s choice of Switzerland as the home for the Libra Association.
- Though Facebook intends to launch Libra next year, regulatory and congressional scrutiny may throw that timeline into jeopardy.
Facebook is about to face the music on Capitol Hill.
In hearings Tuesday and Wednesday, the social media giant will defend its ambitious cryptocurrency project, Libra, which it revealed in June through a white paper and supporting documentation. While Facebook lined up major payments and VC firms to support the project, lawmakers expressed doubts almost immediately, with the U.S. Senate Banking and House Financial Services Committees calling for hearings soon after its unveiling.
The Senate hearing will take place on Tuesday, while the House panel will hold its hearing the next day. David Marcus, Facebook’s blockchain lead, will testify at both. The House hearing, at least, will also call other expert witnesses. Potentially at stake is the timing of Libra’s launch. Facebook said last month that it was targeting a 2020 rollout, but whether the company will be able to meet that deadline is still in the air, and not just for technical development reasons. For starters, if the Securities and Exchange Commission (SEC) decides that Libra resembles an exchange-traded fund (ETF), then Facebook’s ability to launch the cryptocurrency will be dependent on the regulator’s approval. Congress could also delay Libra’s launch: If lawmakers decide they need to have greater oversight on the project, they can try writing and passing a bill (indeed, a draft bill circulating online suggests that some lawmakers are already considering this). Even President Donald J. Trump has criticized Libra, which may indicate that he would be willing to sign such a bill into law. However, if lawmakers come away from the hearings satisfied with Marcus’s statements, then Facebook will have passed a major hurdle on its road to launching Libra. Indeed, in his prepared remarks for the Senate hearing, released Monday, Marcus indicated that Facebook would not follow its famous dictum to “move fast and break things.” “In fact, I expect that this will be the broadest, most extensive, and most careful pre-launch oversight by regulators and central banks in FinTech’s history,” Marcus said. “And I want to be clear: Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”
Libra, as outlined last month, is designed to be an open-source cryptocurrency that individuals – regardless of whether they’re Facebook users – can send each other for payments. Those who use Libra will be able to send funds using Facebook’s Messenger, WhatsApp or Instagram apps, or other third-party wallets. The company is hoping to provide financial services to unbanked individuals worldwide (though it is not launching in India, the world’s largest market for WhatsApp, where crypto is highly restricted).
Companies such as Visa, Mastercard, PayPal and Coinbase have all agreed to act as launch partners for the Libra Association, the governing council which will be tasked with overseeing and guiding the project’s technical developments once it is live. However, these partners have signed nonbinding agreements, and do not appear to have paid the $10 million fee to join the association, according to the New York Times.
The backlash to Facebook’s announcement was swift, bipartisan and extremely public. The Senate Banking Committee called a hearing the next day, while members of the House Financial Services Committee have repeatedly called for a moratorium on the cryptocurrency’s development.
Past letters and comments by these officials provide hints at what the lawmakers might focus on during the hearings.
The Senate Banking Committee has been looking into Libra since at least May, when chairman Michael Crapo (R.-ID) and ranking member Sherrod Brown (D.-OH) wrote an open letter to Facebook asking several questions about the project.
While the letter overall was about the crypto project, many of the questions specifically focused on issues of consumer financial data collection and user privacy in Facebook’s flagship business.
Crapo also wrote an opinion piece in Fox News this month, emphasizing the importance of data privacy, and suggesting how lawmakers might be able to aid in securing this privacy as a legal right.
Facebook responded to the committee’s questions last week, assuring lawmakers that the company would not hold any personal financial data, though its Calibra subsidiary would collect any and all know-your-customer (KYC) and anti-money laundering (AML) information that is required by law.
Marcus, who wrote the response, also told lawmakers that because Libra’s code will be open-source, anyone could build their own wallets. These third-party developers would be responsible for any data that their wallets collect, as well as ensuring compliance with any relevant statutes.
Kristin Smith, head of the Blockchain Association, a lobbying group, told CoinDesk that “given the recent turmoil surrounding Facebook and the general shift in perspective on Big Tech in D.C., it’s natural that Facebook itself would be getting the majority of the focus from lawmakers, rather than the specifics of the Libra project.”
However, she believes this is “a missed opportunity.”
“We … would rather see this moment used to answer long-standing questions about U.S. crypto policy, no matter what you think of Facebook’s recent history,” she said, adding:
“There are some overlapping regulatory issues facing traditional crypto companies and Libra, though we think the latter needs its own consideration from lawmakers as part of a broader discussion of public policy in the U.S.”Indeed, House Financial Services Chair Maxine Waters (D.-CA) and ranking member Patrick McHenry (R.-NC), in their own statements questioning the project, also indicated that their concerns lie more with Facebook than with the cryptocurrency itself.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of users,” Waters said last month. On the other hand, there is a wild card, in the form of House committee member Brad Sherman, who has repeatedly called for an outright ban on crypto activities in the U.S. and may take the opportunity to bash the asset class again on Wednesday.
User data collection aside, another apparent cause for alarm seems to come from the fact that Facebook set up a subsidiary in Switzerland, ostensibly to develop hardware or software, as well as to provide financial and technology services.
Lawmakers appear to believe that Facebook might have established a subsidiary in Switzerland to skirt U.S. regulations.
Brown tweeted last month that “we cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
Smith had another interpretation, however. She told CoinDesk that Facebook may have chosen to set up shop in Switzerland because of a lack of clarity around U.S. regulations.
“It’s no secret that Switzerland is well-known as a crypto-friendly jurisdiction,” she said, adding:
“The pervasive regulatory uncertainty is having a dampening effect on U.S.-based companies and investors, which could have played a role in Facebook’s decision, no matter what the merits of Switzerland’s laws may be on their own.”
In that context, “it is striking that Facebook decided against basing this project in the U.S.,” she said.
If the U.S. legal and regulatory structure is not clarified, she expects other projects might also follow suit in leaving the country for other jurisdictions.
Companies based in the U.S. may even consider moving to another country in search of this clarity.
“If regulators and lawmakers, who have to this point focused mainly on the risks associated with cryptocurrencies, instead supported the positive growth potential of the industry as other countries have done, the U.S. may be able to lead the growth of this economy for decades to come,” Smith said. But Marcus’ prepared remarks suggest he thinks the lawmakers are thinking defensively rather than offensively. For example, he downplayed the potential threat to fiat currencies posed by Libra, reassuring the Senators:
“The Libra Association, which will manage the Reserve [of assets backing the coin], has no intention of competing with any sovereign currencies or entering the monetary policy arena. It will work with the Federal Reserve and other central banks to make sure Libra does not compete with sovereign currencies or interfere with monetary policy. Monetary policy is properly the province of central banks.”
David Marcus image via CoinDesk archives