The economic risks of a global cryptocurrency with the reach of Facebook were sufficient by themselves to give official Washington pause. It may be the social media giant’s own reputation, however, that poses the biggest challenge to bringing Libra to market.
Even the lawmakers, mostly Republican, who praised Mark Zuckerberg’s company for its innovation criticized a past checkered by data privacy breaches that affected millions of account-holders, failure to prevent misuse by Russian agents during the 2016 presidential election, and claims of partisan censorship.
“Just because we don’t understand a new product doesn’t mean we should call for its prohibition,” Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, told Facebook executive David Marcus during the second of two days of congressional hearings on the proposal. “But let’s be honest. It’s Facebook. I’m skeptical.”
McHenry’s assessment was mild compared with that of some his colleagues in both the House and Senate. Already a draft bill dubbed the “Keep Big Tech out of Finance Act” has been circulated, with provisions barring any large platform utility from becoming a financial institution or from creating its own medium of exchange.
The president has weighed in, too, telling his 61 million Twitter followers that Libra would be undependable. His administration has long warned that cryptocurrencies — generated through so-called mining, or confirming transactions on a shared digital ledger — are ripe for misuse.
Because Facebook has already profited off the wealth of information its account-holders supply through their posts and connections as well as their likes and dislikes, lawmakers have raised the specter of it engaging in similar behavior with data from Libra transactions.
“Facebook is dangerous,” Sen. Sherrod Brown of Ohio, said during the first hearing, called by the upper chamber’s banking committee. “Facebook might not intend to be dangerous, but surely they don’t respect the power of the technologies they are playing with. 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.”
Facebook, which has acknowledged it must regain the trust of both users and regulators, said it shares concerns about the risks of its initiative but argues Libra is a vital innovation, particularly for the 1.7 billion people in developing nations who lack access to traditional banks.
The Menlo Park, California-based company has attempted to avoid some of the criticism leveled at older cryptocurrencies like bitcoin, which has experienced wild value fluctuations, by linking Libra to a basket of world currencies including the dollar and the British pound. To counter criticism of its reputation, Facebook has pointed out that while it is leading development of Libra, it plans to give up control.
Once introduced, the currency would be overseen by a governing body, the Switzerland-based Libra Association, in which Facebook will have no more voting power than any of the other 100 eventual members. The company would retain ownership of Calibra, a digital wallet designed for the currency, which Marcus oversees, though it has pledged that purchases made with that wallet wouldn’t be shared with the parent company.
Still, Calibra will have to scan the federal ID cards of users in order to comply with anti-money-laundering laws, and that information along with data on the transactions would be stored in the blockchain ledger that powers Libra.
“Facebook says there are safeguards in place” to prevent it from exploiting Calibra’s data, said Jaret Seiberg, an analyst with Cowen Washington Research Group, which has tracked federal policy for the past four decades. “And it has vowed clearly and strongly not to track how consumers spend Libra. The problem for Libra is that neither Republicans nor Democrats believe that commitment.”
The Senate hearing, he said, “exposed the widely held view on Capitol Hill that Facebook has violated past pledges to honor consumer privacy, so there is no reason to believe the company today.”
Whether Facebook is actually guilty doesn’t matter, since that’s “seen as the truth in Congress,” Seiberg said. “That is enough to drive policy.”
Basing the governing Libra Association in Switzerland raises its own questions, said Rep. Maxine Waters, the California Democrat who chairs the House Financial Services Committee.
The country “has a history as a monetary haven for criminals and shady corporations,” she added, and the reach of U.S. regulators there would be limited, a concern shared by lawmakers in both chambers.
Libra may be “the biggest thing this committee will deal with this decade,” said Brad Sherman, a California Democrat who termed the cryptocurrency a “ZuckBuck.” Ultimately, it may prove more dangerous to America than the 9/11 attacks, he suggested.
Sen. John Kennedy, the Lousiania Republican, summed it up more succinctly, if less colorfully.
“Facebook wants to control the money supply,” he said, citing the company’s lagging disclosures about accounts operated by Russian software “bots” during the 2016 election. “What could possibly go wrong?”
The possibilities are what worry Federal Reserve Chairman Jerome Powell. Libra could become large enough that its failure would imperil the financial system, thanks in part to Facebook’s existing audience of more than 2 billion users a month, about a third of the world’s population.
For that reason, it should be “subject to the highest level of expectations” as well as regulations requiring risk-controls and capital reserves for crises, Powell has told lawmakers.
By letting such concerns block Libra altogether, however, Washington risks becoming the place “where innovation goes to die,” warned McHenry. At the same time, Facebook has done nothing to allay lawmakers concerns, said Rep. Tom Emmer, a Minnesota Republican.
“You and your company have decided to approach this undertaking with as equal a level of ignorance and misunderstanding as those who wish to quell any new developments in cryptocurrency,” he told Marcus, the Facebook executive.
“You have failed to realize there is much to do in Washington in terms of educating both members of Congress and regulators on the benefits of this technology,” Emmer said. “I hope someone whose opinion you value conveys to you how wrong you’ve been operating. People have concerns with the amount of data you have on them, and now you want to be their money, too.”