The US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Facebook’s Libra project this morning, with Facebook crypto chief David Marcus in the hot seat.
After a lengthy introduction by Idaho Senator Mike Crapo in which he called Facebook’s aims “commendable,” the committee discussed the potential ramifications of Facebook banking services.
And subjected David Marcus to an absolute grilling.
There is potential that the US government might appoint a new regulator to deal with cryptocurrencies, understanding that existing regulators aren’t fully equipped to deal with all the complexities. The entry of Facebook has spurred this idea, Mike Crapo revealed.
Crapo noted that the technology underlying Libra is “changing” and therefore regulators are uncertain how to approach it.
He then went on to say that the US government cannot enforce existing bank privacy laws on Facebook, and may have to establish a new regulator to handle the convergence of private data and financial information.
Existing regulators aren’t equipped for the type of power that Facebook wields – far greater than a traditional bank or money service provider. As Facebook’s financial services evolve, we may see a world of “social credit” translating into real credit, with the extensive information available to the company becoming more valuable than a credit report.
Senator Sherrod Brown was first to take the floor after the opening remarks, and he pulled no punches:
“Facebook is dangerous. Now 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 has two competing missions: make the world more open and connected. And as Facebook attempts to serve both these missions, they reek havoc on the rest of us.”
Brown then commented on one example of Facebook’s “disruption.” He spoke of how Facebook killed much of the online journalism industry by “redirecting” most of the profits away from journalists toward themselves.
In fact, Brown spent much of his time talking about Facebook the social media company, rather than the potential financial services firm. He spoke of the overall dangers of Facebook, not just its entry into finance. Speaking of Facebook’s news feed ranking algorithms, he said:
“I don’t have to tell you what the amplification of our divisions has done to the political discourse in this country. […] It takes a breathtaking amount of arrogance to look at that track record and think, you know what we ought to do next? Let’s run our own bank […] let’s do it for the whole world.”
Facebook blockchain chief David Marcus then took over. CCN.com reported on his prepared remarks yesterday.
Sen. Crapo then asked Marcus about the nature of the Swiss establishment of Facebook Libra. He asked if he agreed that the US should lead on regulating Libre.
Marcus said that Facebook chose Switzerland because it is a world headquarters for governments, financial institutions, and regulators. He pointed out that the company would still face oversight from FinCEN and other US agencies.
Crapo then spoke of all the different regulatory agencies in the US which Libra will have to answer to. He asked Marcus if Facebook was sure which regulators they would have to submit to. Marcus said the company would “keep working” until they had received a blessing from everybody.
Asked whether Calibra-associated wallets would share data with each other, Marcus reiterated that Facebook is only developing one wallet, but that others would be usable on the network.
“The way we’ve built this is to separate social and financial data.”
Given his opportunity to grill Marcus, Senator Brown started off by pointing out that Facebook is the only member of the Calibra Association with over 2 billion users. “So that’s important,” he said.
Brown then made some points of contention, particularly that Facebook has abused the data of its users. He said Marcus recently headed the messaging team responsible for allowing major companies access to private conversations.
By way of an eventual question, Senator Brown asked Marcus:
“Every time Americans trust you, they seem to get burned. […] Sitting here today, Mr. Marcus, after all the times Facebook has abused the public’s trust, you really think people should trust Facebook with their hard-earned money?”
Marcus, appearing uncomfortable, deferred to Mark Zuckerberg, which failed. Marcus reiterated that the company is working “really hard” on privacy.
“The reason we designed Libra in such a way that Facebook will only be one among 100 different members and will have no special privilege means that you will not have to trust Facebook.”
Senator Brown wasn’t buying this. He repeated that Facebook has the largest network of users. Brown then dared Marcus to eat his own dog food.
“If you think hardworking Americans should trust Facebook’s monopoly money, I want to see […] Will you pledge today that you and your team who are working on this project will accept 100% of your salary and other compensation in this Facebook currency?”
Marcus started by pointing out that Libra is not a replacement for traditional financial infrastructure. “That’s not the question,” said Brown. He repeated the question.
Marcus gave the same answer:
“Libra is not meant to compete with bank accounts.”
Accusing Marcus of avoiding the question, Brown repeated it for a third time.
Marcus responded, plainly stating he would trust all of his assets to be held in Libra. Unsatisfied, Brown specifically wanted to know whether Marcus would be willing to receive his compensation in the form of Libra.
Finally, Marcus answered:
“Senator, I would, because it is backed one for one with a reserve.”
Asked if Facebook would continue the project even if US authorities did not give their blessing, Marcus refused to say yes or no, once again. He said instead that they would continue working on the project until it did receive such blessing.
Pennsylvania Senator Pat Toomey then took the floor and said he believes it’s “wildly premature” to assume that the government needs to do anything at all at this point.
Toomey said he sees “enormous” potential in blockchain technology and can see the potential benefits, particularly in reducing transactioni costs.
Toomey asked the question raised earlier in this article. Will Facebook eventually look to share transaction data? Marcus responded:
“No, this is not the intention at all.”
He later said he “couldn’t think of any reason” Facebook would want to share the data.
Marcus then said Facebook’s angle is to bring 90 million small businesses online – with little friction. Facebook should earn plenty that way, he insinuated, because small businesses would increase their advertising on the platform.
He then spoke of potential partnerships with existing banks and financial companies, which may drive more revenue to One Hacker Way, Facebook’s headquarters.
Toomey also inquired about the financial structure of Facebook’s reserves and Libra’s status as a non-profit.
Montana Senator Jon Tester asked about reversible transactions, which are difficult in a cryptocurrency environment. He related the experience of losing your debit card – even though it’s your fault, the bank covers fraudulent transactions. Marcus responded that Facebook is “working” on reversible transactions, and Tester called this “critical.”
Neither party discussed the technical limitations of a censorship-resistant platform and the ability of one party to reverse transactions.
Effectively, if Marcus honestly implements this “feature,” then Libra will lack one major quality of a cryptocurrency. It will still be considered a “distributed ledger technology,” but the ability to censor and reverse transactions is native to banks, not crypto.
Tester then asked Marcus how “bad actors” would be prevented from using Libra and promised to “shut up” after getting an answer.
Marcus pointed out that people will have to create a second account, with know-your-customer information, unlike Facebook accounts. He said the company will have “systems and a dedicated team” for fraud and money laundering.
Virginia Senator Mark Warner asked for clarification on the competing implementations of Libra wallets. How will we know that WhatsApp and Facebook will actually encourage users to try alternatives?
“The network is interoperable, meaning that people who are using Libra from within WhatsApp will be able to send and receive with other wallets, even not the Libra wallet.”
Asked if Marcus would make it “easy” for users to go to other wallets, Marcus said “absolutely.” Warner then hinted that he would soon be introducing legislation which would force Facebook and other existing platforms to have “portable” data.
The hearing continued toward lunch time with additional, detailed questions about the cryptocurrency coming from various senators on the committee.