Facebook’s David Marcus got a warmer reception from the House yesterday than he did in the Senate on Tuesday. Not that it was friendly, but the questions focused more on the power Facebook would gain from its Libra cryptocurrency, and getting Marcus to commit to working at the pace of Washington, D.C., not Silicon Valley.
Marcus, who is spearheading Facebook’s Libra cryptocurrency project, testified before the House Financial Services Committee [Go to 2:02:30 on C-Span] a day after facing the Senate Banking Committee, where Facebook’s trustworthiness and abysmal record with users’ private data came under repeated attack.
The Wednesday hearing began with a similarly hostile statement from committee Chair Maxine Waters, the California Democrat who had called on Facebook to stop work on Libra until Congress and regulators come to grips with its implications. But the rest of the committee, by and large, wanted to get into the details of how Libra would work.
Certainly the most often-repeated comment from committee members on both sides of the aisle was that they wanted to support innovation.
Facebook’s proposal calls for a cryptocurrency backed by a basket of fiat currencies and overseen by an association in which the social media giant would have only one vote. This group, the Libra Association, has already attracted the likes of Mastercard and Visa, Uber and eBay, as well as several cryptocurrency focused firms including the Coinbase exchange and venture capital firm Andreessen Horowitz.
Facebook hopes its 28 current members will grow to 100 by the time Libra goes live, insulating it from concerns that Libra will be “its” cryptocurrency. While the social media giant’s only formal Libra connection will be the Calibra wallet, Facebook and its WhatsApp messaging service will bring 2.7 billion users to Libra, giving it substantial clout.
Waters vs. Libra
Rep. Waters came out swinging, taking Marcus to task for Facebook’s well-publicized privacy failings and seemingly deceitful behavior. But she quickly refocused on the power Libra could bring Facebook.
“If Facebook’s plans come to fruition, the company and its partners will yield immense economic power that could destabilize currency currencies and governments,” she said
Pointing to concerns about Libra’s potential impact on national security and monetary policy, she added that the cryptocurrency “threatens to concentrate government influence in the hands of a few elites.”
Waters also made clear that from her perspective, the committee’s goals went beyond learning about Libra.
This law, if passed, “would prevent large platform utilities like Facebook from becoming financial institutions and block them from creating their own currencies,” said Waters. “Today’s hearing is only the first step in our oversight and legislative process.”
The tone of the conversation changed when the ranking minority member of the committee, Republican Rep. Patrick McHenry of North Carolina, followed Waters’ opening remarks with his own.
In a thinly veiled dig at Waters, McHenry said, “Let’s be honest, it’s Facebook and I’m skeptical, but we can either make you a political talking point or we can choose to conduct thoughtful governmental oversight. That’s my hope for this day is it’s thoughtful government oversight.”
Instead of a “knee jerk reaction of banning something before it begins,” he added,
“This Republican stands ready to work with innovators to successfully implement responsible technology here in the United States … before we lose out to other countries around the world. So, I ask my colleagues on both sides of the aisle to join together and supporting innovation, ingenuity and the entrepreneurial spirit that this nation was founded upon.”
That was the end of his appeal to bipartisanship.
“Some politicians want us to live in a permission-based society where you need to come to government, ask for its blessing, before you can begin to even think about innovating,” McHenry added. “Those are the politicians who would rather kill it before it grows. But there are others who believe in the vibrancy of American ingenuity, of American innovation ”
McHenry also questioned why Libra was based in Switzerland and backed by a variety of strong currencies, asking Marcus, “Why not the good old American dollar?”
The Calibra boss replied “the choice of Switzerland has nothing to do about evading responsibilities of our oversight,” adding “we would like for Libra to be a digital global currency and as a result to be one unit of a digital currency for the whole world.”
No to moratorium
In questioning Marcus, Democratic members tried repeatedly to pin him down on a pledge to not launch Libra before congress and regulators were ready.
Waters was first, saying in an exasperated tone, “[w]ill you stop kind of dancing around this question and commit here in this committee, before the duly elected representatives of the American people, to a moratorium until Congress enacts an appropriate legal framework to ensure that Libra and Calibra do what you claim it is intended to do?”
Marcus said no.
Technically, what he said was, “the proper oversight needs to be set up before a Libra can launch. We released a white paper very early … so that we could have the time to engage with all of the proper regulators and central banks and lawmakers, to ensure that we will get this right.”
He added, “this is my commitment to you, Chairwoman. We will take the time to get this right.”
Which is not a moratorium, as Democratic New York Rep. Carolyn Maloney pointed out when she got roughly the same answer to the same question.
Saying, “I take that as a no,” she told Marcus before asking “will you commit right here in this hearing room to walk before you run? Will you commit to doing a small pilot program for Libra first, limited to no more than one million users and overseen by the Federal Reserve and the [Security and Exchange Commission]?”
Marcus again skirted around a no. “We will continue to engage with regulators and the working group at the G7 that is [working to] ensure that however we launch this, it is responsibly, and it is with appropriate oversight. You have my commitment on that.”
That’s when Maloney suggested pre-emptive action to ban Libra.
“If you will not commit to testing this out as a pilot program first, and I think it’s a reasonable request, I think that Congress should seriously consider stopping this project from moving forward.”
Will Facebook challenge banks?
After failing for a third time to get Marcus to agree to a moratorium, New York Rep. Nydia Velazquez, a Democrat, suggested that the Treasury Department’s Financial Stability Oversight Council (FSOC) should use its power to impose extra regulatory oversight on non-banks that have the ability to impact the nation’s financial system.
That led Marcus to make a commitment that flew in the face of comments he made on June 18, when he said if Libra “is successful, it will be a big opportunity for us to provide lending to all these consumers loans.”
While Facebook and Calibra have had conversations with the FSOC, Marcus replied that both they have “no plans to engage in banking activities. As far as the Calibra wallet is concerned, we will be active in the payments space, like many other non-banks are active in the payments space.”
A few minutes later, Marcus backpeddled under questioning from Rep. French Hill of Arkansas, a Republican. After promising that Calibra would not make any revenue from advertising—which would probably mean gathering user data from Facebook, which Marcus has repeatedly pledged not to do—he said the company would likely partner with existing financial institutions to offer other financial services.
“The reality is whether Facebook is involved or not, change is here. The world that Satoshi Nakamoto, author of the Bitcoin white paper envisioned and others are building, is an unstoppable force.”Rep. Patrick McHenry, (R-N.C.)
In the short term, Marcus said that Facebook had not even begun planning on revenue streams for Calibra, and probably wouldn’t “for a number of years.”
He added that the company hoped to make person-to-person transactions extremely cheap or even free, pointing at the Libra Associations’ stated goal of focusing its efforts on the unbanked and remittances from migrant workers.
“There will likely be small merchant fees that will be very competitive with the current fees that are paid by merchants,” Marcus added.
High-profile freshman Democrat Alexandria Ocasio-Cortez of New York was more concerned about corporate control of a potentially major currency than Facebook’s reputation. Pointing to the power that Facebook and its Libra Association partners could accrue, she told Marcus that her problem was “we are discussing a currency controlled by an undemocratically selected coalition of largely massive corporations.”
In this, she said almost word for word what French Finance Minister Bruno Le Maire told a meeting of the Group of Seven a day later, according to Reuters. “We cannot accept private companies issuing their own currencies without democratic control,” Le Maire said, adding “stablecoins and other various new products currently being developed, including projects with global and potentially systemic footprint such as Libra, raise serious regulatory and systemic concerns”.
It’s worth noting that traditional banks don’t seem too concerned, at least in the short term.
JPMorgan Chase CEO Jamie Dimon addressed the broader issue of cryptocurrencies and blockchain technology during the company’s second quarter earnings call on Tuesday.
“To put it in perspective … we’ve been talking about blockchain for seven years and very little has happened,” he said. “You’re going to be talking about Libra three years from now. I wouldn’t spend too much time on it.”
Of course, JPMorgan has already launched its own stablecoin on its Quorum enterprise blockchain, the JPM Coin, earlier this year.
If it walks like an ETF and quacks like an ETF
While the Financial Services Committee members largely avoided bitcoin and other truly decentralized cryptocurrencies, Republican members did bring them up a few times.
Talking about broader issues with the government oversight of cryptocurrencies, Rep. McHenry addressed their place in the financial system, albeit briefly.
“The reality is whether Facebook is involved or not, change is here,” he said. “Digital currencies exist. Blockchain technology is real and Facebook’s entry in this new world is just confirmation, albeit at scale. The world that Satoshi Nakamoto, author of the Bitcoin white paper envisioned and others are building, is an unstoppable force.”
Rep. Bill Huizenga, a Republican from Michigan, brought up the question of whether Libra would be classified as an exchange traded fund (ETF). If so, that would make it a security, which would bring huge hurdles to its usefulness.
Marcus said he did not believe it was, calling it a “payment tool” rather than a digital currency.
Rep. Jim Himes, a Connecticut Democrat and former banker, brought the issue up again while questioning Marcus about the likelihood that libra users would be caught off guard by the cryptocurrency’s exposure to exchange rate fluctuations in the basket of currencies backing it.
Giving the example of an American using libra to pay a $1,000 monthly rent, Himes said if that equaled 1,000 libra one month, a big fluctuation in one of the fiat currencies in the Libra basket could make that rent 1,100 libra the following month.
“What I’m getting at is, users will have the profoundly unfamiliar experience of assuming foreign currency risk,” said Himes. “Traditionally, the regulatory apparatus here has said that if you were going to assume an unfamiliar risk, that risk will be disclosed to you with full transparency. And the mechanism we have traditionally used to disclose that kind of risk is through public filings and disclosure.”
This means Libra “looks to me exactly like an exchange traded fund backed by a series of foreign short-term instruments and foreign currency,” he said. “Tell me why this is not an exchange traded fund?”
Marcus responded with three reasons, the first being that because Libra is designed with financial stability in mind, no one will buy it as an investment.
Also, under the four-part Howey Test used by the Securities and Exchange Commission (SEC), a security is an investment made for profit through the efforts of a third party, he said. Libra “is not a product, it is a payment tool,” he said. “And you can’t use ETFs for payments.”
The culture wars?
Republican Rep. Steve Stivers of Ohio brought the culture wars into the hearing room, asking Marcus if Calibra would ban users like Facebook does, giving the example of far-right media provocateur Milo Yiannopoulos and black-nationalist Louis Farrakhan, both of whom were kicked off the social media platform for violating its community standards.
“Do you expect to have the Libra Association ban Chick-fil-A, or anyone else that might have social views that you disagree with,” Stivers asked Marcus. “I would just urge you not use this for social engineering.”
Again, Marcus notably did not say no, pointing out that “this is actually not going to be my decision or Facebook’s decision. It’s going to have to be a decision that is going to be taken by the council of members of the Libra Association.”