Mark Zuckerberg endured a serious grilling this week as lawmakers around the world continue to express their concerns about Libra.
The Facebook CEO did not look comfortable. Having swapped his customary grey t-shirt for a suit, Mark Zuckerberg endured over six hours of intense questioning the other day. The United States House of Representatives Committee on Financial Services had called the social media platform founder to testify about Libra, a cryptocurrency project.
Facebook announced Libra in June. It also revealed a new subsidiary called Calibra, a digital wallet for Libra. At the time, Facebook estimated that the project would be launched in 2020. The Menlo Park company is not the only organization backing the project, but a one out of 21 members of the Libra Association, the Switzerland-based consortium behind Libra.
The members include companies like Farfetch, Lyft, Spotify and Uber as well as a selection of venture capital firms and not-for-profit organizations. However, when Libra was first announced, there were 27 entities backing the initiative. Several of them – including PayPal, Stripe, Visa and Mastercard – have abandoned it since.
The other wee, their departure led to a heated exchange on Twitter between David Marcus, the former president at PayPal and current vice-president of messaging products at Facebook and co-creator of Libra, and some cryptocurrency experts.
During the six-hour session, Republican representative Ann Wagner asked Zuckerberg why those backers had jumped ship. “It’s a risky business,” he replied.
The companies dropped out as the Libra project has experienced intense scrutiny from regulators and lawmakers around the world. In the months since the initiative was first announced, American lawmakers have repeatedly expressed their concerns about the digital currency.
In August, Maxine Waters, the Democratic chairwoman of the House Financial Service Committee, and five of her peers went to Switzerland to discuss how the cryptocurrency would be regulated with the country’s top regulator. They had previously co-penned an open letter, expressing their concerns.
Other lawmakers who have expressed their worries over the past few months include the EU’s finance commissioner and France’s finance minister as well as a board member of the European Central Bank.
Moreover, authorities from the UK, Australia, the US, Canada, Burkina Faso and Albania, as well as the EU’s European Data Protection Supervisor signed an open letter in August asking the social media giant to be more transparent about its digital currency and its infrastructure.
The marathon session with the US House of Representatives was supposed to be a way for Zuckerberg to ease these worries.
The hearing also touched on the Cambridge Analytica scandal, its fact-checking polices and political advertisement. On several instances, Facebook’s past failings funneled into a skepticism about the company’s suitability to lead the project.
“With all of these problems I have outlined, and given the company’s size and reach, it should be clear why we have serious concerns about your plans to establish a global digital currency that would challenge the US dollar,” said Waters.
While Zuckerberg acknowledged that Facebook is “not the ideal messenger right now”, he maintained in his prepared remarks that an initiative like Libra was vital to bring about financial equality around the globe.
“There are more than a billion people around the world who don’t have access to a bank account, but could through mobile phones if the right system existed,” Zuckerberg said. “This includes 14 million people here in the US.
“Being shut out of the financial system has real consequences for people’s lives – and it’s often the most disadvantaged people who pay the highest price. People pay far too high a cost – and have to wait far too long – to send money home to their families abroad. The current system is failing them. The financial industry is stagnant and there is no digital financial architecture to support the innovation we need. I believe this problem can be solved, and Libra can help.
“The idea behind Libra is that sending money should be as easy and secure as sending a text message. Libra will be a global payments system, fully backed by a reserve of cash and other highly liquid assets.”
Zuckerberg also reiterated that Facebook would not move forward with the launch of Libra until US regulators had given it a green light. He declined prompts to supply a list of which regulators he sought approval from.
Dante Disparte, head of policy and communications for The Libra Association, tells RegTech Analyst, “This is enshrined in our long launch runway, which has helped inform regulators, policymakers and other stakeholders around the world about our commitment to responsible financial innovation and strong oversight.”
Oliver Woodhouse, a lawyer at Capital Law, the legal firm, is unsurprised by the backlash from policymakers. “The Libra project is intended to be global, so there’s a worry people could abandon national currencies in times of crisis,” he tells RegTech Analyst. “Shifting away from national currencies, towards projects such as Libra, is seen by many as a privatisation of money which may damage a country’s monetary sovereignty.”
Woodhouse adds that while Facebook has so far held a leadership role over the currency, it has stated that it intends to eventually take a step back and to have the same influence as the other members of the Libra Association.
“Therefore, the relationships between Facebook and governments might not change that much,” Woodhouse argues. “Also, even if Libra were to be a Facebook product, it would still be subject to the legal and regulatory requirements of each jurisdiction it operates in. The Libra Association must ensure the token is appropriately regulated, legally sound and users are appropriately protected.”
Iqbal V. Gandham, UK managing director at eToro, the multi-asset investment platform, believes introducing Libra would also affect governments’ ability to hold Facebook accountable. “This would change if Libra is successful because the social media giant would have the ability to switch on and off people’s access to money, thereby affecting local economies,” Gandham tells RegTech Analyst.
“Facebook has the potential to be the biggest single economy in the world if it can control a globally-adopted cryptocurrency. But the strength of the Libra coin will rely on regulation and then subsequent adoption by both consumers and businesses, which, at this point in time, governments do have control over.”
Disparte answers to these concerns, saying, “Libra was created to complement the existing system, not replace sovereign currencies, and is digitising existing assets and currencies through the reserve. Further, since Libra will only represent a small share of all transactions in any single economy, we expect its impact to be minimal on any one economy.”
Another concern levied against Facebook and the other Libra Association members is what it would mean for people’s privacy. “These concerns are real because for the first time, Facebook will now have access to both people’s purchasing and spending habits as well as their social media activity,” Gandham says. “How secure this is depends on Facebook. However, this doesn’t differ to far from the information banks currently hold on us. Banks already know where we spend our money and how we spend our time – we just don’t necessarily upload photos and status updates to accompany this data.”
While Woodhouse agreed that Facebook’s history regarding data privacy is questionable, he says it is “important to remember that Facebook is distinct to Libra, forming only part of the Libra Association – so Facebook won’t have immediate insight into transactions on the Libra network.”
He adds that even though can opt to use another digital wallet than Calibra to tap into Libra, “we consider this does raise a flag” from a privacy perspective.”
“All entities would be subject to applicable regulation governing data processing and user privacy, such as the GDPR, but it’s unclear how financial data held by Calibra may be held or recorded and sit separate to the wealth of data from Facebook’s network,” Woodhouse says.
Of course, not everyone is dismissive of Libra. For instance, Diego Zuluaga, a policy analyst at the libertarian think tank the Cato Institute, penned an opinion piece the other day, published by CNN. In it, he makes the case that if Facebook is unable to back the launch of Libra, then another company should still launch the cryptocurrency.
While acknowledging many of the concerns expressed by lawmakers over the past few months, Zuluaga argued that launching Libra or a similar initiative is essential to close the gap between those living in poor countries and the people in wealthier nations.
And it should also be mentioned that while many legal stakeholders have worried about Facebook’s new cryptocurrency project, the Swiss Swiss independent financial market regulator FINMA’s CEO Mark Branson has said that Libra is by far not his biggest concern.
Speaking at an event a few weeks ago, he said, “I am much more nervous about projects which develop in a dark corner in the financial system somewhere, spread themselves out through cyber space and one day are too big to be stopped,” he said, according to Reuters. “Here is something which is being done transparently.”
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