The US Senate Committee on Banking, Housing and Urban Affairs today held a hearing examining Facebook’s proposed cryptocurrency, libra, and I almost filled up a whole notebook taking notes, which I’ll try and distill into something coherent now.
It was fairly compelling, although frequently frustrating and sometimes amusing, stuff.
Firstly, it’s worth noting that the House Committee on Financial Services is having its own hearing tomorrow on libra which, schedule permitting, I’ll try and pen some thoughts on as well.
The witness at the Senate hearing was David Marcus, the head of Calibra – which is the Facebook subsidiary that will build and operate services on the Libra Network and will form part of the Libra Association tasked with the governance and oversight of this network.
Throughout the hearing, Marcus remained calm and unruffled despite the obvious hostility of the committee members to Facebook and its proposed cryptocurrency plans, although frankly the line of questioning was generally so poor that the tech firm could probably have sent the summer intern in his stead and achieved the same results.
“Either the committee members hadn’t read the whitepapers Facebook published regarding libra, or they read them and didn’t understand much of it”
1. The committee members have, at best, a shaky grasp of how libra and Calibra operate
Either the committee members hadn’t read the whitepapers Facebook published regarding libra, or they read them and didn’t understand much of it. As such, they didn’t get the distinctions between Facebook the technology firm, libra the cryptocurrency and Calibra the subsidiary of Facebook running operations on the Libra Network.
Hence there were endlessly repetitive questions about why people should trust Facebook with their data, given the firm’s past – and well documented – transgressions around data privacy. To which Marcus had a fairly stock response each time:
(1) Facebook will not have access to account or financial data on Calibra, the two data streams will not be connected
(2) The Libra Association, not Facebook, will be responsible for the governance and oversight of the Libra Network that the cryptocurrency operates on and Calibra will be only one firm of the 100 that comprises the association. Calibra will have no special voting rights or authority above others in the network, and therefore people don’t have to trust Facebook because it has no authority to change anything unilaterally.
(3) People will be able to access and transact using the libra cryptocurrency through a variety of wallets from different providers that will all be interoperable. So they can use the cryptocurrency, which remember Facebook can’t control, without ever using a Facebook–owned product or platform, meaning that the technology platform will never see their data.
“For all its talk of just wanting to help people with no access to the traditional financial system, Facebook is a for-profit entity and isn’t just pushing this new cryptocurrency out of the goodness of its corporate heart”
2. The committee members struggled to understand Calibra’s business model. Three times.
Understandably, given Facebook’s history, the senators were concerned about how the technology platform was going to monetise the financial data it would gain access to were libra to gain significant adoption.
After all, for all its talk of just wanting to help people with no access to the traditional financial system, Facebook is a for-profit entity and isn’t just pushing this new cryptocurrency out of the goodness of its corporate heart. Thus, senators wanted to know how, if Facebook isn’t going to have control over or be able to monopolise libra, the firm plans to make money from this venture.
Marcus explained that there are no plans to monetise the data itself, but rather that by enabling the 90 million small businesses already using the Facebook platform, as well as individuals, to engage in more commerce, there is significant potential for more advertising spend. Additionally, he said that over time, Calibra wants to partner with existing financial services firms to provide other services and products that will also drive revenues.
Now, given that Facebook’s traditional business model has centred around monetising data, it was perfectly reasonable to ask about the model at play with libra. What’s less reasonable was that it had to be asked on at least three occasions during the hearing, and with a lot of grandstanding and finger wagging each time, when the answer clearly hadn’t changed in the intervening 30 minutes.
“Senator Tina Smith was convinced that there had to be one single individual in charge of the Libra Association, making the analogy that the US Senate has 100 members and yet Mitch McConnell is in charge of it”
3. In fact, there was a lot the committee didn’t really understand…
Senator John Tester didn’t seem to get the fact that the libra cryptocurrency will be backed by the Libra Reserve on a 1:1 basis, as opposed to having a fractional reserve. So as he continued to formulate different ways of asking what happens if there was a run on the cryptocurrency, Marcus struggled to find different ways of explaining that the assets are backed 1:1 and therefore people would be able to keep getting out of libra and back into traditional assets.
Senator Mark Warner spent a fair amount of his questioning time wrestling with the concept of interoperability. Marcus explained that Calibra will have to compete with other cryptocurrency wallets and that people will be able to send and receive funds from these other wallets, meaning that Calibra can’t gain a competitive advantage from walling off its users from the rest of the ecosystem.
This explanation appeared largely lost on Warner, but also on Senator Martha McSally who – when Marcus tried to explain in answer to her question how libra was structured so that Facebook couldn’t control it, so that there’s competition and interoperability between wallet providers – cut him off by stating: “I don’t want to get into the technical issues”.
Senator Kyrsten Sinema didn’t seem to know that WhatsApp messages are encrypted and therefore Facebook can’t read them and seemed to be under the impression that libra promises anonymity, when it does not.
Senator Tina Smith was convinced that there had to be one single individual in charge of the Libra Association, making the analogy that the US Senate has 100 members and yet Mitch McConnell is in charge of it. Marcus was a little vague on the consensus mechanism that will drive the Libra Association, stating that major changes would require a super majority of member approval and other smaller changes will not, but Smith’s analogy is clearly flawed. After all, the US Senate is effectively divided into two opposing sides, making it easier for the majority leader to rally their side together and push an agenda. By contrast, the Libra Association will be composed of 100 largely disparate, and in some cases competing, firms.
I could go on and on, but you get the point.
“Cotton demanded that Marcus explain what safeguards would be in place to stop a left-wing skew extending into the digital payments space”
4. Senator Tom Cotton somehow epitomised the best and worst of the hearing
You could generally divide up the senators between those that were only interested in grandstanding or scoring political points and those that had genuine questions for Marcus, but Senator Tom Cotton managed to straddle this divide, eliciting one of the most irritating and also one of the most interesting moments in the entire hearing.
He started off complaining that firms based in Silicon Valley are “very left wing” and that as a result, Facebook has suppressed and disadvantaged conservatives’ voices and news on its platform. Taking this as his premise, Cotton demanded that Marcus explain what safeguards would be in place to stop a left-wing skew extending into the digital payments space.
After Marcus said that, as long as it’s legal, people can do what they want with their money on Calibra, we got to a more interesting point.
There were many, many questions during the hearing around how libra will comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, which generally prompted boring responses about how people will need to upload government–issued IDs to use Calibra and how the firm is working with the relevant authorities to ensure that they’re comfortable with the procedures and policies being developed.
But Cotton tweaked the question slightly, pointing out that the US government is able to prevent money laundering by imposing economic sanctions, and that these sanctions can only have a significant impact because the US dollar is the global reserve currency. Indeed, he pointed out that such sanctions are a major tool that the government has for exerting power internationally, and questioned whether the potentially global adoption of libra could undermine this.
“If we don’t lead, others will,” was the response from Marcus. To paraphrase his subsequent comments: right now, we’re heading towards a world where there could be two different financial networks and two sets of financial infrastructure, one of which the US government would have no control over. Marcus argued that libra represents an alternative to this dynamic; it offers consumers a chance to adopt digital financial tools using wallets provided by firms that have to comply with rules set by either the US or countries that depend on the current dollar-based financial system.
My interpretation: finance is inevitably going digital and the US can either help lead this charge and at least retain some control over the companies that operate in this new digital world or it can watch China build a digital financial network over which the US will have no control or influence.
Food for thought indeed…
“I couldn’t believe that it took just under two hours for the Spectre comparison to voiced”
5. The moment I’d been waiting for, from an unlikely source
In his five minutes at the microphone, Senator Chris Van Hollen managed a whopping total of zero questions, went on a long waffle complaining about President Donald Trump, railed against the fact that the US is so far behind other countries with regard to real–time payments and then mused about the nature of the Libra Association.
Seriously, why even bother turning up?
But then, just when I thought all was lost, he provided me with the moment that I’d been waiting for the entire time: a reference to Spectre.
Considering that the senators had almost unanimously made out Facebook to be this evil, nefarious, shadowy organisation intent on using people’s data for all manner of ills (Senator Sherrod Brown began his comments by accusing the platform of abetting genocide), I couldn’t believe that it took just under two hours for the Spectre comparison to voiced.
Spectre (an acronym of Special Executive for Counter-intelligence, Terrorism, Revenge, and Extortion), is of course the fictional global criminal and terrorist organisation featured in the James Bond novels and films – a vast organisation that is not aligned to any nation or political ideology that is based in Switzerland, the planned headquarters of the Libra Association.
“Marcus was vague on the consensus mechanism for the Libra Association, but also on how it would avoid conflicts of interest amongst its membership and the formation of blocs or coalitions that might start to subsequently influence the governance of libra”
6. There’s still a lot of legitimate questions about libra
I don’t want to give Facebook/Calibra an easy ride here and just focus on the politicians, it’s just frustrating that their line of questioning was either poor or repetitive when there are so many valid concerns around libra.
And for his part, Marcus managed to swat away a lot of questions with vague assurances or non-answers.
He repeated on numerous occasions that there needs to be a regulatory framework for the Libra Reserve – the basket of assets that will underpin the stability of the cryptocurrency – yet gave no indication of what this framework should look like.
When pressed on whether Calibra would commit to instantly making a customer whole again in the case of theft or fraud like a credit company would, Marcus merely said that the firm would “resolve the issue as fast as possible”.
As previously noted, Marcus was vague on the consensus mechanism for the Libra Association, but also on how it would avoid conflicts of interest amongst its membership and the formation of blocs or coalitions that might start to subsequently influence the governance of libra. The charter of the association is still being drafted and will apparently be made public at a later date, he added. In fact, Senator Brian Schatz claimed to have had conversations with members of the consortium backing libra who have serious concerns about the whole project but have signed onto it for fear of being left behind because of Facebook’s market power. I have no idea if Schatz is overstating these concerns, but the idea that firms will sign on just to avoid losing out isn’t that outlandish (R3 consortium, anyone?).
Valid concerns about how third party providers on the Libra Network will be vetted and what measures will be in place to prevent bad actors on the network were met with assurances that libra will not be launched until these concerns have been satisfied, but no indication on how these issues would actually be resolved.
Again, I could go on and on, and this is ignoring the many valid concerns that the committee didn’t even address. That being said, Marcus did repeatedly make the point that Facebook plans to continue moving forward with libra at a very slow pace and it put the whitepapers out detailing the cryptocurrency well in advance of its planned launch precisely in order to generate some of these questions for it to then consider how best to address.
“Rather than problems with the technical setup or structure of libra, this political opposition to it might be what ends up killing the cryptocurrency”
7. US politicians REALLY hate Facebook right now
I knew that Marcus was going to come under some serious scrutiny from the senators today, but I was genuinely surprised at the level of vitriol aimed at Facebook – from both sides of the aisle. Now some of this might be because there were cameras in the room, some of it might be political expediency, but some of the hostility towards the tech platform seemed very genuine.
And honestly, rather than problems with the technical setup or structure of libra, this political opposition to it might be what ends up killing the cryptocurrency.
Interestingly, when Brown pressed Marcus about whether Calibra would push ahead with the launch of libra even if all the regulatory authorities in the US told the firm not to pursue it, he received a somewhat evasive answer.
Marcus said that his firm will “do what it takes” to address the regulatory and oversight concerns around libra and pledged that it won’t launch the cryptocurrency until this is done.