So today it was the turn of the US House Committee on Financial Services putting Facebook’s proposed cryptocurrency, libra, under the microscope, and it was a vast improvement on yesterday’s hearing in the Senate.
Full disclosure: I had to run into meetings and so couldn’t stay for the full hearing, however, I caught the first two hours of the hearing(!), during which 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 – was grilled by members of the House.
Here’s what, in my humble opinion, were the key takeaways from this second hearing.
1. It’s hard to over-emphasise how much better the House hearing was (mostly)
Yesterday I complained that the senators questioning Marcus didn’t understand key concepts associated with libra, but today it seemed like the House Committee had done its homework. And to my mind, no one exemplified the difference between the two hearings better than Congressman Patrick McHenry.
As the ranking Republican on the committee he made an opening statement which he used to admit that, personally, he is sceptical about libra. But McHenry also emphasised that he wanted to use this hearing to “get beyond the headlines” and learn more about the proposed cryptocurrency, stressed that committees such as this “can’t be where innovation goes to die” and said that it seems illogical to dismiss out of hand what is still at this stage only a proposal before taking the time to fully understand it.
Now here’s the crucial bit. McHenry said that the US government cannot ignore the fact that blockchain and cryptocurrencies exist, calling this technology an “unstoppable force’ that no government can stop. Therefore, he concluded, the question facing US policymakers is what are they going to do in the face of this new world?
This is in direct contrast to the opening statements from the Senate, which were used mainly to remind everyone present of how evil and untrustworthy Facebook really is at the expense of such larger and more thought provoking considerations.
Looking at McHenry’s first question to Marcus also showed a more nuanced understanding than almost any lines of questioning coming from the Senate.
The whitepapers published by Facebook outlining libra say that it plans to move from being a private and permissioned network to a public and permissionless network within five years of launch. McHenry wanted to know how the Anti Money Laundering (AML) and Know Your Customer (KYC) measures on the Libra Network would function as this transition was made, given that the private nature of a decentralised (permissionless) network creates a natural opposing tension to these requirements.
Clearly he had read, or at least been adequately briefed on the whitepapers, and as a result could put forward a cogent line of questioning regarding a technical aspect of the proposed cryptocurrency.
If you’re interested, Marcus’ response was that the Libra Association will still set the rules for the network and can therefore ensure AML/KYC measures are in place, whilst the validators on the Libra Network – such as Calibra – will be subject to AML/KYC regulations in their home jurisdictions.
2. But when it was bad, it was really bad
There was an obvious caveat in the previous point for good reason. As the hearing dragged on, the questions generally became a little less salient and the political point making became a little more heavy handed. Compared to yesterday’s hearings though, it stayed in a range that was broadly tolerable.
That was, until Congressman Brad Sherman got his hands on the microphone. To say that his five minute rant (like Senator Chris Van Hollen yesterday, he didn’t manage to ask a single question) was weird is a massive, massive understatement.
He came out of the blocks exclaiming that “we need to get Mark Zuckerberg in here”, which subsequently became a refrain that he fell back on a couple of times when he seemed to be momentarily running out of steam.
Next up, he claimed that innovation isn’t always good, but to make his point he rather bizarrely claimed that the consequential innovation of recent times was made by Osama Bin Laden when he planned for two planes to fly into the twin towers.
Then he swiftly pivoted and declared with complete certainty that no one, absolutely no one, will call this new currency by its name, “libra”, but will instead only refer to it as the “Zuck Buck” (which, to be fair, I did think was rather amusing).
But Congressman Sherman wasn’t done yet. In fact, up until this point he had just been finding his groove and building up to the main thrust of his “argument”. Sherman then began to sketch out a conspiracy theory in which Facebook’s claims about wanting to solve existing challenges around cross border payments and helping the unbanked people in the world were quite clearly all a front. A front for what?
Well, Congressman Sherman’s theory was as follows:
- Mr Zuckerberg is very powerful, but right now he can’t print money.
- Mr Zuckerberg is under attack right now because he invades people’s privacy and sells their information.
- Ergo, Mr Zuckerberg has decided to create a new privacy device that will let him print money and can be used for illegal activity.
Following this eminently logical thought process, Sherman claimed that libra is nothing less than an “attempt to transfer power from the US government to Facebook and its allies”. Honestly, I thought that he was about to burst out chanting “Lock Him Up!” at any given second.
3. When is a bank a bank?
At yesterday’s hearing there were a couple of attempts to paint Facebook/Calibra/the Libra Association (as noted in yesterday’s piece, the senators struggled with the distinctions between each) as effectively a shadow bank, efforts that were undermined by the fact that the senators didn’t really understand the cryptocurrency or Calibra’s business model. As such, all Marcus had to do each time was point out that Calibra is not offering banking services, only payments.
Today, the House committee was more effective in this line of questioning.
Congressman Jim Himes, a former banker at Goldman Sachs, claimed that libra – which is backed by the Libra Reserve – looks just like an ETF backed by a currency, noting that the Securities and Exchange Commission says that any security backed by another security is an ETF. As such, he claimed that the proposed cryptocurrency might have to submit to the relevant regulations around these financial products.
Marcus conceded that libra will operate in a similar manner to an ETF, but stressed that it would fail the SEC’s Howey Test because it is a payment tool and therefore will remain stable in value rather than being something to invest in with the expectation of profit. Marcus may be right, but this is likely to be an avenue of further questioning in the future.
Congresswoman Carolyn Maloney, who wanted Marcus to commit to doing a pilot programme for libra with a maximum of one million users and overseen by the Federal Reserve and the SEC, made a point that was subsequently echoed more than once during the hearing. She said that if libra becomes widely adopted, the Libra Reserve would need to be so big in order to back the cryptocurrency that it would become systemically important. Congresswoman Maloney also argued that theoretically too much money could be pulled out of the existing financial system to buy libra, weakening the system, and that only a government which is accountable to its citizens should be able to issue currency.
To which Marcus gave a tepid response about continuing to engage regulators and the G7, who are looking at these issues right now.
Congresswoman Nydia Velaquez commented that the Federal Reserve has granted authorities more power over non-bank firms operating in and around financial markets, and commented that “we don’t know what you are” , the latter of which I think is a significant point here. Across the two hearings, lawmakers seemed nervous and confused about how to define both libra and the firms that would be on the Libra Network at launch, despite Marcus’ repeated attempts to depict it as nothing more than a cheaper, more effective Western Union (yeah, a Western Union with the potential to reach billions of people across the planet in short order, was the general response to that).
Velaquez then asked Marcus if Calibra was designated as a Systemically Important Financial Institution (SIFI), would it submit to the rules associated with this?
Marcus’ response, carefully worded to avoid the question directly, was to reiterate that it is a non-bank offering payments, but that – of course – it will comply with all relevant regulations.
4. Not all questions got good answers
Marcus remained calm, never let the committee press him into a giving “yes or no” answer, admitted Facebook’s past mistakes and – I thought – put in another good performance. For a number of tricky questions in both hearings he was able to hide behind the fact that this is still very early days in the development of libra and the claim that Calibra deliberately released the whitepapers well ahead of any launch so that it could take the time to get feedback from various authorities and agree the specifics of the cryptocurrency with them.
However, there were one or two points where I suspect some people will feel less than reassured by his answers.
For example, Marcus was forced to repeat ad nauseum yesterday that Calibra will be only one wallet available to people wanting to use libra and that all the wallets will be interoperable to help prevent anyone developing a monopoly. Further, he had to constantly stress that Calibra will be only one voice of 100 in the Libra Association, which will govern the Libra Network.
But, while the Calibra wallet will be interoperable with other wallets, he dropped in that the WhatsalApp and Facebook Messenger apps – both owned by Facebook – will only allow Calibra to be embedded within them. Congresswoman Maloney noted that these apps are so ubiquitous, numbering billions of users, that being embedded in them will likely give Calibra a dominant position and effectively create something close to a monopoly.
To which Marcus responded that the current system for cross-border payments isn’t working, and other people are plowing ahead with other solutions (other people, who he had already suggested, would not be seeking the approval of US authorities). Which really doesn’t address one of the biggest concerns that lawmakers seem to have, which is that libra could make Facebook too powerful (well, even more too powerful than it already is).
Elsewhere, Congressman Sean Duffy wrong-footed me a couple of times with his line of questioning, but Marcus didn’t have strong answers to his concerns. He initially praised libra as “brilliant and innovative” before pulling out a $20 bill and highlighting that anyone could use that $20 for any reason, whereas he got Marcus to confirm that only people who pass Calibra’s AML/KYC requirements will be able to transact through it on the Libra Network.
I assumed that Congressman Duffy was a friendly for Facebook, trying to point out that today’s cash can be used for any kind of nefarious activity, whereas at least libra would have some control mechanisms in place. In retrospect, this was entirely naive given the tone of the two hearings on Libra – there are no friendly faces for Facebook in there. What Congressman Duffy instead asked was whether people like Louis Farrakhan and Milo Yiannopoulos, who have been banned from Facebook for hate-speech, would be able to use libra.
“I don’t know yet” was the response from Marcus after some initial prevaricating.
Congressman Duffy noted that Facebook doesn’t allow gun sales and questioned whether such sales would be allowed using libra, to which Marcus responded that a policy has not yet been written on this issue and then tried his best to exude as much sincerity as possible as he added that it’s important to be “very thoughtful” on this issue going forward.
5. The US government is between a rock and a hard place
Some of the people on the Senate and House committees that spent the past two days grilling Marcus may not realise yet, but the US government might not have any good choices when it comes to cryptocurrencies.
I alluded to this in yesterday’s piece, but the strongest card that Marcus and Facebook have in their hand is simply that – as much as US politicians seem to detest them right now – they are, in fact, the least worst option available for producing a globally recognised cryptocurrency.
Marcus made the point relatively gently, but I strongly suspect that behind closed doors it will be made rather more forcefully and dramatically, that it is only a matter of time before other players attempt to do what Facebook is doing with Libra (for “other players” read: Alibaba or WeChat).
Although the Libra Association will be based in Switzerland, a number of sources I’ve spoken to say that, in practice, the US government could ultimately kill the project if it wanted to. However, I think it would be harder for it to stop a similar project launched out of China by firms that can command a similar reach to Facebook. Were such a project to gain traction, all of the fears expressed by the members of the two committees – about monopolies, about a lack of accountability and transparency for a body governing a major currency, about systemic financial risks, about undermining the dominance of the US dollar in the global financial system – could be realised and the US would have no effective means to do anything about it. Geopolitically, this would have enormous implications.
Thus, the argument from Facebook will be that by getting behind libra, the US government can try to ensure that the global cryptocurrency of choice becomes one whereby it is governed by a body that is at least willing to work with the government and accept some level of oversight and will operate within the rules of the road laid out by the existing financial system, which currently helps cement the US’s position as the most powerful nation in the world.
From this perspective, which assumes that a global digital currency of massive scale is inevitable, the choice then becomes: would the US government rather give up partial control or relinquish total control of such a digital currency?
To end, it’s worth pointing out that this presents the situation as a binary choice, which might not be the case. Perhaps Amazon will come up with a cryptocurrency proposal that the US government finds more acceptable. Perhaps it will decide to launch its own cryptocurrency via the Federal Reserve and try to somehow leverage the dominance of the dollar into the digital space.
After all, who knows what the future holds?