Senators Scrutinize Facebook's Cryptocurrency PlansDemocrat Sherrod Brown Calls Company 'Dangerous'
At a U.S. Senate Banking Committee hearing on Tuesday, lawmakers grilled Facebook executive David Marcus, who’s leading the company's effort to launch a cryptocurrency called Libra, with the ranking committee Democrat expressing significant concern.
During his opening remarks, Sen. Sherrod Brown, D-Ohio, called Facebook and its business model "dangerous.”
"Now Facebook might not intend to be dangerous, but it surely does not respect the power of the technologies they are playing with - like a toddler who has gotten his hands on a book of matches," Brown said. "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 make a lot of money."
Look at Facebook’s record. We would be crazy to give them a chance to experiment with people’s bank accounts and to use powerful tools they don’t understand, like monetary policy, to jeopardize hardworking Americans’ ability to provide for their families. #FacebookFakebucks— Sherrod Brown (@SenSherrodBrown) July 16, 2019
Before he began testifying, Facebook’s Marcus received a slightly warmer reception from the chairman of the committee, Sen. Mike Crapo, R-Idaho, who noted that Facebook's Libra cryptocurrency could help the 1.7 billion people around the world who don't have access to a bank but can access the internet from a smartphone.
"If done right, Facebook's efforts to leverage existing and evolving technology and make innovative improvements to traditional and nontraditional payments systems could deliver material benefits, such as expanding access to the financial system for the underbanked, and providing cheaper and faster payments," Crapo said in his opening remarks.
Crapo noted, however, that Federal Reserve Chairman Jerome Powell expressed concern about Libra during previous Congressional testimony. And he said that Facebook still needs to address a host of questions, including how the actual payment systems will work, how users will be protected from fraud and how the company will protect user privacy.
Crapo also said that lawmakers might even need to consider establishing a new regulatory body to oversee cryptocurrency issues.
Marcus, a former PayPal executive who is overseeing Facebook's cryptocurrency plans under a new subsidiary called Calibra, testified for about two hours, explaining the steps the company plans to take to protect financial data and ensure user privacy.
In June, Facebook unveiled Libra and the Calibra subsidiary. Facebook plans to create the Libra Association, based in Geneva, to oversee and regulate the cryptocurrency. This new payment system will be accessible to anyone with a smartphone, with Calibra collecting a fee for transactions (see: Facebook's Libra Cryptocurrency Prompts Privacy Backlash).
Marcus told the committee that Facebook understands the concerns of lawmakers and regulators, and he said that the company would not begin to offer Libra until it has satisfied the skeptics.
"I want to make clear that we recognize that we are only at the beginning of this journey," Marcus said during the hearing. "Federal Reserve Chairman Powell has said publicly that the process for launching Libra needs to be patient and thorough rather than a sprint to implementation. [Treasury] Secretary [Steven] Mnuchin reinforced those views at his press conference yesterday, and we strongly agree with both of them. We will take the time to get this right."
In his written testimony, Marcus told senators that Libra will not function as a "stablecoin" - a digital currency that’s designed to minimize volatility by being "pegged" to a single asset. Instead, Libra will not have a fixed value in any single, real-world currency. It will be backed on a one-to-one basis through the Libra Reserve, which will hold "a basket" of currencies in safe assets such as cash bank deposits and highly liquid, short-term government securities. These currencies will include the U.S. dollar, the British pound, the euro and the Japanese yen.
Marcus also testified that Calibra's first offering will be a digital wallet for Libra that will be available as a stand-alone app for smartphones as well as through Facebook's Messenger and WhatsApp platforms.
"The Calibra wallet will let users send Libra to almost anyone with a smartphone, similar to how they might send a text message, and at low to no cost," according to Marcus' written remarks. "We expect that the Calibra wallet will ultimately be one of many services, and one of many digital wallets, available to consumers on the Libra network."
Marcus also noted that Calibra is not likely to be profitable at the start and that financial information will not be shared with Facebook, so it cannot be used to target advertising.
Marcus testified that Calibra and the Libra Association would participate in the fight against money laundering and terrorism financing.
When it announced the Libra project in June, Facebook released a whitepaper that included some technical details about the cryptocurrency, including its use of blockchain - the digital ledger that supports other types of cryptocurrency - to protect transactions and user data. That whitepaper includes details about Move, a new programming language that Facebook developed to create customized "smart contracts" within the blockchain to protect transactions and to ensure that assets aren't cloned to cut down on fraud and abuse.
But some security experts have expressed concern that Facebook would not adequately protect the financial and personal data of Libra users.
On Monday, The Hill reported that some Democrats on the House Financial Services Committee are considering introducing legislation that would ban major social media and technology companies from providing financial services and offering digital currencies. While not mentioned directly, it seems that the draft bill is targeting Facebook and Libra.
The hearing about Libra also came a few days after the Federal Trade Commission reportedly voted to fine Facebook $5 billion for violating users' privacy. The Justice Department still must approve the penalty (see: FTC Reportedly Approves $5 Billion Facebook Fine).
Facebook's plans for Libra have attracted widespread concern among lawmakers and financial regulators, so Tuesday's hearing is likely the first of many forums for scrutinizing the company's plans.
In addition to questions from U.S. lawmakers, Facebook is facing questions from financial regulators around the world - including the Bank of England - and elected officials in Germany, France and elsewhere.