Libra’s main problem is that people don’t like Facebook, senate hearing shows
There are a lot of vested interests in play, and "don't trust Facebook" is a very easy sell.
- Many US senators strongly oppose Libra from all angles.
- Senators remain concerned with issues even when they've been demonstrably addressed.
- Strong opposition to Libra is natural in many ways, but may not be the healthiest long term strategy.
At today's hearing on Facebook's Libra cryptocurrency, before the US banking committee, one of the most constant refrains was that the general public (or "Hard Working Americans" as they were most often called) would have to be crazy to trust Facebook with a currency, and that the banking committee certainly didn't trust Facebook with it.
"Facebook is dangerous," was the first thing committee ranking member Sherrod Brown said.
"Facebook might not intend to be dangerous, but surely they don't respect the power of the technologies they're playing with. Like a toddler who's got his hands on a book of matches, Facebook has burned down the house over and over and called every arson a learning experience."
"Facebook does all it can to manipulate billions of users... to turn even bigger profits."
"The last thing we need is to concentrate even more power in huge corporations. Look at Facebook's record. We'd be crazy to give them the chance to experiment with peoples bank accounts, to give them powerful tools they don't understand, like monetary policy, to jeopardise Hard Working Americans' ability to provide for their family."
"This is a recipe for more corporate power over markets and consumers."
"We've designed Libra in such a way that Facebook will only be one among a hundred different members of the Libra association, and will have no special privilege, [which] means you will not have to trust Facebook," the company's blockchain head and Libra lead David Marcus replied.
Brown was not convinced.
"Mr Marcus, you know better than that. You know that only Facebook has access to 2 billion people, and to say that you are just one of many is simply not true after people's data and private messages have been stolen and sold... you really think people should trust you with their bank accounts and economy? I think that's delusional."
"If you think hardworking families should trust Facebook's monopoly money, would you pledge that you and your team will accept 100% of your salary and other compensation in this Facebook currency?"
Yes, Marcus answered. Yes, he would.
And why not? It's backed by a basket of various international currencies and will be backed up 1:1 by the Libra reserves, unlike the fractional reserves that banks operate under. Assuming it works exactly as described, Libra will simply be much more resistant to fluctuating exchange rates, as well as being more secure in the event of a bank run, than a bank account.
The committee remained unimpressed.
"What kind of faith do we have in Libra?" senator Jon Tester asked. "There was a bank run in 2008. Nobody anticipated a bank run like that. Nobody. How can we be assured that our money is going to be there?"
Libra reserves will always be at 100%. Marcus answered. The coin will be backed 1:1, and "we want the appropriate oversight for anyone to have the ability to understand exactly how big the reserve is".
The minimum reserve requirements for financial institutions in the USA is about 10%, while Libra is planning to be 100% backed. It's eager for regulators to help it transparently demonstrate to the world that it is 100% backed at any given time.
The committee wasn't entirely satisfied though.
"It's not up to you guys to determine what that reserve is," Tester shot back. "There has to be that kind of reliability there."
At various junctures people also made generic points about the possibility of Libra being used by criminals.
Data privacy concerns
Privacy issues were also a needling concern, given Facebook's disastrous track record on the issue.
"If Libra goes as planned, there would be lots of valuable data about payments - my understanding is you've said you'll never share it without consent," Pat Toomey said. "Is it the business model to at some point seek the consent of participants so you would be able to commercialise the data somehow?"
"No, this is not the intention at all," Marcus said.
"The plan, as far as Facebook is concerned, to monetise Libra and this initiative, is actually to enable the 90 million small businesses that are currently on the Facebook platform, and the many users that are on the platform as well, to engage in more commerce together. And if they engage in more commerce, there will be more advertising spend from small businesses."
"That would be the first indirect effect of having Calibra and the Libra network be successful. Over time, what we hope is that through the Calibra wallet we can offer more partnerships and services through existing financial services companies, to drive new revenue streams for the company."
"One thing is very important, and I want to state this very clearly. We will have, with the Calibra wallet, to compete with a number of other wallets that will operate on top of the Libra network, and the Libra network will be interoperable, meaning that wallets can send money from one wallet to another wallet."
"As a result, to earn people's trust we will have to have the highest standards when it comes to privacy. And the way we've built Calibra is that no financial data or account data that is actually connected with Calibra to offer the service, will actually be shared with Facebook... the way we've built this is to separate social and financial data, because we've heard loud and clear from people that they don't want these two data streams connected."
"Calibra is committed to protecting the privacy of its customers. The Calibra wallet will not share Libra customer information with the Libra association, or with Facebook, except in limited circumstances such as preventing fraud or criminal activity and complying with the law."
It's a blockchain miracle
Many of the points made by Marcus in response to the senate are the exact same points that people made as soon as the Libra whitepaper was released. The mood on the more technically-inclined street was that it seemed to be a good faith effort.
And thanks to that blockchain magic dust, it's actually possible to be 100% sure – if you discount the risk of collusion from Libra Association members – that the privacy systems are working as designed, and that if someone doesn't trust Facebook's Calibra wallet that they can switch to a more private one.
It's open-source and anyone can see what makes the Libra blockchain tick.
But none of that does much good when people just plain don't like Facebook, don't trust Facebook and are unwilling or unable to differentiate between Facebook and Libra.
"Is there anything experts can say which would convince you and Facebook to not launch this currency?"
Brown succinctly captured the key argument from the opposition when he asked whether there was "anything experts can say which would convince you and Facebook not to launch this currency?"
People just don't like Facebook, and don't trust Facebook.
Demonstrable 100% backing, the use of fully open-source software, provable security measures, invitations for other developers to start building on Libra and that trust machinery "blockchain magic" is largely falling on deaf ears.
The opposition wasn't uniform though, and some members chose a more measured tack.
"It strikes me as very premature to say we have to act now to prevent what could be a very constructive innovation in financial service," Toomey pointed out.
"I just think we should be exploring this, and considering the benefits as well as the risks, and taking a prudent approach. To announce in advance that we have to strangle this baby in the crib is wildly premature."
"If all of us find this to be a bad idea, and think you shouldn't do this launch, are you still going to do it?" Brown asked.
"If these concerns are not addressed, and the regulatory oversight is not appropriate, we will not launch until it is," Marcus answered.
"I believe if America doesn't lead innovation in digital currency and payments area, others will. If our country fails to act, we could soon see a digital currency controlled by others whose values are dramatically different from ours."
The overall tone struck by the committee today meshes closely with the overall vibe of Treasury Secretary Steven Mnuchin's comments on cryptocurrency yesterday; that for the sin of not being a straight-up US dollar, the value of cryptocurrency is deeply suspect.
It was probably inevitable that Facebook would not be trusted, and that lawmakers in the country would be deeply concerned that Libra and other cryptocurrencies could be used to facilitate criminal activities, and that the USA would be the toughest nut for digital assets to crack.
The US government and banks are both enjoying the benefits of having the US dollar serve as the international standard, the country's finance sector is disproportionately large compared to other countries, and consequently it also holds a disproportionate degree of political power compared to other countries. It's a statistical reality that political inclinations follow campaign contributions, the current treasury secretary is a former Goldman Sachs executive, and many of the heaviest-lobbyists in the country hail from the investment and financial services industry. Indeed, the investment industry is the biggest single campaign contributor industry in the USA, while miscellaneous financial services separately contribute more than oil and gas, and health services combined.
When you put all this together, you get a lot of people being really concerned that digital assets on a transparent ledger could be used to facilitate criminal activity, fretting about whether 100% backing instead of 10% really provides adequate security for account-holders, and simply knowing that whatever Facebook is up to in the world of finance, it can't be good, regardless of evidence to the contrary.
"Libra by design, is open in order to achieve its goal of serving the world's unbanked. As such two design choices have been made with Libra that will greatly reduce the risk of misuse by bad actors. Firstly, like Bitcoin or Ethereum, Libra is based on a transparent transaction ledger," Elliptic chief scientist and co-founder Dr Tom Robinson pointed out. "Secondly, Libra transactions will be processed by "validators", which are businesses such as Mastercard and Uber. Libra transactions will only be processed if a quorum of the validators agree to do so."
"It is worth noting that Bitcoin transactions tied to illegal activities have decreased from 7% in 2012 to less that 1% in 2019. Regarding Libra, the Libra Association have stated that they will follow strict KYC/AML international standards in an effort to safeguard against criminal activities," said Christophe de Courson, CEO of Olymp Capital.
And yet, "it's no surprise to see certain US officials align with President Trump on the subject of cryptocurrencies," he said. "Cryptocurrencies have boxed technology, economic and governance matters all together. Thus, Facebook's Libra is seen as a major threat to the US dollar's supremacy and the role the FED plays in the US economy."
Cryptocurrency like Libra is both hazardous to established financial institutions, as well as the pole position of the US dollar. It would always encounter strong opposition in the States.
"The conflation of cryptocurrency with criminality has become the standard position of big banks because it is their last rhetorical line of defense against a new technology that threatens their stronghold of global financial power," said Sky Guo, CEO of Cypherium. "First, those who our industry disrupted had to insist that this tech was a fad; then they argued that first-gen currencies like Bitcoin could not serve as global financial instruments; and now, finally, they push on moral grounds that cryptocurrencies should not serve as global financial instruments."
"There is a growing realisation from the US political establishment on the ramifications of decentralised borderless digital currencies," said NEM Ventures advisor Iain Wilson. "The USD, with its pivotal role in banking and trade, has allowed the US to exercise control far outside it's national borders. Whilst BTC could be seen as a fringe pursuit, the Libra project offers the prospect of mass market adoption with a collateral pool consisting of a basket of currencies. There is no reason why either the basket or governance body should stay constant over time and hence this represents a potential risk to US financial hegemony."
The US government and its financial institutions might have good reason to be concerned, but acting on them too hastily could very much see the USA miss out.
Libra's unveiling was enough for China to upgrade its national digital currency from "hypothetical" to "work in progress" and similar initiatives are underway all over the world.
"The risk that the US could miss out on the next big thing is real," de Courson said. "Internationally, other countries in Europe are already taking advantage of the potential new technologies around cryptocurrencies present. We may well once again see entrepreneurs leave the US and set up their projects in Europe where they are offered support."
Disclosure: The author holds BNB, BTC at the time of writing.
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