Opinion: Libra and Congress are at an impasse. Congress has to move
The digital revolution is happening. It's better to lean into it than resist it.
Anyone hoping that Congress would either swiftly stamp out Facebook's Libra cryptocurrency, or just let it breeze through, isn't getting what they want out of the Libra hearings.
Libra and Congress have come up against a wall in three specific places.
- Congress wants more information about Libra before it launches, in order to build proper regulatory guardrails for it, but some of that information won't be available until it launches.
- Some of the elements that Congress wants Libra to address are also found in Bitcoin and other cryptocurrencies. The only way for Libra to get the green light is if the US either willingly lets go of some control or tries to pass a more comprehensive cryptocurrency crackdown.
- Congress broadly wants to innovate and do what's in the best interests of its consumers and promote helpful technology. But this innovation may not be in the United States' immediate best interests.
The affair is far from over, but it's increasingly clear that the Libra affair will be having impacts on the wider cryptocurrency space.
Catch 22 one
Congress won't let Libra launch until it has more information, and it needs some of this information to properly quantify the risks associated with it, but Libra won't have more information until it launches.
Facebook's mantra until 2014 was "move fast and break things", after which it was changed to the functional equivalent of "move fast but please try not to break anything". And the trend is even more pronounced in the cryptocurrency industry, where as a natural consequence of regulatory and technological uncertainty everyone has just spent the last 10 years just making things up as they go.
This wasn't sitting well with Congress.
"What average balance you expect Libra users to have?" asked representative Mike San Nicolas of Guam.
Dunno, replied representative David Marcus of Facebook.
"You expect me to believe that? Facebook is built around average hits. Visa, Mastercard, all these huge players are signing up and you have no idea how much you expect to have in the average Libra account?"
"We have not made projections for this," Marcus said.
"I absolutely disbelieve that. Those organisations are built around understanding their users and anticipating what their usage is going to be. I think you're just trying to hide that figure," San Nicolas replied.
It's all quite believable though. Libra has no way of calculating the average user balance when the average balance will depend on whether it has regulatory approval to launch in the US, whether other countries follow India in banning Libra outright, how well its technology will really work or who the competition is and what they do.
The assumption that Libra Association partners would be averse to this level of uncertainty is also largely unfounded. Each member is believed to have paid $10 million for a seat at the table, without any kind of binding commitment to Libra. It's a small price to pay for a roll of the dice on one of the biggest deals in the history of digital currency.
As one Libra member said, no one knows how any of this is going to work. Facebook's partners are fully aware that nitpicking those precise numbers is futile right now.
Of course, none of that helps assure Congress that Libra is a safe development. If anything, it's just more reason to crackdown hard on cryptocurrency as a whole.
"Would you trust your money with a company that essentially admits it's just winging it?" Representative Ayanna Pressley
"We do not want to stifle innovation, but we have a healthy dose of skepticism," said representative Nydia Velasquez of New York. "This is not Silicon Valley. You cannot work out problems as you go, so all those problems need to be resolved and worked out before you launch Libra."
But in the end, the only choice might be to weigh the odds as best as one can, and then decide whether or not it's safe to take a leap of faith.
Congress wants to have all the answers before letting Libra proceed, but it's not going to get them. No one is.
Another key concern was that Libra could be used to facilitate crimes, and Congress wants assurance that this problem can be solved prior to launch. Unfortunately, it can't. The Libra cryptocurrency is susceptible to use by criminals, just like the US dollar or Bitcoin.
"Tell us, what specifically - don't say the whitepaper - what do you see as the responsibilities of Libra to combat money laundering, to protect our financial system? Could you tell us right now?" asked representative David Scott of Georgia.
"You're marketing this currency as a new entity to financial services, and with that will surely come new and innovative methods of committing financial crimes. What you bring is new. Criminals out there are going to invent ways of dealing with it."
But while most representatives expressed only vague concerns of Libra's money laundering risks, representative Bill Foster of Illinois went to the heart of the matter. Facebook assured Congress that the Calibra wallet would be KYC'd, but Foster pointed out that Calibra KYC isn't really the issue. Libra is meant to be an open ecosystem, and some of the other Libra wallets would not require KYC.
"I'm interested in Libra [not Calibra], which I understand is an anonymous bearer instrument. I'm not worried about wallets. I'm worried about abusive self custody. If I own the cryptographic code for Libra, do I own that Libra or not?"
Yes, you do, Marcus answered.
"Once there starts to be a significant flow on the dark web and other places, how do you prevent that from actually... you know, allowing things like ransomware?" Foster asked. "We're going to have to be absolutely dependent that every wallet is in a regulatory regime that we trust. If one wallet is on an island somewhere... are we out of luck?"
There's no good answer to the question because, as with cash or other cryptocurrencies, the correct answer to a certain extent is "yes, you're out of luck".
It would have been extremely entertaining, but probably quite detrimental to Libra's prospects, to see Marcus tell congress that in the course of banking the unbanked they're just going to have to suck it up and deal with some terrorist financing and money laundering.
But the problems associated with "abusive self-custody of anonymous bearer instruments", as Foster succinctly described it, extend well beyond Libra and touch on Bitcoin and many other cryptocurrencies.
As such a wide-ranging problem, it's probably better handled by FATF than US Congress alone. But as treasury secretary Mnuchin and others have made clear, preventing Libra from raising additional money laundering risks is a key concern, and Libra's going nowhere until these concerns are addressed.
It's an impasse. Congress doesn't want to let Libra launch until it finds a way to solve the "problem" of anyone being able to hold and transfer cryptocurrency without the intervention of a third party.
It also suggests wider impacts on the cryptocurrency space as a whole. Congress is saying loud and clear that it's not ready to accept wide use of decentralised pseudonymous cryptocurrencies. The implication here is that the only reason the United States hasn't been actively attacking Bitcoin (to say nothing of Monero, Zcash, etc) is because those cryptocurrencies are small enough to be ignored.
A recurring theme was the fact that Congress doesn't want to hinder innovation, but there's no regulatory precedent for Libra and when you apply existing laws in their strictest form, Libra would be a security rather than a currency.
"Users will have the profoundly unfamiliar experience of assuming foreign currency risk [with Libra]," pointed out representative Jim Hines of Connecticut. "Traditionally, the regulatory apparatus here has said if you're going to assume an unfamiliar risk, that risk will be disclosed to you with full transparency... This looks to me exactly like an exchange traded fund."
"Why would it not be considered a security? A special Facebook clause?" asked representative Warren Davidson of Ohio.
To both, Marcus gave a similar answer:
"The reason we believe that Libra is not a security is because it is designed as a payment tool."
Of course, exempting Libra in particular from this rule would functionally be very much like a special Facebook clause. However, Libra is clearly designed to remain stable in value rather than serve as an investment.
It doesn't make sense to regulate Libra as an investment product, but as Hines said, as long as it's fluctuating against the dollar (or any other local currency) there's still going to be an assumption of risk on the part of users. Functionally, this crimps Libra's potential for use in domestic payments relative to a good old fashioned USD-pegged stablecoin, and it's a risk that people should be aware of.
Conversely, this also makes it more useful for remittances, and payments in areas without a stable currency. Why should a potentially useful remittance tool and stable international store of value be taken out of action just because although it's stable, it's not stable against the US dollar in particular?
That's something of an impasse in its own right. Every bone in Congress' body – with the exception of the Sherman bone – says it should be encouraging innovation, and that Libra is trying to innovate. But innovation here might require laying down favours for Facebook, an organisation which has somehow accomplished the incredible feat of being wildly unpopular on both sides of the political aisle.
The other impasse might be the fact that cryptocurrency as a whole, and the success of Libra in particular, is not in the best interests of the US dollar.
Viva la financial revolution
The country derives a lot of power from the dominance of the US dollar. Making money transfers more efficient, banking the unbanked, promoting financial inclusion and all around making the world a better place actually doesn't do a whole lot to advance the United States' best interests.
"I don't think you should launch Libra at all. The creation of a currency is a core government function, and should be left to democratically accountable institutions that are accountable to the American people," said representative Carolyn Maloney of New York.
Quoth representative Maxine Waters of California:
"Facebook is apparently trying to create a new global financial system that is intended to rival the US dollar... ownership of government assets on such a massive scale without proper oversight threatens to concentrate government influence in the hands of a few elites."
It's a good point.
After all, can you even imagine a system where political power is concentrated in the hands of the elites? A system where the wealth just keeps consolidating in the hands of the richest, and a world where the government follows the whims of the richest?
As Marcus said, the current financial system is not working for a lot of people.
When queried about whether he actually meant to say that it could be working better, he reiterated that it's just not working – at all – for millions and millions of people.
You can choose whichever survey you want, but any measure will find that people don't trust banks. They don't trust financial institutions, they don't trust the government, they don't trust Facebook, they don't trust tech companies or big corporations, and they don't trust that ephemeral beast called "the economy". People all around the world are disenchanted with their own democracies, let alone the United States'.
And all else being equal, tech companies are based around providing free services to grow massive user-bases, and are associated with entertainment and socialising, while banks are more often geared around the use of pseudo-monopolies to fleece customers, and are associated with chores and bad news.
Trust has to be earned, but a profound lack of trust does too.
Congress might be very uncomfortable with the idea of Facebook controlling a large slice of the global economic pie, but it's tough to say Facebook is any less ethical or trustworthy than the legacy financial system.
Tech companies have never colluded to fix global exchange rates, as far as we know. And as data dealers, they've never actively invaded countries, used slave labour, financed dictators or done any of those things that the US government and some consumer goods providers have.
Congress and Libra are at an impasse, but in all cases it seems Congress will have to move at least a little bit, because if they don't, Libra and digital currency will simply walk around them.
The "lack of information" catch 22
Regulators can work with Libra to try to make their predictions, but at a certain point you're walking into the unknown. Refusing to entertain Libra until you have 100% of the answers means getting left behind by more adventurous countries.
Wanting to wait until Libra solves "abusive self-custody of bearer instruments"
You'll be waiting a long, long time.
Innovation vs regulation
Trying to tie Libra to existing regulatory frameworks makes no sense.
If helping Libra avoid the strict definition of classification as a security helps it deliver a more useful product, then this is self-evidently a useful new category to have available. If the products launched within that new regulatory category are not useful then there's no harm done. And if they are used abusively then that bridge can be crossed when you come to it.
The thing to do now is let Libra in, but lower the barriers enough to make sure it will have plenty of competition once inside, including a healthy range of well-regulated American dollar-backed digital currencies and the US dollar itself.
Viva la financial revolution.
Disclosure: The author holds BNB, BTC at the time of writing.
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