Could Facebook’s Crypto Break the Financial System? Congress Airs Fears

Xconomy San Francisco — 

In late 2017, a federal watchdog unit assigned a working group to keep an eye on cryptocurrencies such as Bitcoin, and to sound an alert if those alternate currencies showed signs of becoming a risk to the stability of the US financial system. Soaring prices of Bitcoin and other so-called digital tokens were attracting investments from speculators hoping to get rich quick—but these virtual coin values were also known to drop just as suddenly, the US Treasury Department’s Financial Stability Oversight Council noted.

But when the financial oversight council published its 2018 annual report, it concluded that volatility in the cryptocurrency realm could not yet cause broad ripples affecting the health of other US financial institutions. The total value of cryptocurrencies still made up a small fraction of US financial assets, and the coins had “limited use in the real economy or financial transactions,’’ the council wrote.

That was before Facebook (NASDAQ: FB), in June, publicly unveiled details about the new digital currency it’s proposing to launch by the first half of 2020 in partnership with at least 27 well-established business partners, including Visa (NYSE: V), Mastercard (NYSE: MA), Uber (NYSE: UBER), Lyft (NASDAQ: LYFT), PayPal (NASDAQ: PYPL), Spotify (NYSE: SPOT), Vodafone (NASDAQ: VOD), and venture capital firms including Andreessen Horowitz.

Facebook’s plans to make the novel currency, Libra, a global medium of exchange have raised alarms not only from US regulators, but also from lawmakers and guardians of the international financial system. Federal Reserve Chair Jerome Powell, a member of the Financial Stability Oversight Council, told members of Congress last week that Libra could pose a risk to US financial stability, and to the role of the US dollar in international finance, according to The Washington Post as well as lawmakers’ comments.

Two committees of Congress this week gave a public airing to that concern—and many others—as a Facebook executive endured hours of often testy questioning. Democrats called for a moratorium on the Libra project. Republicans—though many said they were loath to stifle business innovation with regulation—also joined Democrats in reviewing a litany of past user abuses laid at Facebook’s door, from making its privacy policies hard to navigate, and allowing member profiles to fall into the hands of third party developers without their consent, to failing to stop Russian government agents from manipulating the 2016 US presidential election through its social media platform.

“Facebook now wants to control the money supply,’’ Sen. John Kennedy (R-LA) said Tuesday during a Senate Banking Committee hearing on Libra. “What could possibly go wrong?’’

Lawmakers from both parties said they feared that Facebook, with more than 2 billion users and global dominance in social media platforms, could also dominate digital payments with Libra and mine user financial data from transactions with the currency, for profit. In its core social media business, the company earns money by offering advertisers the ability to target ads to groups of users based on information they share on the Facebook site.

Leaving Facebook’s checkered track record on data privacy aside, however, some lawmakers focused their questions on the finance elements of the company’s plan for Libra, which might have raised urgent questions no matter who was leading the charge. For the first time, a digital currency could be adopted at a large scale for worldwide use to buy and sell things.

“This is a complete overhaul of the circulatory system of the global economy,’’ said U.S. Rep. Jim Himes, (D-CT) at a hearing before the House Committee on Financial Services Wednesday.

Facebook has no plan to disrupt the financial system, and will make sure the concerns of all international regulatory bodies are addressed before the Libra currency is launched, according to hearing testimony by David Marcus. He heads up Calibra, the digital wallet that Facebook created so users can conduct transactions using Libra.

Marcus would not commit, however, to starting the Libra endeavor as a limited pilot project involving no more than a million users, and under supervision by the Federal Reserve and the Securities and Exchange Commission—a request from US Rep. Carolyn Maloney (D-NY). Nor did Marcus volunteer to change the planned timeline of the Libra rollout.

Ironically, Facebook’s digital currency initiative is drawing fire for eliminating many of the weaknesses that have confined earlier, volatile cryptocurrencies to the narrow backwaters of the financial world. While most digital coins have no intrinsic value, Libra would be backed by a reserve fund comprised in part of government-backed currencies including US dollars, euros, British pounds, and Japanese yen. Users would be able to change their Libra back into conventional currency, and the reserve fund is expected to maintain a stable exchange value for the digital coin, according to Marcus.

In his testimony before Congress, Marcus conceded that Facebook needs to earn back the public trust due to its much-maligned performance on data privacy issues. For that reason, he said, the company had decided to share the governance of the new digital currency with at least 27 other businesses and organizations, which he said have already established relationships of trust with consumers.

The digital currency, and its reserve fund, would be administered by the Libra Association, a private, nonprofit member organization set up in Geneva, Switzerland. Facebook and the other members would each have only one vote, and the membership of the association could eventually grow to 100 partners from a variety of nations.

Marcus told members of Congress that Facebook’s original 27 partners had been chosen because they had the ability to “accelerate the acceptance and utility of Libra’’ as a payment method for goods and services, as well as a tool to transfer money across international borders.

The Libra Association would keep transaction records through a blockchain—an online, distributed ledger, whose “nodes’’ would be operated by members of the Libra Association. This varies from the blockchain designs of some other cryptocurrencies, but the differences are of little consequence compared to Libra’s possible macroeconomic consequences and impact on international finance, said Claudia Biancotti, a visiting fellow at the Peterson Institute for International Economics in Washington, DC.

“What matters is that 28 private businesses, mostly from the United States, aim at introducing a global means of payment,’’ Biancotti said in an interview. “They actually have the numbers to succeed in this enterprise. This could get very big, very quick.’’

If Facebook’s more than 2 billion users decided to use Libra to make purchases and move money around, “it could become one of the world’s biggest financial entities,’’ according to a report in The Economist. Other partners in the Libra Association could also draw millions of their own customers into the digital currency.

“The crux of the matter is that the private sector is introducing a global currency,’’ Biancotti said. “This never happened before.’’

The creation of a currency is normally the exclusive sphere of the central banks of sovereign nations, Biancotti said. Safeguards should be put in place to prevent … Next Page »

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