Facebook’s planned virtual currency will serve underbanked consumers and foster more efficiency in transactions, according to the head of Facebook subsidiary Calibra, Inc., but legislators remain skeptical.
In a hearing on Facebook’s proposed cryptocurrency Libra and the potential impact on consumers and the financial system generally, the House Financial Services Committee questioned David Marcus, head of Facebook subsidiary Calibra, Inc., on the proposed Libra system and challenges that may arise. According to Marcus, the digital currency would use blockchain to benefit users through faster and cheaper financial transactions and serve consumers with limited access to means to transfer money domestically and across borders. However, the legislators expressed concerns about privacy and security, power concentration in the Libra Association governing the system, and the potential for systemic issues arising as a result of widespread adoption.
Libra. On June 18, 2019, the Libra Association (a consortium of organizations, including Facebook’s Calibra subsidiary) announced plans to develop Libra as "a simple global currency and financial infrastructure that can empower billions of people." The currency would be built on a reliable blockchain and backed by a reserve of real assets called the Libra Reserve. Calibra would develop a digital wallet for Libra that would be available both as a standalone app and through Facebook’s Messenger and WhatsApp products.
Libra is designed to target more mainstream users than traditional cryptocurrencies, particularly the millions of adults who do not engage with the traditional financial system but have access to a mobile phone, according to the organization.
Potential pitfalls. FSC Chairman Maxine Waters (D-Cal) opened the discussion by raising privacy and security concerns and asked if Facebook through Calibra would agree to a moratorium on developing a cryptocurrency. She expressed concern regarding the Libra Association’s concentration of wealth and noted Facebook’s history of privacy failures and existing consent order from the Federal Trade Commission. Marcus explained that Calibra will have no more authority over Libra than any other association member and Libra blockchain transactions will offer consumers the same level of privacy as other blockchain transactions. The association will not retain any user’s personal data, he noted.
Representative Carolyn Maloney (D-NY) described general concerns about systemic risk and suggested that the money held in the Libra Reserve could involve an exchange-traded fund. She also urged Facebook and Libra to take the time to get things right and asked if Libra would commit to a smaller-scale pilot program to test the waters. Marcus stressed that Libra is only at the beginning of the process and that the association has no plans to "sprint" toward implementation. The organization is also committed to working with regulators, he explained, but no ETF would be involved because Libra is a payment system.
Marcus also agreed with Rep. Nydia Velazquez (D-NY) that potential problems and regulators’ concerns need to be addressed before a launch but questioned her suggestion that Libra could be deemed a systemically important financial institution given the size of Facebook. He also noted that Calibra intends to be in compliance with the Financial Crimes Enforcement Network’s requirements and obtain money transmitter licenses, as appropriate.
In response to questions regarding Libra’s location in Switzerland as opposed to the U.S., Marcus noted the need for a generally accepted global financial center. Switzerland offers an international platform, and the Libra Association wants Libra to be recognized as a global unit of measure, he said. The country also has more clarity in governing regulations, according to Marcus, and the organization would be supervised by the Swiss Financial Markets Supervisory Authority and has been in touch with the regulator.
Representative Anthony Gonzalez (R-Ohio) reiterated that trust is a big issue for Facebook at present. He expressed concern that, through Calibra, Facebook will overpower the other members of the Libra Association and also was incredulous regarding Marcus’s claim that Calibra will not share data with Facebook. However, Marcus maintained that Calibra will not share a user’s data without consent unless doing so is legally required and that, as such, data will not be used by Facebook or its affiliates to target advertisements.
Several representatives also opined that the one-to-one nature of Libra and existing currency overlaps on the core functions of traditional financial institutions and could result in a challenge to the U.S. dollar. Representatives Trey Hollingsworth (R-Ind) and Alexandria Ocasio-Cortez (D-NY) noted that Libra looks and feels much more like a standard currency than a cryptocurrency and that innovation should not raise a challenge to sovereign currencies. Andy Barr (R-Ky) expressed concern that Libra could ultimately present a challenge to central banks and potentially displace the U.S. dollar as the strongest currency.
When asked how Facebook and Calibra will profit from the Libra system, Marcus explained that 90 million small-business Facebook users cannot, at present, transact directly with one another. If these businesses can grow, he said, they can purchase more advertisements. In turn, Facebook would grow and could potentially expand into providing capital, Marcus concluded.
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