Securities Regulation Daily Zuckerberg defends Facebook, Libra before FSC
Wednesday, October 23, 2019

Zuckerberg defends Facebook, Libra before FSC

By Amy Leisinger, J.D.

Facebook’s Calibra subsidiary would leave the Libra Association if the payment system is not approved by U.S. regulators, he said.

Facebook CEO Mark Zuckerberg spoke to members of the House Financial Services Committee regarding Facebook’s involvement with the proposed Libra payment system and the ongoing challenges facing the tech giant. According to Zuckerberg, the digital currency would serve consumers with limited access to means to transfer money, but the legislators expressed concerns about privacy and security, power concentration in the Libra Association governing the system, and the potential for systemic issues arising resulting from widespread adoption. Several of the committee members also pressed the Facebook official on the company’s approaches to discriminatory advertising and issues surrounding employee diversity.

Libra. In June 2019, the Libra Association (a consortium of organizations, including Facebook’s Calibra subsidiary) announced plans to develop Libra, a currency that would be built on a 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 those who do not engage with the traditional financial system but have access to a mobile phone.

FSC Chairwoman Maxine Waters (D-Cal) opened the discussion by urging Facebook to address its other privacy and advertising concerns before jumping into the cryptocurrency arena. According to Zuckerberg, however, the primary purpose of Libra is not strictly to act as a cryptocurrency but to promote financial inclusion for the unbanked and underbanked with a safe, efficient means of sending and receiving payments around the world. Money should be able to move as quickly as a message, he said. In his view, the financial structure in United States is outdated, and a more modern approach could serve the financial system as a whole. In response to Rep. Carolyn Maloney (D-NY), Zuckerberg stressed that Facebook does not ultimately control the Libra Association and would not be involved the Libra project if approval from U.S. regulators cannot be obtained.

"[W]e support Libra delaying its launch until it has fully addressed U.S. regulatory concerns," Zuckerberg stated.

Regarding risks, several committee members asked why individuals and businesses should trust Facebook given its history of failing to protect private information. Zuckerberg reiterated that compliance with U.S. regulations will be a prerequisite of Facebook’s involvement in the Libra project, and "know your customer" and anti-money laundering regulations, as well as other federal regulations, will apply. In addition, there is and will remain a clear separation between Facebook’s social data and Calibra’s financial data, he explained. Zuckerberg stressed that the goal is to create global payment system not a currency, and the United States needs to innovate to ensure that the dollar continues to lead. Representative Andy Barr (R-Ky) agreed that it is always better to be on the side of innovation, and Zuckerberg noted that there are also risks to not trying new things. Legislation and regulation could put the United States at odds with counterparts around the world, including China, which is moving forward with a system similar to Libra. Assets would be used to underpin Libra, and protections would be in place for unauthorized transactions, Zuckerberg explained. However, Rep. Juan Vargas (D-Cal) stated, "when something threatens the dollar, we get nervous."

When asked why companies including Visa, Mastercard, PayPal, and eBay have dropped out of the Libra Association, Zuckerberg noted that the Libra project is an innovative project that comes with a certain amount of risk. Over 20 companies remain in the association, and other entities have expressed interest in getting involved, he stated. Calibra is only one member of the group, and Facebook does not expect to continue leading Libra efforts; the Libra Association now has a governance structure in place and will be driving the project going forward, according to Zuckerberg.

Chuy Garcia (D-Ill) questioned Zuckerberg on the potential for Facebook to overpower traditional financial institutions, noting his introduction of the Keep Big Tech Out of Finance Act, which is designed to prohibit large platforms from becoming financial institutions or being affiliated with financial institutions, as well as to prohibit them from establishing or operating a digital asset intended to be broadly used as medium of exchange. Garcia asked whether Libra should be regulated as a bank, and Zuckerberg stated that, although Libra is a different type of payment system, the SEC should ultimately decide. Garcia replied that blurring the lines between banking and commerce tends to cause problems.

Other concerns. Several committee members also questioned Zuckerberg regarding potential discrimination in connection with Facebook advertisements and diversity issues in employment. He acknowledged that as part of a settlement, those who seek to advertise housing, employment, or credit opportunities are now required to go through a special advertisement purchasing process that prohibits targeting by age, gender, or zip code. Separately, he noted that Facebook has made diversity a priority in hiring and plans; within the next five years, Facebook plans to have women, people of color, and other under represented groups make up at least 50 percent of its workforce, Zuckerberg said. Diversity leads to "better decisions, better products, and better culture," he concluded.

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