Tue. Aug 20th, 2019

All you need to know about Libra and the Senate Banking Committee Hearing

10 min read

Facebook’s Libra digital currency has faced a vicious bashing from nearly every angle possible over the last week.

Here’s a recap:

Senate Banking Committee hearing: Tuesday, 16th July 2019

David Marcus, Head of Facebook’s digital currency subsidiary Calibra was attacked by U.S. lawmakers.

Senator Sherrod Brown expresses deep concern about Facebook trying to become the central bank of the world.

At the beginning of the hearing, Senator Sherrod Brown likened Facebook to a child tampering with fire, stating:

what happens online, has consequences offline…that’s why it is so hard for us to understand why Facebook, the company that has ushered in this revolution, doesn’t seem to comprehend that its actions have real world consequences. They don’t seem to understand why their intention to run their own currency … has been met with such fierce opposition.”

The fired up Senator went on to quote Facebook CEO Mark Zuckerberg as saying: “Facebook might be more like a government, than it is a company,” and went on to express that ‘no one has elected Mr Zuckerberg!’

Facebook has demonstrated through scandal after scandal that it doesn’t deserve our trust,” Senator Sherrod Brown has said, adding thatFacebook ‘should be treated like the profit seeking corporation it is…. Mr Zuckerberg and his executives have proven over and over that they don’t understand governing or accountability. They are not running a government. They are running a for-profit laboratory.”

Now Facebook asks people to trust them with their hard earned pay cheques…It takes a breath taking amount of arrogance’ to liken themselves as a central bank or ‘for-profit version of the Federal Reserve for the whole world,’ Senator Brown said.

He added, it is “tempting to think anyone can do a better job than the Wall Street mega banks but the last thing we need is to concentrate even more power in huge corporations. Look at Facebook’s record. We would be crazy to give them a chance to experiment with people’s bank accounts. To use powerful tools they don’t understand – like monetary policy” …

This is a recipe for more corporate power over markets and consumers and fewer and fewer protections for my constituents.”

But Calibra vows not rest until it gets it right

David Marcus responded to Senator Brown’s bashing saying:

“We will take the time to get this right,” adding he expects “the review of Libra to be the most extensive ever.”

We are fully committed to working with regulators in the U.S. and around the world”, adding “Let me be clear and unambiguous – Facebook will not offer the Libra digital currency until we have fully addressed regulators concerned and received appropriate approvals.”  

According to Mr Marcus’s testimony, the Libra Association itself will be regulated by the Swiss Financial Markets Supervisory Authority, or Finma, with whom it has had “preliminary discussions”.

But Marcus also emphasised to the Senate Committee that Libra has every intention to abide by all U.S. regulations even though the headquarters of the Libra Association is based in Switzerland.

He explained to Senator Tommy the only reason why the Libra Association is headquartered in Switzerland (and not the U.S.) is because that is where international financial groups such as the World Health Organisation, World Trade Organisation and the Bank for International Settlements are located. There are no nefarious reasons for Calibra to be in Switzerland and certainly ‘not to evade any responsibilities of oversight’, he added.

Marcus also stressed Facebook’s intent to be compliant with the United States Financial Crimes Enforcement Network (FinCEN) so that U.S. regulators could have the necessary oversight they need to assess the risks.

Addressing the issues of money laundering and terrorism financing, Senator Cortez Masto asked Marcus how Facebook is going to ensure the platform is not being used for such purposes. Marcus responded that “this is something that I care about deeply, personally.” Marcus added that the company will have an Anti-Money Laundering program, reiterating Facebook’s commitment to FinCEN.

Calibra urges U.S. to embrace and take the lead in blockchain and cryptocurrency regulation – before someone else does!

Marcus said the U.S. should step up and lead global regulation for cryptocurrencies and blockchain.

Marcus informed the Senate Banking Committee that blockchain technology is inevitable and “if America doesn’t lead innovation in digital currency and payments area, others will”. If we fail step in “we could soon see a digital currency whose values are dramatically different than ours”.

Would Calibra executives accept to have their salaries fully paid in Libra?

When Senator Brown asked Marcus whether he and his team at Calibra would accept 100% of their compensation in the Libra currency – he replied that he would. “if you question whether I would trust all of my assets in Libra, yes I would, because it is backed 1 for 1 with a reserve,” Marcus responded.

It wasn’t all doom and gloom – Senator Toomy showed significant support for crypto

Senator Toomy said that It is “wildly too premature to act now to prevent what could be a very constructive innovation in financial services,” adding “there could be tremendous potential benefits in blockchain technologies and crypto currencies”.

Toomy said blockchain and digital currencies could clearly lower payment transaction costs, facilitate access to capital, it could provide pseudonymity, it could provide higher levels of security that other forms of currency have not, etc.., His speech was extremely accomodative towards blockchain and crypto, adding “we should be exploring the benefits as well as the risks.”

Calibra’s business model

Republican Senator Martha McSally echoed the views of Senator Sherrod Brown, telling Marcus: “Instead of cleaning up your house, you are launching a new business model.”

But Marcus tried to quash concerns about Libra being a mechanism for Facebook to monetise user data.

Marcus explained that Facebook will indirectly benefit from Libra in two ways:

1. It enables the 90 million businesses and many users that Facebook has to engage in more commerce, and by doing so they hope there will be an increase advertising spend.

2.And over time Calibra expects there will be more services and partnerships with financial services companies to drive new revenue streams.

He explained that it is ‘not the intention at all’ for Calibra to sell or monetise user data directly, although if it offered additional financial services in partnership with other financial organisations, it would ask consent to use their data specifically for those purposes.  

Some of the members of the Libra Association plan to integrate technology into their services. For example Vodafone said it could use the Libra to improve M-Pesa, a popular mobile money service it owns in Africa.

Calibra and Libra – as explained by its Head, David Marcus – to the Senate Banking Committee

What is Calibra? And will it prioritise privacy and security?

The objective of Calibra is to develop products for Libra, such as wallet that will enable Whatsapp and Facebook Messenger users to buy, hold and transfer Libra,” Marcus explained to the Banking Senate Committee.  

Calibra will offer one of many digital wallets on the Libra network,” Marcus said. “Using the Calibra wallet, consumers will be able to save, spend and send Libra from their smartphone.”

Marcus explained “Calibra will be affordable, accessible, safe and secure with strong safeguards to protect user accounts and information”. It will be governed by rules administered or enforced by regulators to ensure it is fully compliant, he added.

Marcus also reassured the Senate Committee that Calibra is fully “committed to protecting the privacy of its customers and the calibre wallet will not share individual customer data with the Libra Association or with Facebook except for limited circumstances such as preventing fraud or criminal activity and complying with the law. “

What is Libra?

Libra is Facebook’s digital currency, and it will be stored and transacted through the Calibra wallet.

Marcus explained that “Libra is a safe, secure and low cost way for people to efficiently move money around the world.”

Facebook’s goal is to be able to liberate the unbanked (hence the reference to Libra). The goal is to make the global financial transactions easy and free.

When will Libra be launched?

Libra is expected to launch in the first half of 2020.

Is Libra compatible with other crypto wallets?

Marcus explained to the Banking Senate Committee that Libra will be compatible with all crypto wallets, though only the Calibra wallet will be included in Facebook Messenger and WhatsApp.

Certain media claim not to know whether the Calibra wallet will be able to store other cryptocurrencies. However, Marcus had clearly explained to the Banking Senate Committee members that the “Calibra wallet will compete with a number of other wallets that will operate on top of the Libra network.”

What makes Libra network unique?

Marcus explained to the Bank Senate Committee members that the “Libra network will be interoperable, which means wallets can send money to other wallets, which is not possible under the current system”.

But it is also understood that Calibra will be portable, which means users could switch entirely to a competitor if they wanted to.

Will Calibra collect data?

To earn people’s trust, we will have to have the highest standards when it comes to privacy,” Marcus explained to the Bank Senate Committee members. “No financial data or account data that is collected in Calibra will be shared with Facebook. The way it is built is to separate social and financial data since people don’t want the two to be associations.”

What type of payment options will be supported?

Marcus explained to the Bank Senate Committee members there will be “many optionsPeople will be able to pay with debit card, credit card as well as their Calibra wallet.”

But Marcus wanted to emphasise to the Bank Senate Committee members that Libra is “not designed to compete with bank accounts” since will not pay interest to its users.

Who will govern the Libra Association?

Marcus informed the Senate Banking Committee that Libra will be independent from Facebook. He said “A non-profit called the Independent Libra Association will govern the currency”.  

He explained that initially the Libra Association will be comprised of 28 members, including Mastercard, Visa eBay, Spotify, Uber, Andressen Horowitz, Vodafone and non-profits such as Women’s World Banking, a non-profit dedicated to women’s financial inclusion.

Marcus said the Libra Association will be governed by the Libra blockchain network and administered by the Libra reserve.  

It will establish the rules of the road and will prioritise privacy and consumer protection, and it will implement safeguards that require service providers within the Libra network to fight money laundering, terrorism financing, and other financial crime,” Marcus explained.

He added: “Once it is fully formed, the Libra Association will include 100 diverse members.”

Marcus said that “Facebook will only have 1 vote and it will not be in a position to control the association”.

Will Libra compete with sovereign currencies?

Marcus vowed that Facebook or the Libra Association “would never position themselves to compete with sovereign currencies or interfere with monetary policy. In fact the Libra Association will work with the Federal Reserve and other central banks to minimise any the risk of any competition with their currencies or monetary policies.”

About Libra’s reserves

It was noted in the media that each member of the Libra Association stand to commit at least $10 million towards the project – so if we there are 28 members then simple arithmetic dictates an initial reserve base of at least $280 million. However, when asked about Facebook will be committing, Marcus was not able to provide a straight answer, saying that Facebook and Calibra hadn’t determined exactly how much it would invest in the project.

However, Marcus did say that “the money that Libra has in reserves will earn interest.” Marcus explained.  “This interest will be returned to the investors within the ecosystem who made Libra happen.”

Marcus said that not all the income earned from interest will go back to investors. He explained the interest will contribute towards operating costs and that they “will need to find a way to create new pools of incentives that go back to people and businesses that use the Libra network.”

Marcus explained “the reserve is one for one and not fractional” to ensure there is full backing.  However, Senate Committee members pointed out that the reserves will have to be reviewed by regulators, and that regulators (not Calibra or Facebook) will have a say on this.

Certain Senate Committee members had difficulty comprehending how Facebook could in fact call the Libra Association a non-profit when its backers are actually receiving the interest on the reserves.

But there were other grey areas that Marcus did not answer clearly, such as:

How much data Facebook would collect on purchases users make with Libra?

Marcus was not able to answer questions about how much scrutiny it would apply to developers (particularly relevant when it comes to consumer protection and users’ funds)

When Chairman Crapo had asked whether Facebook would be able to access Calibra’s transaction data, Marcus explained that Facebook would still let users pay with credit cards and other mediums as well as Calibra. That means that even though Facebook might not know how much money is in someone’s Calibra wallet or their other transactions, it might know how much they paid.

Overall, the hearing was surprisingly coherent. Many Senators showed strong base knowledge of how Libra worked. There was little regard to how Libra could improve remittance or cut transaction fees.

Earlier this week

Former CFTC Libra deemed a security

The day before the Senate, former advisor to the Commodity Futures Trading Commission (CFTC) Gary Gensler told the US House of Representatives that Libra is fundamentally a security and should be regulated as such.

Treasury Secretary and Federal Reserve Chairman concerned about Libra

On Monday, U.S. Treasury Secretary Steven Mnuchin said he was ‘uncomfortable’ with Libra. Whilst U.S. Federal Reserve Chair Jerome Powell said he has “serious concern” over Libra.

U.S. President Trump slams bitcoin and cryptocurrencies

US President Donald Trump last week tweeted that he is not a fan of Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.

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