In its bid to jump onto the moving wagon, Facebook is facing scrutiny over their newly unveiled cryptocurrency. The social network’s announcement on Tuesday of its new cryptocurrency termed as Libra caught the attention of senior congressional finance committee members, global regulators, former lawmakers, and industry insiders who were quick to scrutinize.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” said Representative Maxine Waters, D-Calif., Chairwoman of the House Financial Services Committee, in a statement on Tuesday. She asked Facebook to delay the project until Congress and the Watchdogs have a better ‘look’ at it.
Facebook announced that the cryptocurrency would be run by the nonprofit Switzerland-based Libra Association starting in 2020. As per its White Paper, Facebook won’t be in the limelight while running the cryptocurrency. Many companies are pushing the deal through, some of which include Mastercard, Visa and PayPal, Stripe, Uber and Spotify. Facebook plans to derive profits from another subsidiary named Calibra which is meant to create wallets in order to store and exchange the cryptocurrency.
Facebook’s shares jumped after the initial announcement but that didn’t last long. The stock was lower again on Wednesday, down 1.7% in early trading.
ALL KINDS OF ALARMS
Although Facebook has maintained that it won’t be managing the cryptocurrency itself, it is notorious for its election scandals and privacy leaks. That infamy is leaking forward and spilling itself over the new canvas as well.
Former Rep. Barney Frank, a major architect of the post-crisis financial reform, said “without a doubt, it will become a hotbed issue ahead of the 2020 election. That, combined with cryptocurrencies’ anonymity, raises all kinds of alarms.”
“There’s already a concern that Facebook is being used by bad actors to disguise their identity and pretend to be other people — cryptocurrency enhances your ability to do that,” the former congressman stated. “In this case particularly, it’s a problem because there is potential synergy between the anonymity you get from cryptocurrency and the ability to mislead people on Facebook.”
The senior Republican on the House Financial Services Committee, Rep. Patrick McHenry, said that there should be a hearing on the project and “its potential unprecedented impact on the global financial system,” while the senior Democrat on the Senate Banking Committee, Sen. Sherrod Brown stated, “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy.”
“We look forward to responding to lawmakers’ questions as this process moves forward,” a Facebook spokesperson replied.
A Group of Seven nations working group will meet this week to discuss how to regulate cryptocurrencies especially in light of Facebook’s new announcement, according to the Financial Times. The group will reportedly include central banks and the International Monetary Fund. Bank of England Governor Mark Carney said Tuesday at a conference organized by the European Central Bank in Portugal that he is open-minded about cryptocurrency but it’ll face regulation when it’ll have to.
“Anything that Facebook is doing is obviously receiving greater scrutiny from the government’s perspective,” said Jeremy Allaire, CEO of cryptocurrency Circle. “I think this is a tipping point for regulation and for mainstream awareness.”
Allaire’s company is supported by Goldman Sachs and also launched a U.S. dollar-backed stablecoin with Coinbase, said Facebook and a broader group of companies’ entrance is an overall positive for the industry. The Libra blockchain “looks interesting,” Allaire said, but it’s still not entirely clear just how “open” it will be and over what time frame. His suspicion was shared by many Congressmen as well.
Matthew Roszak, CEO and founder of Bloq and chairman of the Chamber of Digital Commerce, said that the new platform will have a lot of personal information involved. “There’s a treasure trove of new data here. The question is, who has access to it, and who has eyes on that?” Roszak said.
This is where Facebook’s past catches up with it. It’s obvious that not all data might be used by Facebook but there is an “obvious desire to monetize this,” according to Stephen Palley, partner at Anderson Kill and co-chair of the law firm’s blockchain and virtual currency group.
“How can you really have something that is decentralized and distributed that is actually controlled by a bunch of Silicon Valley plutocrats? Colour me sceptical,” Palley said. “There’s some nontrivial antitrust questions that haven’t been widely answered. This might lead to them being more heavily regulated.”
The concentration of power in the hands of Big-tech companies worries the Justice Department and they have been preparing anti-trust probes against the likes of Google and studying how these companies, such as Amazon, affect the competition.
With the 2020 Presidential elections in sight, the matter was expected to be heated. Democrat Elizabeth Warren has been the most vocal presidential candidate on Facebook’s new move. Her campaign sponsored a billboard in San Francisco that said: “BREAK UP BIG TECH.” President Donald Trump also said that “there is something going on in terms of monopoly” when it comes to technology companies.
NEW LAWS ON THE SCENE
Libra might bring cryptocurrency to another spotlight and just might force the lawmakers to finally learn more about it, according to Kristin Smith, head of external affairs at Blockchain Association, a D.C. lobbying group.
“At the moment, Facebook obviously has some problems in Washington,” Smith said. “They’ve lost trust with many policymakers so there’s a tough road ahead to show that an effort that is part of a broader group, and that there’s going to be very open governance. There’s definitely going to be some work to do in gaining trust.”
Smith is lobbying against U.S. policies including cryptocurrency tax treatment. For example, the tax code has a minimal exemption for personal foreign currency transactions. Cryptocurrencies do not qualify for the exception and based on guidance issued in 2014, the IRS considers virtual currencies as’ property’ under U.S. tax law, meaning the sale or exchange of tokens for other goods is a taxable event, she said.
“That’s something that does add a lot of friction into the system and is definitely going to need to be cleaned up and fixed in the U.S. tax code for this to fully take off,” said Smith.
MOMENTUM IN CONGRESS
Rep. Warren Davidson, R-Ohio, member of the House Financial Services Committee, is one of the few people in the government supporting cryptocurrency. He and a few more officials tried to bring in reforms which will exempt cryptocurrencies from federal securities laws that apply to traditional equities. He acknowledged data and privacy concerns but said it “highlights the danger of what’s at stake if we don’t get regulation right.”
“If Facebook starts to have that kind of influence on payment processing, I think that’s going to cause lots of concerns,” he said. “The way to make sure that that doesn’t happen, whether it’s Facebook or anyone else in the space, is to move legislation.”
Facebook’s user base is expected to bring cryptocurrency into the hands of normal people and introduce it to a far wider audience.
The Token Taxonomy Act, which Davidson said at the time would send a powerful message to entrepreneurs that “the U.S. is the best destination for blockchain technology,” could now be revived. The congressman said the fact that the Libra project is launching in Switzerland may affect the lawmakers and make them realise that strict regulation means outsourcing the creativity and manpower of America.
“Our capital markets are phenomenal and our scale is phenomenal and the ideas are American. They’re there launching out of the outside of the U.S.,” he said. “Congress is supposed to pass laws. I certainly hope this is enough time to motivate people to start paying more attention to this.”
HURRAY OR NAY?
The mission statement of Libra is bold and inspiring: to give the 1.7 billion people in the world, without access to a bank account, the ability to have one at no or low cost. It is about, as per Facebook, igniting a new commerce ecosystem that will make sending money from one point of the world to another as easy as sending a picture or a video over the same distance but with more security. Libra, and Calibra, as an initial application, Facebook says, will move the ecosystem forward to solve the problem of privacy. The word ‘privacy’ seems quite big and equally ironic coming from the tech giant. It’s not unimaginable to think about a small but rather increasing user-base which is quite scared about Facebook’s new move. On one hand, Facebook’s currency promises to carry out swift transactions in the most decentralised manner but on the other hand, buying or selling anything from a platform involved with Facebook screams ‘Privacy Breach’ like nothing else.
Facebook’s new plan requires that people feel comfortable buying into using an entirely new global currency backed by an association they’ve never heard of based in a country they’ve probably never visited — and using, at least initially, a digital wallet created by Facebook on one of two platforms that are also part of Facebook network: Messenger and WhatsApp.
A big priority for Libra and Calibra is to establish that trust with those users — and there are a number of ways that can be done. For example, Libra and Calibra could approach governments that pay social benefits to people in developing countries in cash and ask them to use Libra currency and deposit that instead in their Calibra wallets. The World Bank report says that social benefits paid into a digital account would bring 100 million more people globally into financial inclusion. Libra and Calibra could also approach private sector employers that make cash payments to workers with the same proposition.
Just because consumers feel completely comfortable using Messenger and WhatsApp today to send and receive messages doesn’t mean they will feel comfortable using the same apps to send their money when someone on the other end needs it as soon as possible.
At the end of the day, the question remains as to how much people can trust Facebook. They trust it, to some extent, with their posts, likes, and dislikes. But will they trust it with their money, especially with the Congress and Cryptocurrency regulatory laws becoming increasingly stringent with each passing day?