Calls from the US House Committee on Financial Services for Facebook to halt all development on its Libra virtual currency demonstrates that regulators still have concerns over the criminal history of cryptocurrency, according to Simon Taylor, head of blockchain at consultancy firm 11:FS.
“Having reservations about a new entrant makes sense but asking a firm to stop development? That’s quite a reaction,” said Taylor in an email. “I believe it’s due to three intertwined narratives at play: Firstly, if Libra went mainstream it could threaten central banks role in the economy. Secondly, Facebook has a less than stellar reputation with governments in the wake of the 2016 US elections and the Brexit vote in the United Kingdom … being scrutinised for not preventing ‘fake’ news stories from potentially influencing the electorate. Thirdly, crypto has a bad rep with governments.”
The US House Committee on Financial Services wrote to Facebook last week, requesting a halt to all development of Libra, as well as its digital wallet Calibra, until Congress and regulators have had time to investigate the possible risks it poses. In the letter, it cites Facebook’s “troubled past, where it did not always keep its users’ information safe”, as a major concern.
“For example, Cambridge Analytica, a political consulting firm hired by the 2016 Trump campaign, had access to more than 50 million Facebook users’ private data which it used to influence voting behavior,” the letter continues. “Facebook expects to pay fines up to $5 billion to the Federal Trade Commission (FTC), and remains under a consent order from the FTC for deceiving consumers and failing to keep consumer data private.”
According to a development whitepaper released last month, Libra is a cryptocurrency minted on its proprietary Libra Network, a blockchain which has been developed by a Switzerland-based consortium backed by Facebook. The currency is supported by a non-profit organization named the Libra Association, which is charged with overseeing the network and managing reserves. Libra has faced intense regulatory scrutiny since it was first announced in June.
In its letter to Facebook, the Committee wrote: “It appears that these products may lend themselves to an entirely new global financial system that is based out of Switzerland and intended to rival U.S. monetary policy and the dollar. This raises serious privacy, trading, national security, and monetary policy concerns.”
Chairwoman of the Committee, Maxine Waters, followed up on the letter by calling for a congressional hearing into Libra and Facebook, scheduled for 17 July. The Senate Banking Committee also announced its intentions to organise a hearing with Facebook, calling David Marcus, Facebook’s head of blockchain, to testify.
Marcus, in a letter addressed to the Committee and seen by The Hill, wrote that Facebook was taking time to do things right, and added: “We want, and need, governments, central banks, regulators, non-profits, and other stakeholders at the table and value all of the feedback we have received.”
In the crosshairs
11:FS’s Taylor said: “Part of the reason regulators are pushing so hard to make sure crypto exchanges and wallets follow financial services rules is the reality that cryptocurrency is still used for illegal activity online. The politicians might not even believe that Libra is likely to go mainstream any time soon, but the potential for more people to have access to cryptocurrencies more generally has clearly sent alarm bells ringing.”
Nigel Green, chief executive and founder of advisory firm the deVere Group, believes that Facebook has expected this level of scrutiny. “I would suggest that it is prepared for it, has the resources for it, and will welcome it, as it will make its cryptocurrency stronger,” he said, over email.
“Whilst it might well take some time, as it is something of a ‘test case’, I’m confident the process will conclude that development can continue. Regulatory scrutiny will also be welcomed by the wider cryptocurrency sector as it adds credibility and legitimacy, giving both retail and institutional investors more confidence”
For Taylor, the fact that Libra is not just underpinned by Facebook is crucial. “The consortium model, irrespective of who, precisely, is involved at any one time may actually make it harder for regulators. With Facebook, with issues occurring on its platform, at least there is a throat to choke. With Libra, how do you manage all the organisations involved, from VC firms and payments networks, through to telecoms and non-profits?
“But when an organisation that’s already in the crosshairs of governments, one that hasn’t gotten full control of its ‘fake news’ problem, then launches something that leaves a lot of unanswered questions in its own right, you can see why some of the more conservative elements of the global financial system would react in this way.”