Why Facebook’s Libra Testimony Is Important

Facebook’s Libra has generated a media storm of commentary and analysis since it was released last month. In response, the Menlo Park-based company has mostly restricted itself to providing a drip feed of information about its workings. But a Senate and Congressional hearing over the next two days is expected to provide more details.

The hearings are important because the implications of Facebook’s project span borders and regulatory jurisdictions. The questions asked by regulators and responses from David Marcus, head of Libra at Facebook, will set the tone for engagement and critical scrutiny of the project in other jurisdictions around the world.

The project is already saddled with Facebook’s onerous reputation for handling privacy-related matters. At first glance, that might seem like a disadvantage. But it could also be construed as an advantage because it deflects attention away from the project’s specifics. In fact, even though it has released a whitepaper and other supporting documentation, Facebook has revealed little about it.

This is partly because its launch is a year away. A final product does not exist (a test net for developers to build applications is live); as such, it is difficult to evaluate its regulatory implications. (To that extent, it is possible that there will be more hearings later this year and before Libra’s launch next year as the project takes shape).

Adding to the confusion are news reports that Facebook’s partners in Libra are not fully to committed to it. The project could derail if Facebook fails to reach its stated goal of enlisting 100 partners and raising $1 billion through the effort.

What They Said

Commentators and members of the cryptocurrency community are watching the proceedings expectantly because it has big implications for crypto regulation. Caitlin Long, who heads up the Wyoming Blockchain Coalition, wrote that Libra shines a light on outdated financial regulation.

“…Out of necessity the digital currency industry responded by inventing a “stablecoin”—a digital currency backed by dollars held in trust, whose trades settle on payment rails that are far more efficient than those of the traditional banking system, but which is also inextricably linked to the traditional banking system,” she wrote in a Forbes post.

Up until now, crypto projects have mostly been at the receiving end of regulatory crackdowns. Messaging app Kik attempted to mount a challenge but failed. The Facebook Goliath presents a break from that narrative. Kristin Smith, head of lobbying group Blockchain Association, told Coindesk that the recent turmoil around privacy at Facebook has ensured that the company is the focus of this hearing rather than the specifics of the project. “We … would rather see this moment used to answer long-standing questions about U.S. crypto policy, no matter what you think of Facebook’s recent history,” she said.

Dave Nadig, managing director of ETF.com, has said that the Libra Association resembles an ETF fund because a set number of authorized resellers can redeem Libra (the coin) for local currency. “That sounds a lot like creation and redemption in an ETF,” he wrote.

Jerry Brito from DC-based cryptocurrency advocacy non-profit Coin Center seems to agree with Nadig. “That sounds a lot like a fund,” he told The Block. “I don’t know what type of fund exactly – maybe it is a mutual fund. But it’s a question Facebook is going to have to address Tuesday.”

What He Said

In his advance prepared testimony, David Marcus told lawmakers that Libra is “a payment tool and not an investment…people will use it to send money to family members in other countries, for example, or to make purchases.” Libra’s stability will be ensured with a basket of currencies backing it in a 1:1 ratio. The currencies backing Libra are the US dollar, the English Pound, Japanese Yen, and Euro. It will also have an exchange rate, similar to other currencies, meaning that Libra users will be able to exchange their coins for local currencies. Libra’s coin will be regulated by Switzerland’s FINMA, which has already outlined the three types of cryptocurrencies in its jurisdiction, and the United States.   Marcus’s advance testimony speaks to Facebook’s ambitions of Libra becoming a global currency that overlays national currencies. Lawmakers and regulators have said there are serious concerns related to that ambition.

But they seem to have focused on its effect within developed economies. The real effect of Libra may be felt in developing and weak economies. Reports have already detailed an increase in the use of alternate currencies, Bitcoin or Amazon e-gift cards, in Venezuela – an economy crippled by international sanctions. Interestingly, Marcus states that Libra will work with government officials to ensure that the currency will not affect monetary policy. But that coordination is restricted to governments for the basket of currencies included in the Libra Reserve. For other countries, given Facebook’s reach and popularity, it is not hard to imagine a situation in which Libra becomes another mechanism for commerce.