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House Financial Services Committee Hearing on Facebook’s Digital Currency

House Financial Services Committee

“Examining Facebook’s Proposed Cryptocurrency and its Impact on Consumers, Investors and the American Financial System”

Wednesday, July 17, 2019

 

Key Topics & Takeaways

  • Regulatory Framework: Marcus responded that he and his team are fully committed to working with the Treasury, the G7 working group, the Federal Reserve (Fed), the Financial Crimes Enforcement Network (FinCEN) and other U.S. regulators to appropriately take the time to address all regulatory concerns, and that until concerns are addressed, the Libra network will not roll out the currency. He said that Calibra will not compete with banks and financial institutions. Marcus said that Calibra the reserves system structure is an area that needs to be improved.
  • Money Laundering and National Security: Brummer said Libra provides a gateway for bad actors by failing to explain how the network will combat money laundering and because the network will trade with unsupervised wallets. Weissman said that wallets being interoperable creates unlimited possibilities of exploitation. Gensler said that the wallets trading in relaxed jurisdictions poses threats of leakage and inadequate identification. He added that on- and off-ramp language needs to include codes of prohibition for those on the sanctions list.
  • Risks to Financial Systems: Weissman said there are a number of risks Libra would pose, specifically how it would withstand a run and how scale of the currency would affect the Troubled Asset Relief Program (TARP). He said the structure of Libra is considerably similar to payday lending, and there is room for many financial cases of abuse. Weissman added that Facebook entering the financial system, combined with its current platform, would dominate and stifle competition. Brummer said any run on the coin or any hacks could lead to Libra becoming illiquid. He recommended regulating Libra as systemically important if launched and that it be regulated with enhanced prudential standards by a securities regulator.

 

Panel I Witness

Panel II Witnesses

 

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters stated that Facebook is in the process of trying to “create a new global financial system that is intended to rival the U.S dollar.” Waters said that Facebook’s decision to headquarter Libra in Switzerland should stand out as a national security concern. She said that this proposal must be “heavily” scrutinized due to Facebook’s previous failure to protect consumer data, and the plans raise “serious” privacy, trading, national security, and monetary policy concerns. She stated that the launch of Libra and its proposed reserve of government currencies and government-back securities to back its tokens will concentrate government influence in the hands of a few elite, and the “immense” economic power this would create could destabilize currencies and governments. Waters stated that Libra should halt their proposal and wait for Congress and regulators to fully examine the proposals and take any necessary action.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry stated that Congress cannot call for the prohibition of Facebook’s Libra proposal due to fear of innovation. McHenry stated that it has become abundantly clear that cryptocurrency and blockchain technology is an “unstoppable force” and that those who have tried to intervene with blockchain innovation have failed 100 percent of the time. McHenry stated that instead of banning a proposal before it even begins, Congress needs to take the time and put in the work to truly understand what is being discussed and that it is up to Congress to determine whether current regulatory frameworks meet the demands of this potential innovative technology.

Panel I Testimony

David A. Marcus, Head of Calibra, Facebook

In his testimony, Marcus stated that the process of implementing Libra is just beginning and that Facebook will not release Libra “until we have fully addressed regulatory concerns and received appropriate approvals.” He described Libra as a way for money to move around the world in an easy, accessible, and efficient way for anyone with a smartphone or internet access. Marcus explained that many diverse companies will make up the Independent Libra Association, which will govern the Libra blockchain network, administer the Libra reserve, and establish rules of the road that prioritize privacy and consumer protection. Marcus stated that once fully formed, the safeguards implemented by the Libra Association will protect against money laundering, terrorism financing, and other financial crimes. Marcus concluded that if digital currency is not created in the U.S. it could be created somewhere else with “dramatically different” values.

Question & Answer

Regulatory Framework

Several members of the committee asked about regulatory and tax oversight, the intent of Libra, how Libra will serve the unbanked, the reserve system of Libra, and why Libra is headquartered in Switzerland. Marcus responded that he and his team are fully committed to working with the Treasury, the G7 working group, the Federal Reserve (Fed), the Financial Crimes Enforcement Network (FinCEN) and other U.S. regulators to appropriately take the time to address all regulatory concerns, and that until concerns are addressed, the Libra network will not roll out the currency. He said that Calibra will register with FinCEN and Treasury as a payments system to have proper regulatory oversight and will not compete with banks and financial institutions. He said that Calibra will be backed by a one-to-one reserve and that the reserves system structure is an area that needs to be improved. Marcus said that Calibra will offer underserved and unbanked communities the opportunity to engage in the global financial system while lowering their operational costs. He added that Libra is headquartered in Switzerland for the network to coordinate their efforts to operate and provide a stable global currency. Marcus said Calibra is engaged in conversation to avoid impacting the U.S. dollar with the creation of Libra.

Governance and By-Laws

Reps. Alma Adams (D-N.C.), Rashida Tlaib (D-Mich.), Jesús Garcia (D-Ill.), Jim Himes (D-Conn.), Joyce Beatty (D-Ohio), Nydia Velázquez (D-N.Y.), Michael San Nicolas (D-Guam), Alexandria Ocasio-Cortez (D-N.Y.), Ayanna Pressley (D-Mass.), David Kustoff (R-Tenn.), Scott Tipton (R-Colo.), Steve Stivers (R-Ohio), Ann Wagner (R-Mo.), Sean Duffy (R-Wis.), Anthony Gonzalez (R-Ohio), Ted Budd (R-N.C.) and Waters asked about membership operations and the by-laws. Marcus said the Libra network consists of a council of 100 different members, one of whom is Facebook. Marcus added that companies must meet specific criteria to become members of Libra, and the network aims to bring diverse business models and voices to the table. He said all members of the council will operate with the intent of wallet interoperability and data portability. Marcus said the council is working through the by-law process and will make them public once they are complete. He said members joined based on their interests to add value and provide services to the network, and no one member, including Facebook, will hold more power over others.

Data Privacy

Reps. Stephen Lynch (D-Mass.), Madeleine Dean (D-Pa.), Sylvia Garcia (D-Texas), Roger Williams (R-Texas), Denver Riggleman (R-Va.), Lance Gooden (R-Texas), McHenry, Tipton, Jesús Garcia, Adams, Tlaib and Pressley asked how the Libra network will operate regarding data protection. Marcus said the intent of Libra is to create a wallet-to-wallet payments system with the highest privacy standards, which will be shared with Congress once they are complete. Marcus said it is important for the U.S. to be the lead on blockchain and to set standards for the technology to comply with the U.S. regulatory and financial systems. He added Calibra will collect government-issued identification for authentication purposes, which will not be shared with Facebook. He said over time Facebook will aim to make a profit through the increase of Facebook business and user commerce interactions and the potential of lower capital formation costs.

Money Laundering and National Security

Reps. David Scott (D-Ga.), Bill Foster (D-Ill.), Barry Loudermilk (R-Ga.), Trey Hollingsworth (R-Ind.), French Hill (R-Ark.), Tlaib, Wagner, Stivers, Tipton, Budd, and McHenry asked about how Libra will be structured to address concerns about the permissions systems, money laundering, terrorism financing, and other bad actors. Marcus said the Calibra wallet will have consumer fraud protections in place, including a customer service team to address fraud claims and use of unregulated wallets, just as financial companies have in their structures. He added that the Calibra network will have a team of individuals on board who will keep the currency in compliance with know your customer (KYC) and anti-money laundering (AML) policies, and Calibra will implement on- and off-ramp procedures.

Panel II Testimony

Chris Brummer, Agnes N. Williams Research Professor Director, Institute of International Economic Law, Georgetown University Law Center

In his testimony, Brummer stated that Facebook’s Libra White Paper is filled with hyperbolic language, empty promises, and omissions of important information consumers would need before using the service. He said that the Libra White Paper fails to inform potential users that they can lose money using the product, and that it also fails to inform potential customers that they will be exposed to the risk of mismanagement of reserve investments.

Katharina Pistor, Edwin B. Parker Professor of Comparative Law at Columbia Law School

In her testimony, Pistor stated that Libra is designed to become a new global currency, calling it a “for-profit currency of currencies.” Pistor said that the profit earning beneficiaries of Libra will be “freeriding” on a public safety net for which they are not paying. She stated that the legal structure will allow members of the Libra Association to be insulated from liability and noted that existing legal and regulatory frameworks in the U.S are highly incomplete and leave ample room for arbitrage. She stated that Libra’s global reach will further complicate these regulatory issues, and that the regulatory activities needed to monitor Libra will be out of the control of U.S regulatory agencies.

The Honorable Gary Gensler, Professor of the Practice of Global Economics and Management, MIT Sloan School of Management, Senior Advisor to the Director, MIT Media Lab, & CoDirector of MIT’s Fintech@CSAIL

In his testimony, Gensler stated that the Facebook Libra proposal will need significant forms of regulation. Gensler stated that Libra can be regulated as an exchange-traded fund (ETF) by the Securities and Exchange Commission (SEC) and can even be regulated as a bank. He said that in the future, regulators must prohibit Libra’s loaning ability and ensure the custody of funds remains with users. He also stated that Libra’s accounting division should adopt payment infrastructures consistent with Federal Reserve policies.

Robert Weisman, President, Public Citizen

In his testimony, Weisman stated that Facebook’s goal is to be in between as many transactions as possible. He said that it was clear that Facebook as a company cannot be trusted, and that many of the key features listed in the White Paper are not legally binding. He said that the makeup of Libra is similar to that of a cartel, in that the insiders will have all of the power. He stated that this application will allow Facebook to monetize the lives of its users.

Meltem Demirors, Chief Strategy Office, CoinShares

In his testimony, Demirors stated that it is now inevitable that cryptocurrency will continue to expand. She said it was important to recognize that Libra is not truly a cryptocurrency like Bitcoin, as Libra is a centralized company, while Bitcoin is completely decentralized. Demirors stated that Libra is an attempt by a privately-owned profit-maximizing company to imitate Bitcoin.

Question & Answer

Risks to Financial Systems

Reps. Lacy Clay (D-Mo.), John Rose (R-Tenn.), Gregory Meeks (D-N.Y.), Brad Sherman (D-Calif.), Warren Davidson (R-Ohio), Andy Barr (R-Ky.), Katie Porter (D-Calif.), Velázquez, Jesús Garcia and Tlaib asked how Libra would affect the current central banking system, what risks are posed by Libra and how to best regulate the currency. Weissman said there are a number of risks Libra would pose, specifically how it would withstand a run and how scale of the currency would affect the Troubled Asset Relief Program (TARP). He said the structure of Libra is considerably similar to payday lending, and there is room for many financial cases of abuse. Weissman added that Facebook entering the financial system, combined with its current platform, would dominate and stifle competition. Brummer said any run on the coin or any hacks could lead to Libra becoming illiquid. He recommended regulating Libra as systemically important if launched and that it be regulated with enhanced prudential standards by a securities regulator. Gensler said the SEC and Federal Reserve should consider the major disruptions Libra could pose to the financial system based on Facebook’s balance and size, the payments infrastructure, and the company activities. Pistor said there is the risk of the network voting to change how the currency reserve rules in the future.

Switzerland

Reps. Velázquez and Hill asked why Libra is headquartered in Switzerland. Pistor, Demirors, and Gensler all stated that the law in Switzerland is favorable to less regulatory and tax oversight, and this allows for the Libra network to operate under a clearer and simpler framework. Pistor added that Switzerland does have the benefit of many different international non-profits being centralized in the nation. Demirors said the Libra headquarters should be in the U.S. for proper oversight.

Challenges of Libra

Reps. Waters, McHenry, Hill, Meeks, Davidson, Barr, Porter, Sherman, and Tlaib asked what the various challenges for Libra are before its launch. Demirors said the system is not a cryptocurrency, is built like Bitcoin, and faces the challenge of jurisdiction and regulatory clarity. She said that the nature of Libra is anti-competitive and there is a need for open-source coding and decentralization of the currency. Weissman echoed the currency is anti-competitive and added his concerns over privacy issues. Gensler said there are concerns about shadow banking and that regulators should treat Libra like an ETF. Brummer said there is a need for transparency on how companies can become members of the Libra network, and how Libra will manage the access and exchange of money.

Money Laundering and National Security

Reps. Clay, Scott, Foster, Hill, and Sherman asked how sanctions and money laundering policies should be addressed. Brummer said Libra provides a gateway for bad actors by failing to explain how the network will combat money laundering and because the network will trade with unsupervised wallets. Weissman said that wallets being interoperable creates unlimited possibilities of exploitation. Gensler said that the wallets trading in relaxed jurisdictions poses threats of leakage and inadequate identification. He added that on- and off-ramp language needs to include codes of prohibition for those on the sanctions list.

For more information about this hearing, click here.