Democrats on the House Financial Services Committee are asking Facebook to postpone the launch of its crypto

LibraThe Democrats led by Maxine Waters, a Democrat from the State of California who chairs the committee, sent the letter to Facebook Chief Executive Officer Mark Zuckerberg on July 2. 

We write to request that Facebook and its partners immediately agree to a moratorium on any movement forward on Libra—its proposed cryptocurrency and Calibra—its proposed digital wallet. 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 for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy.

“On June 18, 2019, Facebook announced its plans to develop a new cryptocurrency, called Libra, and a digital wallet to store this cryptocurrency, known as Calibra. To assist it in this venture, Facebook has enlisted 27 other companies and organizations to form the Libra Association, which is based out of Switzerland. These companies span the financial services and retail industry and include payment systems, like Mastercard, Paypal, and Visa, and technology giants, like Uber, Lyft, and Spotify. By the target launch date of early 2020, Facebook hopes to have recruited over 100 firms into the Libra Association.”

David Marcus, Facebook’s Vice President of Messaging Products, released a post on Facebook on July 3, addressing a series of concerns. 

It’s been two weeks since we introduced Libra, a new cryptocurrency powered by blockchain technology. We shared a white paper, a number of deep-dive papers on important topics, a testnet, and additional material. Since then, we’ve seen a lot of great dialogue from many different viewpoints. It’s been encouraging how receptive so many people have been to the Libra vision and approach. As expected there are also some questions and a few misunderstandings. So I wanted to take the time to provide answers and add clarity. We’ll keep doing this along the way to keep everyone informed and up to date.

“Before I do so, I wanted to remind everyone that Facebook, through its subsidiary Calibra, is just one of the initial 28 Founding Members that are coming together to form the Libra Association. It’s easy to assume from the headlines that Libra is only associated with Facebook, but that is not the case.

“We made the deliberate decision to announce the plans for Libra early. This was after an initial consultative phase with regulators, central banks, and other organizations from all around the world. Our rationale was simple: We wanted to encourage open discussion by design. Launching a high-quality medium of exchange in the form of a cryptocurrency, and its supporting infrastructure, cannot happen in darkness. If we truly want to have a chance to better serve the billions of people, and businesses, who deserve to be served by modern, open, financial services, this is the only way.”

He continued in the post to say that though this crypto won’t be as open as Bitcoin, it would be an open platform, “While the initial mechanism by which organizations can run a node and become a member of the Libra Association, is definitely not as open as, say Bitcoin, where anyone can participate in the consensus algorithm, the Libra Blockchain is absolutely designed to be open. What this means is that no one needs to become a member to access the blockchain, and to build services like wallets, or merchant acceptance.

“On decentralization — we totally get the point — fungibility of nodes to ensure they can always be replaced over time is a fundamental principle of blockchains, and that’s why we’re committed to gradually transitioning to a permissionless state in the years to come. But it was important to start with trusted entities that could operate in a regulated environment and with the operational expertise required to ensure the integrity of the network in its foundational stage.”

He also argued that Libra would be financially inclusive: “With Libra, anyone with a $40 smartphone and connectivity will have the ability to securely safeguard their assets, access the world economy, transact at a much lower cost, and over time access a whole range of financial services. We firmly believe that if Libra is successful, it can be a non-linear step change for billions of people who need it the most.”

One specific concern raised by Democrats, were previous scandals like Cambridge/Analytics, which raises concerns about Facebook’s ability to manage people’s money. 

“These risks are even more glaring in light of Facebook’s troubled past, where it did not always keep its users’ information safe. 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. As a result, Facebook expects to pay fines up to $5 billion to the Federal Trade Commission (FTC) and remains under a consent order from FTC for deceiving consumers and failing to keep consumer data private. In the first quarter of 2019 alone, Facebook has also removed more than 2.2 billion fake accounts, including those displaying terrorist propaganda and hate speech. It has also recently been sued by both civil rights groups as well as the U.S. Department of Housing and Urban Development for violating fair housing laws on its advertising platform and through its ad delivery algorithms.

Marcus noted that this platform was indeed decentralized. “Facebook will not control the network, the currency, or the reserve backing it. Facebook will only be one among over a hundred members of the Libra Association by launch. We will not have any special rights or privileges. Facebook created a subsidiary — Calibra — that will operate a wallet service on top of the Libra Network, and while Facebook, Inc. owns and controls Calibra, it won’t see financial data from Calibra.”

The Democrats were also concerned about a lack of regulatory framework, warning Facebook that plans needed to be paused until that was settled. 

“Because Facebook is already in the hands of over a quarter of the world’s population, it is imperative that Facebook and its partners immediately cease implementation plans until regulators and Congress have an opportunity to examine these issues and take action.” The Democrats said. “During this moratorium, we intend to hold public hearings on the risks and benefits of cryptocurrency-based activities and explore legislative solutions. Failure to cease implementation before we can do so risks a new Swiss-based financial system that is too big to fail.”

The response from Marcus was vague. “We’re talking about something new, at scale in a very regulated industry, and if this is not done right, it could definitely present systemic risks no one wants. This is why we believe in and are committed to a collaborative process with regulators, central banks, and lawmakers to ensure that Libra helps with the kinds of issues that the existing financial system has been fighting, notably around money laundering, terrorism financing, and more. At the core, we believe that a network that helps move more cash transactions — where a lot of illicit activities happen — to a digital network that features regulated on and off ramps with proper know-your-customer (KYC) practices, combined with the ability for law enforcement and regulators to conduct their own analysis of on-chain activity, will be a big opportunity to increase the efficacy of financial crimes monitoring and enforcement. We will – and more importantly, the Libra Association will – continue to engage proactively and openly with all relevant stakeholders on these key issues. Libra should improve detection and enforcement, not set these back.”