The exchange, however, did not result in much clarity with regard to Libra’s standing with regulators and its overall prospects. As Rep. Patrick McHenry summarized at the end of the hearing, “I’m not sure we’ve learned anything new here.”
On Oct. 23, Mark Zuckerberg, founder and CEO of social media platform Facebook, appeared before the U.S. House Financial Services Committee to testify on the prospective global cryptocurrency Libra, which his company is backing. He ended up enduring almost six hours of mostly critical questioning, as some of the legislators used the occasion to raise their concerns about many problematic aspects of Zuckerberg’s social media empire, even those not directly related to the cryptocurrency’s operation.
Those who expected the hearings to shed light on many substantive questions regarding Libra’s design and regulatory status that remain unanswered were likely left disappointed. Some observers noted that Zuckerberg was overall successful in achieving his tactical goal, which was to take the beating with humility while getting his main talking points across and making sure to dodge controversial questions.
Indeed, many things that were conspicuous throughout the hearing were already known: that Congress is deeply suspicious of Facebook’s cryptocurrency initiative in the light of the company’s record of high-profile controversies, that some legislators would prefer to break the company up rather than allow it to extend its power into the domain of finance, and that no one fully understands the potential effects of Libra’s launch on the global financial system.
If there was anything new in Zuckerberg’s testimony and responses, it was the selection of persuasive tools and the scope of concessions that he appeared willing to make.
Leveraging the Chinese threat
This was the first Libra hearing for the Facebook boss – previously, it was David Marcus, the head of the forthcoming crypto wallet Calibra, who was dispatched to be grilled on the Hill. As the project seemed to have hit a regulatory wall, Zuckerberg has apparently come to the conclusion that the matter requires his personal attention. The chair of the House Financial Services, Rep. Maxine Waters, welcomed Facebook’s CEO with a rather unequivocal statement in her opening remarks:
“As I have examined Facebook’s various problems, I have come to the conclusion that it would be beneficial for all if Facebook concentrates on addressing its many existing deficiencies and failures before proceeding any further on the Libra project.”
Many of Waters’s Democratic colleagues, who subsequently took the stage, appeared similarly hostile to Libra and Facebook more generally from the outset. They challenged Zuckerberg on a wide array of issues: personal data breaches, discriminatory ad targeting, lack of commitment to diversity, among many others. Rep. Brad Sherman of California invoked the classic “cryptocurrency for criminals” argument, saying: “You’re trying to help those for whom the dollar is not a good currency – drug dealers, terrorists.”
Anticipating that, Facebook’s CEO heavily emphasized the patriotic frame, seeking to win sympathies of those concerned with maintaining America’s global influence. He suggested that Libra is the kind of fintech innovation that the U.S. needs in order to stand up to the emerging threat of China’s digital yuan.
The problem with this argument is that it pits a state-backed digital currency against one relying on a network of corporate backers. Even to the most hawkish legislators, it may not sound convincing that in order to compete with the Chinese digital currency for global markets, the U.S. should put its faith in Libra, which some believe is itself a potential competitor to the dollar.
Naturally, this line of reasoning led to the question: Why not just create a digital version of the dollar? Zuckerberg responded that it would be less attractive to global consumers than a currency backed by a diverse basket of assets. Importantly, he also stated that he would be open to regulations mandating Libra to be majority-backed by the U.S. dollar.
Striving for full compliance
Another central theme that Zuckerberg dwelled on was drawing a solid line between Facebook and Libra to convince committee members that the two are distinct entities, and that Facebook will not have any more power over Libra than any other member of the association. He also doubled down on the reassurances that Facebook will not initiate the launch of the cryptocurrency unless it gets all the necessary approvals from U.S. regulators.
In illustrating this point, Zuckerberg went as far as to envision a scenario where other members of the Libra Association decide to proceed without securing U.S. authorities’ permission, in which case Facebook would have to pull from the project – something that sounds as realistic as, say, the United Kingdom leaving the Commonwealth.
At the same time, the testimony added nothing to the overall understanding of Zuckerberg’s views on what specific regulations should apply to Libra. His responses to specific questions regarding regulation and governance of the Libra Association conspicuously lacked detail, which didn’t help in winning representatives’ endorsements.
While some Republican committee members praised Zuckerberg’s entrepreneurial achievements and drive for innovation, not a single one voiced support for Libra during the hearing. Perhaps McHenry, the ranking member on the House Financial Services Committee, came the closest in calling for a measured approach to the initiative. Just ahead of the hearing, he expressed concern over the possibility that lawmakers may be stifling innovation that they do not fully understand:
“My fear is that we now have American innovation on trial by policymakers here in Washington because they don’t understand it. … Because they’re a big company doing this type of innovation, you have American policymakers trying to pounce on them. This also sends a chilling signal to innovation in the United States.”
This sentiment echoes what some of the crypto industry stakeholders have to say on the matter. Patrick McLain, co-founder of San Francisco-based blockchain accelerator MouseBelt, thinks that the hearings are indicative of the legislators’ stance on cryptocurrencies at large and are not about Facebook or Libra:
“This is the government putting the very concept of cryptocurrency on trial. Today, lawmakers have drawn a line in the sand that says, ‘Cryptocurrency is unwelcome in the United States, and we will do everything in our power to stop it – including villainize some of the world’s best innovators.’ But cryptocurrency is a borderless and immutable movement that can’t be stopped. Libra may not survive, but something else will.”
While some of the issues that members of Congress take with the Libra project are legitimate, others belong to the realm of prejudices that have been refuted by respectable research, suggesting that McHenry might have a point. Tom Robinson, chief scientist and co-founder of blockchain forensics firm Elliptic, told Cointelegraph that the fears of Libra being used by criminals and terrorists are overblown, as it will not prove to be a useful tool for them:
“Libra transactions will be transparent and traceable. Law enforcement around the world have repeatedly demonstrated that cryptocurrencies are not safe havens for criminals, because they’re able to trace transactions and identify the individuals behind darknet markets, ransomware attacks and other bad actors. A shift toward crypto-assets would have the opposite effect that is being suggested by many politicians because AML technology is easier and more effective in tracing crypto transactions than fiat.”
What or who needs to change?
In sum, regulatory pushback against Libra is fueled both by Facebook’s trust problem and regulators’ lack of understanding of the project’s mechanics and potential effects. While Zuckerberg pledged to comply with all regulations that U.S. government deems necessary to give Libra the green light, he offered little in the way of a comprehensive vision of what such framework may look like.
Given the gravity of legislators’ concerns, appealing to the threat of Chinese digital currency competition is unlikely to sway a significant number of lawmakers. After Wednesday’s hearing, the odds of Libra ever seeing the light of day are still unclear, and the project will remain in regulatory limbo until the negotiating parties arrive at a more specific action plan.