Moment of Truth: Live Coverage on US Senate's Libra Hearing

Various members of the US government have publicly on Facebook's Libra project. US congresswoman Maxine Waters called for a moratorium on the project; Senator Sherrod Brown has spoken out vehemently against the project. Most recently, none other than President Donal Trump came out as a critic.

Today, the US Senate held a hearing on Capitol Hill on the Libra project, beginning at 10:00 Eastern Time. Finance Magnates covered the event live.

David Marcus, who is acting as the head of the Libra Project, was grilled for roughly two and a half hours on why users should trust Facebook with their money, Facebook's past behavior with user data, and whether or not Libra was willing to comply with international regulations. Marcus stated again and again that although Facebook's track record has been so unsavory, Libra has been set up in such a way that users will not have to trust Facebook, and that the company is willing to wait until all of the regulatory boxes are checked before launching the final product.

“Libra and Calibra will only expand [Facebook's] reach”

Senator Mike Crapo (R-ID), who acted as Chairman for the session, opened the hearing by listing the multitude of US and global regulators that have expressed concerns over the future of Libra, beginning with Federal Reserve Chairman Jerome Powell, who believes that Libra could be influential in facilitating money laundering and “financial instability problems”. He also expressed concerns over Facebook’s handling of user data and privacy.

According to Crapo, Powell’s sentiments were echoed by United States Secretary of the Treasury Steve Mnuchin and Bank of England Governor Mark Carney.

Concerns include how the system will work, how it will be managed, and how the Libra Association will interact with Facebook. “What consumer protections will apply?” Crapo asked. “[What are] the potential implications for consumers with respect to loss from fraud or the project’s failure?”

Additionally, how will individuals' data be protected? How will privacy be preserved? How will Libra comply with banking regulations? And could Libra pose larger economic threats?

However, Crapo did describe Facebook’s goals for the project as “commendable,” adding that 1.7 billion adults remain unbanked--but many of them have access to mobile phones. He explained that if implemented correctly, Libra could result in material benefits.

“Still, Libra is based on a relatively new and continually evolving technology in which it is not entirely clear on how existing laws and regulations apply,” Chairman Crapo said, adding that Facebook has access to a huge amount of personal data from its more than 2 billion users.

“Libra and Calibra will only expand this reach,” he said, adding that “individuals are the rightful owners of their data. They should be granted a certain set of privacy rights, and the ability to protect those rights through informed consent.”

However, Crapo explained that according to Treasury Chairman Powell, “the privacy rules that we apply to banks, we have no authority to apply to Facebook or to Libra.” Powell also said that the creation of a new regulator may be necessary.

"Facebook is Dangerous"

Chairman Crapo then handed the floor to Senator Sherrod Brown (D-OH), who immediately stated that "Facebook is dangerous."

“Facebook may not intend to be dangerous, but surely they don’t respect the power of the technologies they’re playing with. Like a toddler who’s [playing with] matches, Facebook has burned down the house over and over, and called every arson a ‘learning experience.’”

“Facebook has two competing missions: make the world more open and connected, and make a lot of money,” Brown said, adding that this results in “havoc” for the rest of us.

He pointed to Facebook’s impact on the newspaper industry. While Facebook has made it easier for users to share what they’re reading with friends, Facebook has led profits away from journalism and has damaged the journalistic industry as a whole. He also mentioned Facebook's role in polarizing American politics and in inciting genocide.

“This kind of creative disruption that doesn’t actually create anything is just disruptive.”

“Facebook...doesn’t seem to understand that its actions have real-world consequences. They don’t seem to understand why the intention to run their own currency out of a Swiss bank account... has been met with such fierce opposition.”

He added that Facebook CEO Mark Zuckerberg has said in the past that Facebook is more like a government than a company. However, “no one elected Mark Zuckerberg,” Brown said.

He added that Facebook CEO Mark Zuckerberg has said in the past that Facebook is more like a government than a company. However, “no one elected Mark Zuckerberg,” Brown said. “...Facebook doesn’t deserve our trust. It should be treated like the profit-seeking corporation that it is.”

"The last thing we need is to concentrate any more power in huge corporations."

Marcus' Testimony

After introducing himself, David Marcus said that Facebook strongly agrees with the sentiments expressed by Steven Mnuchin and Jerome Powell.

"We will take the time to get this right. We expect the review of Libra to be among the most extensive ever. We are fully committed to working with regulators here and around the world."

"Facebook will not offer the Libra digital currency until we have fully addressed regulators and received appropriate approvals."

Marcus then described Facebook's vision for the future with a scenario in which a daughter wished to send money to her mother in another country. As it stands now, the process is expensive and can take several days, as well as other complications.

"It doesn't have to be this way," he said. He explained that Libra would allow Payments to be sent globally at a moment's notice and with extremely low fees.

"Calibra is committed to protecting the privacy of its customers," he said and explained the details of how data will be kept separate between the various parts of the Libra Association and its subsidiaries, as well as Facebook.

He also stated what could be considered a warning against what might happen if Libra isn't launched. "I believe that if America doesn't lead innovation in digital currency and payments area, others will. If our country fails to act, we could soon see a digital currency controlled by others whose values are dramatically different from ours."

Crapo's Response

Due to the fact that Libra is established in Switzerland, Chairman Crapo asked if Marcus believed that the United States should lead in establishing the rules of the road in establishing regulatory oversight of Libra and "similar digital currency initiatives."

'Yes, absolutely," Marcus said. "I want to reaffirm that we chose Switzerland not to avoid any responsibilities or oversight, but rather because it is a well-established international place with the headquarters of the WHO, WTO, even the BIS. Despite the fact that the Libra Association will be headquartered in Switzerland, it will register with Fincen and will have oversight from US regulators."

Crapo responded: "The US approaches regulation of data and Data privacy in a sectoral way. We have multiple regulators over different pieces of economic activity and other types of social activity. Europe does this differently," he said, pointing to the GDPR as an example.

"Have you analyzed and determined in our sectoral approach to regulation, which of all of these regulators would have a piece in creating the rules of the road if the US stays with this sectoral approach?"

"Chairman, this is not for me to say," Marcus answered. "All I can say is that we are committed to working until we satisfy all the concerns and meet the regulatory bar before we proceed."

"In the US, there are a number of regulators we're engaged with, and we're also engaged with the G7 working group that includes finance ministries and central banks that are looking into Libra."

Crapo followed up with another question: "you recently told the banking committee that Facebook Inc. collects data from transactions that happen on-platform and uses it for advertising and personalization. Would you please describe the personal data collection from on-platform transactions?"

Chairman Crapo also wanted to know if similar data will be collected from Libra transactions.

Marcus responded by saying that the Calibra wallet will have to compete with a number of other wallets that will also operate on top of the Libra network.

"As a result, to earn people's trust, we will have to have the highest standards when it comes to privacy...no financial data or account data that is connected in Calibra to offer the service will be shared with Facebook."

He said that Calibra had been built to separate social and financial data.

Sherrod Brown shoots back with privacy concerns

Brown pointed out that although Facebook is indeed competing with other wallet providers, it is the only company with a user base of more than 2 billion people.

"Facebook has a long track record of abusing users' trust," Brown said, pointing to Marcus' decisions as head of Facebook Messenger to allow third-party companies to have access to users' private messages.

"Facebook has said 'just trust us,' and every time Americans trust you, they get burned. Facebook told the FEC in 2012 that it would stop abusing our data, and then last week got a $5 billion for violating that agreement."

"After all the times, Facebook has abused the public's trust--and you know that [Mr. Marcus], do you really think that users should trust Facebook with their hard-earned money? Yes or no?"

"Trust is primordial," Marcus responded. "We've made mistakes in the past," he continued, saying that Facebook is working "really hard to get better," pointing to investments that the company made.

Marcus went onto explain that because Facebook is only one of 100 members that run the Libra Association, users will not have to trust Facebook.

"Mr. Marcus, you know better than that," Brown retorted, saying that Facebook is the only company with access to 2 billion users. "To say that you are just one of many is simply not true."

"If you think hardworking families should trust Facebook's monopoly money, I'd like to see how much you and your company trust it," Brown continued, asking if Marcus would pledge that he and the project's team will accept 100 percent of their salaries and other compensation in "this Facebook currency."

Marcus responded by saying that Libra wasn't meant to compete with bank accounts. Brown wasn't having it, repeating his question. Eventually, Marcus conceded that he would.

Brown continued by pointing out that a number of US regulators and international leaders have expressed numerous concerns about the Libra project.

"Is there anything, Mr. Marcus, that elected leaders and economic experts can say that will convince you and Facebook that it should not launch this currency?"

Marcus responded by saying that Facebook agrees with the "legitimate" concerns expressed by regulators and that this is indeed why the whitepaper was released so far ahead of the project's projected launch.

Brown responded by asking that if all of the members of Congress unanimously agreed that Facebook should not go ahead with the launch, "are you still going to do it?"

Marcus responded by saying that "if regulatory concerns are not addressed, and if the regulatory oversight is not appropriate, we will not launch until it is."

"I think we should be exploring this"

Pat Toomey (R-PE) said that "it strikes me as wildly premature for us to come to the conclusion that we have to act now to prevent what could be a very constructive innovation in financial services," adding that he sees tremendous potential in Blockchain and cryptocurrency technology.

"I just think we should be exploring this and considering the benefits as well as the risks and take a prudent approach," but to "strangle this baby in the crib" is "wildly premature."

Toomey pointed out that if Libra is implemented as it has been described in its white paper that the company will have valuable transaction data. "Is it the plan to [eventually] seek the consent of [Libra users] so that you would be able to commercialize that data?"

Marcus responded by saying that this is "not the intention at all." Instead, the plan is to enable the small businesses and users on the platform to engage in "more commerce together."

Marcus added that over time, the company hopes to add more partners and services through Calibra to drive more revenue through the company.

Toomey stated that it struck him as "odd" that a non-profit organization has said that the interest collected from its currency reserves would be used to pay out dividends to its founding partners (members of the Libra Association.) "That sounds like a for-profit [company," he said.

Marcus said that the plan is not for the income to be "unlimited" or for all of it to go back to investors. "We'll need to find a way over time to create new pools of incentive that go back t people and businesses using the Libra network." He added that this has already been a topic of discussion with investors.

Senator Jon Tester (D-MO) asked how Libra will handle theft. Marcus responded by saying that Calibra will offer consumer protections against fraud and account recovery the same way that the leading financial services company provide consumer protection.

"We will do our best to resolve [issues of theft] and claims as soon as possible," Marcus added.

Tester asked whether Libra could guarantee users the ability to withdraw their funds. Marcus said that Libra would be backed one-for-one, and therefore, its value would remain stable and retain its value.

How are you going to prevent bad actors from using the application?

Tester pointed out that it's not up to Facebook to determine what its reserve is--this must be determined by regulators.

"How are you going to prevent bad actors from using the application?" Tester asked, pointing out that Facebook's track record with this is less than stellar. Marcus said that "systems and a dedicated team" to prevent fraudulent activity and to meet AML and counter-terrorism efforts.

Senator Cortez Masto (D-NE) asked about money laundering, specifically terrorist financing. Marcus responded by explaining that if the cash transactions that are associated with crime become digital, "it will be better."

He added that KYC and AML programs will be present on the Libra network, and that Libra will register with Fincen, and that the Calibra wallet and other wallets on the network will comply with the Bank Secrecy Act.

Cortez Masto said that "when it comes to pulling around a briefcase full of cash--transnational criminals don't do that anymore. What you're creating right now is an opportunity for them to engage in money laundering and criminal activities."

She demanded that Facebook be more transparent with regards to this issue.

Policing apps and fraud

She also asked about a recent statement that the head of policy and communication for Libra made on a podcast. When asked if Libra would blacklist certain addresses in order to comply with sanctions laws, they said that "the association won't interact with any jurisdiction, it will instead leave that to the entities that provide an on- and off-ramp to the Libra currency."

Marcus said that Libra is engaged with the Treasury department on this question and that it will respect the travel rule. He said that the statement might have been referring to the fact that the Libra Association's primary role is to facilitate governance.

Senator Kyrsten Sinema (D-AR) asked Marcus about Calibra’s head of product Kevin Weil 's statement to TechCrunch that: “there are no plans for the Libra Association to take a role in actively vetting [developers]." She is concerned about unbanked people who may be particularly vulnerable to fraud and abuse.

Marcus said that while the Libra Association will need to find the right approach to ensure that "publishing services on the Libra network has controls." Marcus also noted that educational materials would be provided to help users avoid fraud.

Sinema responded by saying that her concern was not addressed, and followed up with an example in which a scammer based in Pakistan uses an exchange in Thailand to scam an Arizonan whose wallet is issued by a company in Spain. Because Libra is based in Switzerland, which regulator would the Arizonan contact to seek help?

Marcus said that "your constituents will likely use a US-based wallet provider that will have consumer protections." Sinema said that because the hypothetical wallet was issued by a company based in Spain, the question still wasn't answered.

Ultimately, Marcus said that it would depend on the wallet's consumer protection measures.

Sinema continued by saying that she had national security concerns. She said that drug traffickers might try to use Libra to finance their operations along the state's southern border.

"If a drug cartel or one of its sanctioned person attempts to complete a transaction using Libra, would you comply with OFAC policy, or would you allow the drug cartel transaction to be added to the ledger?"

Marcus responded by saying that the platform is not anonymous and will have full KYC and AML requirements.

Senator Jason Schultz (R-IA) asked what he called "the most basic question of all": "why in the world should Facebook, of all companies--given the last couple of years--do this?"

Marcus replied by saying, "Senator, because we have the ability and the means to innovate on behalf of the people we serve, and we shouldn't stand back and wait to do it if we want to help the people we serve. Because we have the resources and the engineering talent, I believe we should."

"Trust is primordial," you dumb motherf***kers

Senator Brown closed the hearing by asking Marcus what he had meant by "trust is primordial," which Marcus said that Facebook CEO Mark Zuckerberg had stated in the past.

"Senator, it means that we need to continue to do better in serving the customers and the users...we'll do what it takes to earn their trust, and that's definitely the case as well for Libra and the Calibra Wallet."

Senator Brown asked if the phrase had been said by the same Mark Zuckerberg who previously called people who trust Facebook with their data "dumb motherf**kers."

"Your biggest problem is that people don't trust you--so what am I to take from this?"

"That we need to continue working very hard to ensure that we are deserving of trust," Marcus said, curtly.