Us Congress vs Libra: Why are Financial Regulators Skeptical of Facebook's Global Project?
Almost anyone can launch own cryptocurrency in today's world. There is nothing supernatural in this and financial regulators rarely turn their attention to such events. But each rule has an exception. Probably everyone has heard about the conflict between the creators of the Libra project and the financial regulators of different countries of the world. We decided to analyze the current situation and understand what kind of claims the officials make against stablecoin Libra.
A few words about Libra
The official presentation of the Libra project was held on June 18, 2019. On that day, 27 well-known and fairly large companies (Facebook, eBay, Mastercard, Visa, Uber, Spotify, Vodafone, Coinbase, etc.) announced the association aimed at creating a new global payment system.
Important to note is that Libra is a stablecoin, that is, its rate will not be subject to volatility, so it can be used as a means of payment. The price of Libra will be provided by several of the most popular fiat currencies in the world (US dollar, euro, pound sterling, etc.), as well as securities.
In order to store and transfer Libra digital coins, the association wants to release a Calibra wallet, integrated into Messenger and other Facebook-branded products.
Developers want to create a payment system by which it will be possible to carry financial transfers to any corner of our planet in a matter of seconds, almost for free. Libra members are of the opinion that money transfers should be as simple as sending messages in messengers.
But if things are so great, why are almost all the leading world governments against this project? Let's find out it together.
Conflict with regulators
Important to note is that Facebook began the process of developing this cryptocurrency long before the official presentation. There had been some rumors back to early 2018.
First of all, there was information on the Internet telling Facebook company has created a special secret division Project Libra. Mark Zuckerberg acquired the rights to the Libra trademark from Libra Services, a New York company. The company was negotiating to attract additional venture capital investments of 1 billion US dollars for the development of the project.
Even upon unconfirmed information about the work on this project, many experts expressed concern about the uncontrolled invasion of the social network into people's private lives. Well, no smoke without fire, the fact is that all this happened while repeated accusations of Facebook in unlawful treatment of personal data of users.
The first time when the United States Senate Committee on Banking, Housing, and Urban Affairs discussed the Libra cryptocurrency was in July 2019. It was attended by David Marcus, responsible for the development of the Calibra wallet, he tried to calm officials and to allay the fears. He said that Facebook does not control the project, and an independent organization, the Libra Association, was created in Switzerland to develop it. It includes 27 of the world's largest organizations, including Facebook, and it will monitor the appropriate level of protection of users' personal data.
After some time it became known that the company representatives did not even contact the Federal Data Protection and Information Commissioner (FDPIC), they only contacted employees of the Swiss Financial Market Supervisory Authority (FINMA).
After that, the conflict gained momentum: regulators in many countries of the world, the Financial Action Task Force on Money Laundering (FATF), the leaders of the G7 and G20 were negative and urged to stop developing the project.
What are the regulators` fears?
French Finance Minister Bruno Le Maire said he will advocate a complete ban on Libra in the eurozone, as this cryptocurrency can carry risks for the state sovereignty of many countries. His colleagues from Germany and the USA expressed roughly the same opinion.
But why did financial regulators from around the world ganged up on the Libra project and what do they fear most?
To begin with, Facebook is a leading social network in the world, the number of its users is close to 3 billion people. That is, the company possesses an enormous amount of personal data of its users, which it has repeatedly applied for its own purposes. Recall the case of the illegal transfer of personal data about 50 million accounts of the analytical company Cambridge Analytica. After that Facebook got one of the largest fines in history — 5 billion US dollars. But even this rather rigorous sentence does not give any guarantee that such a story will not repeat in the future.
Besides, regulators claim that even despite the fact that Libra presents itself as a blockchain project, it looks quite centralized. Besides, developers do not have the appropriate licenses for working with currencies.
Officials from the USA, Germany, France, and several other countries believe that having personal user data, introducing message encryption and anonymous payments, Facebook has the power to create a personal global economy that will destroy the existing global financial system. They think this is fraught with the creation of conditions for money laundering, financing international terrorism, and other illegal activities.
"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 intends to rival US monetary currency 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 global economy."
Analysis of the US Congress on Libra
It is noteworthy that Facebook representatives do not argue with regulators, they claim that they are not going to launch Libra until the last issue with the government is resolved.
Most recently, on October 23, 2019, the head of Facebook met with the US Congress and got a lot of questions to answer, which lasted for more than six hours.
In his speech, he again assured all congressmen that his company was not going to violate current US law and therefore would not release Libra without the permission of financial regulators.
During the meeting, authorities warned the CEO of Facebook of all currently unresolved issues of the company. During the opening statement, the head of the committee Maxine Waters noted that it would be better if Facebook focused on its existing problems, and after resolving them, they may talk about the development of such a large-scale project as Libra. She emphasized the antitrust investigations were instituted against the Zuckerberg company in 47 (out of 50) states. She proposed to divide Facebook into several smaller companies to help resolve the monopoly issue.
In general, the congressmen prepared a fairly large list of complaints:
- Russian interference in the 2016 presidential election was made possible including through Facebook;
- placement of incorrect and misleading political advertising;
- the presence of child pornography;
- discriminatory advertising policy;
- and much more.
Mark did not deny the fact that the company had sufficient problems and he understood that Facebook was not an ideal company for the implementation of such a project.
“I actually don't know if Libra is going to work, but I believe that it's important to try new things as long as we're doing so responsibly.” — he said.
CEO Facebook said that the main developers` goal was to create a payment system making money transfer as simple and secure as sending messages in the messenger.
Zuckerberg did not answer many questions of the officials, for example, he did not know how to explain the Libra network functionality. Based on the initial idea, the main goal of the project is to create an affordable, digital coin, with the rate provided with a reserve. The official documentation says that Libra will be pegged to a number of fiat currencies.
Both members of the consortium and users of the Libra network will form working capital. It is noteworthy that the only way to get a Libra coin is to buy it for fiat money. But Zuckerberg noted at the hearing that the association did not yet have a clear idea of the work of the Libra cryptocurrency. He said that the main goal of the project was to create a global payment system, not a cryptocurrency.
Besides, Zuckerberg said that the possibility of creating a digital payment system based on individual sovereign currencies, and not on a new currency created on the basis of a combination of existing was being discussed within the association.
Benefit for the USA
During a congressional hearing, Facebook CEO repeatedly emphasized the fact that the development and success of the Libra project would only strengthen US financial leadership.
“Since Libra will be global in nature, we decided that it would be better not to rely solely on the currency of one country. But since we are an American company and since the American economy is the strongest in the world, it makes sense that the reserve should consist mainly of US dollars. This will strengthen American financial leadership,” he said.
He further gave an example that a similar idea should be implemented in China in the near future, therefore, to be competitive, it was necessary to start working in this direction as soon as possible. Recall that the Chinese government plans to create a digital yuan in the near future. This project will be handled by both public servants and major private companies.
“While we are discussing these issues, the rest of the world does not sleep. If America doesn't innovate our financial leadership is not guaranteed.” — Zuckerberg said.
Some congressmen considered the argument for strengthening the American economy not entirely convincing. The fact is that the project is not being developed under the jurisdiction of the USA. The non-profit organization responsible for creating the new payment system is registered in Switzerland, its headquarters are in Geneva. Zuckerberg answered the following:
“I think when you are trying to create a global payment system, it makes sense to place an independent association in the country where many international institutions are based.”
The perfect environment for criminals
Perhaps the biggest concern of financial regulators is the possible use of Libra cryptocurrency to organize illegal activities.
Zuckerberg commented on it:
“Libra is trying to create a safe, reliable and regulated alternative. The digital payments industry needs it. We will work with the US authorities to meet the same standards that are maintained by leading financial institutions, or even stricter, ” he said.
He also denied information regarding the anonymity of the Calibra digital wallet. To apply the payment system, users will have to pass the identification. But at the same time, he emphasized that he was not entitled to speak on behalf of the entire association.
Zuckerberg said that a special technology would be built into the Libra network with which it would be possible to track suspicious user activity. Unfortunately, he did not give clearer explanations.
Conclusion
As a result of this meeting, the Republican Party representatives were complimentary about the project. For example, one of the members of the House of Representatives Patrick McHenry said:
"I have my own qualms about Facebook and Libra and the shortcomings of big tech, but if history has taught us anything, it's better to be on the side of American innovation."
The representative of the US Democratic Party, Bradley Sherman was more skeptical after the hearing, saying that Libra would be a good helper for terrorists, criminals, as well as dishonest entrepreneurs who hide their income. He later said he had nothing against Facebook and that he opposed cryptocurrencies in general.
There were quite a few open questions, Zuckerberg simply did not find answers. Now the Libra Association should develop a clear mechanism for the future payment system and submit it to the financial regulators. When this happens it remains to be seen, if you want to be the first to know, subscribe to us on social networks and follow our site.