Two days after Facebook announced plans for the creation of a new cryptocurrency for its 2.7 billion users last month, the tech giant presented its 12-page white paper to more than a dozen officials from the Treasury Department, the Securities and Exchange Commission and other agencies.
Some of the regulators came away from the meeting in a Treasury conference room stunned that Facebook wasn’t more prepared to address concerns about money laundering, consumer protection and other potential financial risks caused by Libra, the cryptocurrency, three people familiar with the meeting said.
The early encounter shows how Facebook, despite several years of run-ins with policymakers, is paying the price in Washington for the lack of trust resulting from its many privacy scandals. If anything, skepticism of Facebook’s newest ambitions has only deepened since then: Opposition to Libra from White House and financial regulators has been joined by members of both parties in Congress as well as several foreign governments.
The tone turned even more acrimonious on Tuesday in Washington as lawmakers used a hearing on Libra to vent concerns about Facebook’s role in society, one of three hearings Tuesday where lawmakers hit big technology firms.
“Facebook is dangerous,” Sen. Sherrod Brown (D-Ohio) said Tuesday at the first of two congressional hearings scheduled for this week. “They certainly don’t respect the power of the technologies they are playing with. Like a toddler who has gotten his hands on a book of matches, Facebook has burned down the house over and over, and called every arson a learning experience.”
Facebook vice president David Marcus, who is spearheading the Libra project, tried to mollify lawmakers’ anxiety about the currency, saying the company wouldn’t move forward without complete buy-in from Washington.
“We agree with all of the concerns,” he said.
Libra is known as a cryptocurrency, a type of decentralized digital token that is interchangeable with dollars and other forms of traditional currency and can be used to make payments online. Its most popular incarnation has been bitcoin, the cryptocurrency that saw huge gains in value in recent years before plummeting.
Still, many in Silicon Valley and on Wall Street see cryptocurrency as a potential game changer for the global financial system it views as antiquated and slow.
But whether Libra has a future, Facebook’s initial foray has rankled a remarkably wide array of influential figures.
Facebook’s vast reach “over a quarter of the world’s population” risks creating a new “financial system that is too big to fail,” Democrats on the House Financial Services Committee said in calling for its hearing with Marcus on Wednesday. It requested an immediate moratorium on Libra.
The Senate’s Libra hearing fell on the same day as two other inquisitions of the tech industry in Congress. Facebook, Apple, Google and Amazon were slated to testify in a high-profile hearing on competition and market power. Google was also due to appear in a Senate hearing about anti-conservative bias on its platform, shortly after President Trump singled out the company for an investigation.
Facebook says that it has learned from its past mistakes of rolling out new products before anticipating their misuse, stressing that Libra is only at a concept stage and far from actual release. Marcus said he has been working on Libra for over two years and that he brought on 27 partners such as Visa, Mastercard and PayPal.
Facebook says the consortium of partners, known as Libra Association, will help make sure the currency operates in a stable manner and is backed by real assets, including banks deposits and government bonds. Each of the partners or other entities that wish to trade Libras can create their own wallet, which will be governed by the consortium; Facebook’s is called Calibra.
“Trust has been a very important of the journey for us in the last few years,” Marcus said in an interview. “We also understand that such a network cannot be controlled by one company and of course not Facebook now.” He stressed that Facebook would not launch the currency until regulator concerns were allayed -- no matter how long that takes.
Marcus, who joined Facebook five years ago after serving as the president of PayPal, sees the need for a currency that would be used by billions of people who don’t have access to a bank to do things like pay rent or food bills. The company says the currency could eventually be used for other forms of commerce online.
“We are very privileged as Americans to have a very high-functioning currency, independent institutions, and free mobile payment services. But the vast majority of the world is not like us,” said Marcus. “As a result, creating a system that would enable anyone that has a $40 dollar smartphone and a basic data plan to have access to a digital form of money, and the ability to pay one another, and have access to the world economy, is something that I believe is worth pursuing.”
Silicon Valley companies and entrepreneurs have long dreamed of making inroads into finance. Apple is launching a mobile credit card and companies like Venmo and Square have helped people send micropayments through their smartphones.
Facebook’s scale does not mean it would have automatic success in payments. Indeed, the company has tried for the last several years to bring mobile payments to Messenger and WhatsApp, but the results have been limited. But Facebook’s cryptocurrency represents the industry’s boldest foray yet into transforming the global financial system.
The success of Libra would mean putting enormous financial and currency power in private hands. Regulators have argued that a digital coin that is beyond the control of any government could facilitate money laundering and finance terrorism. And public trust in Facebook has fallen as a result of data privacy violations, such as the siphoning of user data by political consultancy Cambridge Analytica that led to a record $5 billion fine voted by the Federal Trade Commission last week.
Regulators raised alarms over Libra almost immediately. On the day of Facebook’s announcement of its plans last month, the project was criticized by French finance minister Bruno Le Maire, who called on central bank governors around the world to scrutinize the project.
Federal law requires banks and other financial institutions to follow strict rules regarding how money is transferred from one party to another. Regulators have raised a particular concern about how cryptocurrencies and digital currencies could be used for crimes such as laundering money and financing terrorist operations, in part because they are designed in a way to make the transactions very difficult to track.
“A lot of people within the crypto community tend to be purists, which means they believe in the idea of a decentralized currency that no government can control,” said Daniel Kimerling, cofounder of Deciens Capital, a Silicon Valley venture capital firm focused on financial technologies. “They are distrustful of Facebook, of a world in which Calibra becomes the dominant token and sucks all the oxygen out of the room.”
Marcus said that he had been thinking about creating a “real-time payments system” that would enable people to move money around the world quickly and cheaply since his days at PayPal. He first conceived of the idea for Facebook’s cryptocurrency when he was on a beach vacation with his family in the Dominican Republic in 2017, when he was the head of Messenger. He called up his boss, Facebook chief executive Mark Zuckerberg, and proposed the project. Zuckerberg said he had been thinking along the same lines, Marcus said. Zuckerberg believed cryptocurrency could be the next major Internet platform, similar to messaging or artificial intelligence.
After Zuckerberg gave the go-ahead, Marcus quietly assembled a team of engineers who worked in a separate part of Facebook’s sprawling Menlo Park, Calif., campus, which required special badges to enter.
Marcus, who has traveled to 20 countries over the last year to brief regulators on the idea, said that Facebook had always known the project would be controversial.
One of the main areas of concern to regulators, which came up during questioning in Tuesday’s Senate hearing, is whether Facebook will register as a bank or as a payments platform like Paypal, and if so, how the reserve of assets that will back the currency will work. That makes it in theory less volatile and more regulated than bitcoin.
If regulators determine that Libra poses a "systemic risk" to the financial system, they could try and force Facebook to submit to oversight from the Federal Reserve.
Facebook spread the risk by recruiting partners to the project. The Libra Association said it hopes it will have 100 members and each member will get equal votes, including Facebook’s cryptocurrency organization. But by the time of the announcement, only 27 partners had joined, and some did so several weeks before the launch, according to one of the partners who declined to be named, citing the relationship with Facebook.
When Libra was first launched, some of its partners hailed it publicly. Investors with the venture capital firm Union Square Ventures, a longtime investor in cryptocurrency, argued in a blog post on the company’s website that Facebook’s Libra effort had the potential to move cryptocurrency technologies “from being curiosities for enthusiasts to be being default internet and financial infrastructure.”
Facebook had circulated the white paper to all of its partners in the months before its June launch. But despite having met with regulators for a year, the officials hadn’t seen it before the public unveiling. Facebook executives, led by the company’s deputy general counsel, explained the white paper to officials at the meeting in the Treasury office. Marcus said he didn’t attend the meeting.
Since the June meeting, Facebook has been racing to make its case in Washington. The company has dispatched a group of prominent Washington lobbyists to meet with lawmakers and administration officials, according to a person familiar with the efforts. The lobbyists have stressed that there are competitive reasons to approve a digital currency because other countries, principally China, are quickly building their own.
The charm offensive continued Monday, days after Federal Reseve Chairman Jerome Powell raised major concerns about Facebook’s cryptocurrency plans. That’s when another senior Fed official, Randal Quarles, the Federal Reserve’s Vice Chairman for Supervision, met with Randall Guynn, a partner at law firm Davis Polk who is helping Facebook navigate regulatory concerns, two people briefed on the meeting said.
Quarles, who helps coordinate international financial regulation, had earlier expressed more openness to Libra and other digital currencies compared to some of his colleagues. “There are clear benefits as well as concerns," Quarles said at an event in Washington last week. "We will be deeply engaged on them over the course of the next several months.”