As Facebook continues to be the foundation to make some of the world's most important payment technology and processing companies occupy an important place in the world monetary policy table, the company faces major obstacles to promulgate His plans from both sides of the passage of the Congress.
In the second of those who will surely have many (many many) hearings in front of the Congress committees, David Marcus, The first executive of the new digital payments subsidiary of Facebook, Calibra, faced questions from representatives of the House Financial Services Committee on how and why of Facebook digital currency plans.
Facebook critics had questions on both sides of the company's approach to transforming the global financial services industry.
Marcus could avoid responding to some of its toughest issues by taking advantage of the gray area between the role of Facebook as the main architect behind Libra (a financial instrument that uses blockchain technology to allow transactions with a digital currency managed by a consortium of private companies). and Calibra (the payment subsidiary that owns Facebook).
Marcus stated in his testimony that Libra's Facebook plans consist entirely of obtaining the digital currency that the company is creating recognized by international financial organizations: overcoming the supervision of financial and financial services regulators in the United States in favor of the " neutral "from Switzerland.
Representatives rightly have concerns about each step of the process, which is why it is likely to be better to examine the currency that Facebook hopes to create with its partners in the Pound Association and the affiliate of Calibra separately.
First, there are significant questions about the Libra Association Facebook met and the regulatory responsibility that Congress and several federal agencies have to oversee the digital currency that it expects to create.
The structural problems of the Libra Association and its currency
Concerns start with the independence of the Facebook association selected to be its partners in Criptomoneda. There are a series of links between companies and investors that are in the existing government agency of Libra and on Facebook. The fact that Facebook selected the initial founding members who paid $ 10 million for the privilege of being co-founders of the coin was not lost by representatives such as Alexandria Ocasio Cortez, the first representative of New York.
"The composition is open, according to certain criteria," Marcus indicated in his testimony in response to a question from Representative Ocasio Cortez on the composition of the Libra Association. "The first 27 members that have joined are companies that have shared this desire to build this network and solve problems."
Representative Ocasio Cortez replied: "Well, we are We are discussing a selection currently controlled by a large part of massively massive corporations. "
The representative of New York was not only criticizing the composition of the Association of Libra, asking if Facebook would have an undue influence on the organization.
Leaving aside the independence of the Association of Libra, the representatives also had some pertinent questions about the way in which the currency is structured.
The Pound currency is configured as a reference company, the value of which is established by the Association and is linked to a basket of global currencies that provide coverage against the currency that fluctuates in value as a result of the speculative investment Users pay in a certain amount of currency and receive a balance amount that can be spent on merchants or participating companies (a huge network taking into account that MasterCard, PayPal, and Visa participate in the association).
Taking into account the size of the Facebook user base (estimated at billions of dollars), if each user put an average of $ 100 on the network, the Pound Association would enter the first twenty largest Banks of America (assuming 100,000 million dollars of assets). Only this would justify regulatory oversight by a number of federal agencies, some representatives argued.
They also expressed their concern about how the Pound Association and its members could manipulate the currencies and potentially move the US dollar as a global reserve currency.
"Sovereign currencies must remain sovereign and do not want to challenge sovereign currencies," Marcus said in response to a particularly acute line of questions. "We just want to increase their capabilities in their way of using them."
It is the answer of an engineer to a question about the social function of the currencies. Facebook can use the currency basket basket to argue that Libya is not really a currency, it is based on several currencies to provide more stability and access to its users and make the system work more efficiently. But if the adoption of Libra began to accelerate, the organization behind it would be able to choose winners and losers of foreign exchange and begin to take advantage of its funds to manipulate markets, some fears were representative.
"Facebook could destabilize the currencies and governments, "said the representative of California Maxine Waters." The Facebook entry is worrying, as it has already affected a large number of people. "
For some members of the Finance Committee, the structure of the currency with own funds makes it look like a financial instrument that also requires the regulation of government agencies. At different times, the proposed currency was compared with a negotiated exchange fund (since it is based on a currency basket to create value) or an alternative currency settled.
"What exactly is that? Is it fish or birds? And I think it's more an ornitorinc and evolves in its different parts, "said Bill Huizenga, from Michigan.
For the representative of Connecticut, Jim Himes, the risk in foreign currency that users could be exposed to an opportunity for the government to exercise the supervision of the laws on investments approved in 1940. "They will have some degree of volatility," he said. he said in his testimony.
"This seems to me exactly as a negotiated exchange fund. With the support of a series of short-term foreign currency instruments … it even has a mechanism for creation and remittance," says Himes. The Libra association shall be subject to the regulations of the Stock Exchange and Securities Commission.
Marcus says that the instrument behind Libra is not an interchange fund, since users who will process the cryptomoneda through services such as Facebook's Calibra will not speculate on the increase in currency value. However, this logic seems to be somewhat flawed, since it is expected that all the members of the Pound Association generate yields of assets that remain in Balance and will be invested in the short-term currency basket.
What about Calibra?
If the Free Association and its mechanism for establishing a creation team creates a knot to unleash regulators, then the transaction mechanism proposed by Facebook in the form of a Calibra affiliate is another.
Again, a large number of problems arise from the members of the Congress … Some are associated with the Facebook privacy problems and the history of predatory behavior that, once again, arose with the fine of 5,000 million dollars the company to continue violating.
MROthers is related to the company's policy that conservative critics call "social engineering", which saw Facebook boot some controversial users of their platforms (potentially denying them access to the benefits of the balance). Still another group of concerns is based on the ability of Facebook to correctly implement the client's knowledge standards (KYC) that are required from banks and other financial services institutions.
Concern for the propensity of Facebook to offshore was the highest in the mind of the Republican representative of Wisconsin Duffy
"Milo Yiannopoulos or Louis Farrakhan can use Libra?" Duffy asked. "I'm setting it up because both individuals have been banned in Facebook."
Marcus could only answer "I do not know yet."
Duffy's representative compared the potential of Facebook to participate in the same type of social engineering that granted access to its new payment network as the experiments that China is carrying out with its social credit score.
"For this system, I think you will see a great deal of reversal for both parties," Duffy said. "I am also concerned about the privacy of the data and how we will use this data … How we spend our money is really powerful information and you also have access to it."
Calibra can also face anti-competitive challenges. Facebook has said that its payment processing application will be the only one that will be integrated directly with the other social network and communication tools of the company, but that other potential laptops would be interoperable. Exclusive access to Facebook gives Calibra an automatic advantage over other potential payment tools and opens the company to receive a whole series of transaction information that, on the other hand, would not be up to date.
And while Facebook is restricting access to its platform with its own digital payment service, it is giving course to developers to build other applications for the Libra payment platform without reviewing them.
It is a situation that could lead to another Google Analytica style scandal on Facebook and is another hole in the company's supervision.
The right answer
The Libra project is very ambitious and its critics have several valid concerns about its execution. Some of the concerns about the risk posed are justified and, in fact, they could become a systemic player in the world financial system more quickly than their defenders are willing to accept. All this does not mean that it must be expelled or fired necessarily due to the possible dangers it raises, according to some economists.
The hard work of governing requires proper supervision (which Facebook has been demanding, although it will undoubtedly make it to jurisdictions that have the slightest touch on their activities).
Not only an expert that the president of the International Monetary Foundation, David Lipton, has said so much in recent debates about the role that Libra should play (or could play) in the world monetary system.
"Risks include the possible appearance of new monopolies, with implications on how personal data are profitable, the impact on weaker currencies and the expansion of dollarization, opportunities for illicit activities; threats to financial stability, and the challenges of the companies they emit and, therefore, they obtain large amounts of money – previously the scope of central banks, "Lipton said about the proposed digital currency of Facebook, according to Bloomberg. "Thus, the regulators – and the IMF – will have to accelerate"
But reinforcement does not mean regulating Facebook's currency outside of existence.
"Let's look at the history of technology and innovation, and one conclusion is that you never know at first the value of technology will be," Lipton said. "Experimentation and adaptation is required for years and often decades."