Demystifying the Facebook Libra Congress Hearings

Find out what Libra means for blockchain, cryptocurrency, and global financial markets.

The views and opinions expressed in this post are those of the author and do not reflect the view of the author’s employer, or other group or individual.

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1. Facebook will incentivize the use of its Calibra wallet.

A question repeatedly posed to David Marcus, co-creator of Libra and lead of Facebook’s Calibra wallet, was whether Facebook will use its centralized power and overall size to incentivize the use of the Calibra wallet as opposed to other competing wallets.

While Marcus stated that other wallets may be interoperable with Facebook Messenger, Whatsapp, and its other platforms, Marcus clarified that Facebook would not actively embed other third-party wallets directly in these Facebook-owned applications. Therefore, users of other wallets will likely have to use Facebook’s Calibra wallet for direct integration into Facebook platforms such as Messenger, WhatsApp, and Instagram.

Due to the added steps, it is very unlikely that people are going to use third party wallets. Imagine that you want to give Libra to your friend Bob over Whatsapp. The Calibra wallet may allow you to do so in one step within Whatsapp, while other wallets would require multiple steps including opening up the third-party wallet, finding your friend Bob, and finally sending him Libra. One step beats three steps, every time.

Furthermore, Arizona Senator Krysten Sinema raised some valid questions regarding the need for protection from developers of Libra-apps unrelated to Facebook. For context, the Libra Association has stated that they will not verify or examine third-party developer wallets, which can be dangerous and opens the door for scams and security issues. That being said, vetting every developer and the applications they create would be extremely expensive for the Libra Association.

One question that remains is who will you trust with your money? Facebook’s Calibra wallet or some random third party developer? Many consumers may end up picking Calibra since it is backed by a well-known company, despite its poor reputation in recent years.

2. It’s all about trust.

Much of the focus during the hearing was on Facebook as a company and its prior privacy issues as opposed to questions about Libra and the Libra Association. The majority sentiment held by the committee members can be summed up pretty easily: “Facebook is hard to trust.”

Many members of Congress don’t believe that Facebook will maintain separation from the Libra Association. Facebook has maintained that their interest in blockchain and cryptocurrencies stemmed from a desire to help bank the unbanked. One representative asked Marcus if he expected the committee to believe that Facebook’s intention to build Libra and Calibra did not have anything to do with making a profit. After all, they have shareholders and a responsibility to them. Facebook will have to spend a lot of time trying to regain the trust of Washington.

Had another company started the Libra Association there may have been a more positive response to the idea of creating a sovereign currency. Instead, it appears that the mistrust of Facebook is not going anywhere, anytime soon.

3. Congress doesn’t want to squander innovation.

Overall, Congress seemed open to technology and the innovative capabilities of blockchain technology.

“Washington must not be the place that technology goes to die.” — U.S Representative Patrick McHenry, North Carolina, Ranking Member said.

At the very beginning of the hearing, Congressman McHenry also stated, “Bitcoin is an unstoppable force.”

4. The Senate Committee Seeks More Clarity On Libra Association’s governance.

Throughout the hearing, members of the committee raised valid points around the governance of the Libra Association, most of which were left unanswered.

For example, will China or Chinese state-owned enterprises be able to get involved in the Libra Association?

On the topic of how the current 27 members of the Libra Associations were selected, Congresswoman Alexandria Ocasio-Cortez asked, “[w]ere these members democratically elected?” Marcus did not have a clear answer to this question and his response suggested that the Libra Association decided the initial 27 members.

Representative Rashida Tlaib pondered, “is Facebook forming a crypto mafia?” She cited that a crypto startup, Anchorage, recently raised funding from Visa, which is also a Libra Association founding member. Ben Horowitz, Cofounder of Andreessen Horowitz which is a founding Libra member, sits on the board at Lyft, which is another founding member of the Libra Association. The Senator implied that there may be a conflict of interest.

Moreover, what would happen if Facebook were to acquire Spotify, a Libra Association founding member. Would Spotify remain independent and keep its Libra Association voting rights? Would Facebook get two votes? Who controls that process for these type of situations? TBD.

5. Facebook will make money. Lots of money.

Facebook will make money in potentially four ways.

1. People and companies could buy more ads on the Facebook platform following a higher volume of user transactions and commerce with Libra and the Calibra wallet.
2. Over time, if people use the Calibra wallet, Facebook can offer services in partnership with financial institutions that will be decorrelated from advertisements.
3. Facebook may earn interest on the Libra reserves as a founding member of the Libra Association.
4. Facebook may charge a small transaction fee in the Calibra wallet (from businesses or consumers, or both).

6. The committee was knowledgeable about blockchain technology.

Most of the Members of Congress knew the distinction between Libra and Bitcoin. This is drastically different from just a year ago.

Some senators, such as Representative Denver Riggleman, indicated that he had examined Libra’s GitHub account and even asked some pointed questions regarding Libra’s programming language choices. It appears that politicians are ready to talk blockchain.

Other members referenced utility tokens versus cryptocurrencies. This demonstrated their knowledge about some of the nuances of cryptoassets. Our politicians are definitely growingly informed and ready to take the implications of Facebook’s announcement of Libra (and about blockchain) seriously.

7. The House Financial Services Committee was Concerned That This may be the only chance to block Facebook from creating a new currency.

Representative Michael San Nicolas made the point that if Congress wants to prevent Facebook from launching Libra, this is really their only time to do so. Once Libra is up and running with hundreds of millions of customers, it’s game over. Congress won’t be able to put the cat back in the bag. It’s worth noting that this was only an informational hearing to answer immediate questions. There will be other hearings, more questions, and lots of debate as Facebook proceeds. Clearly, there are tons of regulatory hurdles and this is only the beginning for Facebook. There is so much nuance layered into this issue and it will require continuous conversations between Facebook, the Libra Association, Congress, and relevant regulators. I’m curious whether Facebook and Mr. Marcus will be able to answer market-sizing, volume, and profit related questions.

8. There are lots of questions around custody and compliance.

Marcus stated that there will be a required onramp for Libra by submitting government-issued ID’s. Marcus and the Libra whitepaper clearly stated they will follow AML and KYC compliance standards.

BUT

During the hearings, Marcus also stated that “self custody will be allowed within limits.” If users can opt for a third party wallet and are able to hold their own Libra, then what’s stopping them from trading it between third party wallets? This brings up questions regarding AML and KYC as well as censorship. Will the Libra Association be able to censor transactions? Apparently not if users can hold and trade their own Libra.

Moreover, if an ID is needed to get onto the Libra network or Calibra wallet and people who are unbanked don’t have a government ID, then how will they get access to the Libra network? While Marcus stated some individuals have an ID and they will serve them while they figure out a solution to helping those without government-issued identifications.

9. Marcus won’t commit to anything.

Throughout the Q&A, many senators asked if Marcus would commit to certain policies, statements, and a moratorium of the Libra project.

Senators also frequently requested Facebook and the Libra Association to commit to sandboxing the Libra currency with a small number of users before rolling it out to the public. Marcus’ go-to response was along the lines of “we’ll commit to not launching the network until we have all the necessary regulatory approvals.” Anything else would, of course, be in violation of the law.

Final Thoughts

The impact that Libra could have on the world is transformational. At the very least, the Libra Association is bringing cryptoassets to the centerstage. At its potential peak, Libra presents a new sovereign currency for 1.7 billion unbanked adults around the world. This issue is not one without consequence and as such must be scrutinized and examined carefully. I’m eager to see the answers Facebook and the Libra Association provides to the many standing questions from across the ecosystem.

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Disclaimer: The views and opinions expressed in this post are those of the author and do not reflect the view of the author’s employer, or other group or individual.